Facebook's place in financial services industry

On Monday 4^th October, the unimaginable happened – Facebook, along with Instagram, WhatsApp and Messenger, went down globally. To be fair, I didn’t notice it right away, and it was only when my sister replied, “thanks for your message, but my birthday was yesterday” did I suspect something fishy. Luckily, my mum posted information about the Facebook blackout in our family chat, making me realise that I was just one of the 1.7 million outage victims. Except for this rather rapidly contained political family crisis, the incident did not really impact me. Unfortunately, the same cannot be said for some businesses that rely on these services to sell their products or accept payments.

Should Facebook really enter the financial services industry?

To say that Facebook shouldn’t enter the payments field is probably a lost battle. According to David Marcus, Facebook has already processed over $100 billion in the last 12 months. In fact, I have always been pro ubiquity when it comes to payments methods, advising RedCompass Labs’ clients to offer and support as many forms of payments as possible to their customers to create loyalty. Payments are an excellent means to compete as it remains the most frequent point of contact between a bank and its customers while providing an invaluable source of data.

This pro ubiquity position and my fascination for cryptocurrencies made me curious (enthusiastic, if I am honest) about the future launch of Diem, Facebook’s Stablecoin (originally named Libra). Considering the global high mobile penetration (70%) and Facebook’s unrivalled reach (2.89 billion users monthly), I resonated with David Marcus’ speech and vision and believed that they really could compete with some services offered by retail banks. Maybe to add more colour, back in 2019, the co-creator and board member of Diem expressed the need to build an “open, low cost, accessible, near real-time, ecosystem and network” with the ambition to:

1. Accelerate financial inclusion and provide a solution for the 1.7 billion unbanked adults.
2. Level up the playing field in the cross-border payments space by bringing more competition.

Sadly, Facebook’s outage shadowed this enthusiasm a bit. What would have happened if Diem had already had massive adoption when the incident occurred? Children would have been unable to pay for their school bus rides if they could only transact with Facebook’s payment service, Novi. Mums whose families depend on their daily profit would not have been able to sell goods at their small market stalls because they could not accept payments.

Payments are so central to our daily lives that the underlying system’s reliability, robustness, and resilience are paramount. One key reason the payments industry is so regulated is that operational resilience is crucial. A six-hour outage like the one experienced by Facebook is massively harmful in the payments arena and simply should not happen. We saw it last year when TARGET2 went down for the first time. When banks report too many outages, depending on the scheme, they can be fined, which is the case for Faster Payments in the United Kingdom.

Should Facebook be subject to the same regulations as banks?

The catch-22 is that, of course, Facebook is not under the same regulations as financial institutions: customers don’t need the same protections, and the operating payment network does not need to have a backup from a regulatory perspective. But is it the right approach?

One might argue that this is probably a non-existent problem, as blockchains (the technology Diem will run on) are deemed unbreakable. However, we all know that guaranteeing zero incidents ever is extremely hard. For this reason, I probably agree with Barclays’s response from last year to the Future Regulatory Framework Review Consultation, where they advocated for a ‘same business, same rules’ policy. In other words, the policy should be the same regardless of the original industry of the provider.

What can banks do?

Introducing just the right amount of regulation and, most importantly, at just the right time is a complex problem to solve and will take time. In the meantime, as different rules are applied to various kinds of parties (banks, payments initiators, etc.) and Facebook accelerates their global rollout, banks probably need to level up their game by:

1. Strengthening their infrastructure and ensuring that the services provided are irreproachable (unfortunately, many banks still face many outages), probably by migrating to a resilient cloud infrastructure.
2. Enhancing specific product offerings (e.g. in the cross-border space), tackling the problems Facebook is trying to solve first, leveraging payments data and existing or soon to be launched services like the SWIFT Transaction Manager Platform.

Time is rapidly passing. Please reach out to our expert team at RedCompass Labs if you need any support to modernise your infrastructure. As for me, I can only hope that next year, not only will I be able to send a happy birthday message to my sister without worrying about when it will be delivered, but I’ll be able to send her some money with my best wishes instantly too!

*The name Facebook is used in this article instead of Meta because very little information regarding the full impact of the re-branding was available at the time of publication.