Payments are an interesting space undergoing a lot of innovation. Last month, our partnership became part owner of what could become the world’s largest cryptocurrency-based payments network. This happened on June 18th when Facebook made two important announcements.
First, it published technical papers for a new “rail” of payments infrastructure called Libra. This is—for now—a permissioned blockchain network and Facebook is one among a couple dozen founding members:
Over time, as the network grows to thousands of nodes, Facebook has the intention of moving the network to a permissionless state, which is paramount for user trust.
Importantly, Facebook does not control Libra at all; it has instead set Libra up as an independent, Swiss not-for-profit association. The association will be in charge of maintaining the Libra reserve, which will be a basket of currencies (currently unspecified, but could be a mix of dollar, euro and yen), with the idea that each Libra token will be fully backed by fiat currency.
Take a look at the bottom of the picture above, and you can see what Facebook does control: Calibra, which is the name of the wallet Facebook will build on top of Libra. In essence, one can think of Libra as a new internet of money, and Calibra as a specific application.
Facebook is thus creating an entire new platform: something on top of which anyone can build new applications. To bootstrap both the platform and the application, Facebook is setting up the Libra association and building Calibra.
Customers using Calibra to transact will be able to send or receive Libra as easily as they can send a text message today:
Note how the example above shows fees of $0.00 and depicts the use case of someone in the U.S. sending money to someone in Mexico.
In Libra’s whitepaper, Facebook notes that an astonishing 1.7 billion adults globally remain outside the financial system with no access to a traditional bank. Remittances remain expensive and cumbersome (they cost at least 7 percent and take days to settle), and payday loans “can charge annualized interest rates of 400 percent or more.” The promise of Libra is to include many more people in the modern economy, since the cheapest Android phones are only $40 and data plans very affordable.
It makes sense for fees to be $0.00 for two reasons. First, this fulfills the mission of financial inclusion envisioned by Facebook in creating Libra. Second, given the zero marginal cost of having customers use Calibra to transmit Libra, the goal is to first have as many people using it (land grab) and only then monetize (harvest).
Why is Libra a cryptocurrency at all? The fundamental innovation of the first cryptocurrency, bitcoin, is that it allows trust between entities that have no reason to trust each other. Before bitcoin, to make a digital payment you’d have had to go through one of the existing rails (ACH or wire transfer). This always involved a trusted counterparty, like a regulated bank.
Bitcoin, through the use of cryptography (math!), allows individuals to transact directly, without a trusted counterparty. The bitcoin protocol allows anyone to prove mathematically whether a transaction happened and who owns what. It allows, for the first time in history, for the creation of scarce digital assets.
Given that Facebook has 2.7 billion users, with 90 percent of them outside North America, it makes sense to have a digital native currency that’s global in nature. A Frenchman transacting with an Indonesian need not worry about foreign exchange if both parties are using Libra.
But Libra is exciting for other reasons as well.
It removes friction between the 90 million businesses on Facebook and its 2.7 billion users. This could accelerate Facebook’s flywheel: more commerce leads to more transactions, leads to more ads, leads to more revenue.
Micropayments have long been a dream, ironically, one that has been first realized by China. With their closed ecosystems, WeChat Pay (Tencent) and AliPay (Alibaba) are giant peer-to-peer payment schemes that allow for tiny transactions. In the U.S., credit card processors typically charge $0.30 per transaction plus 2.9 percent of the transaction value, making micropayments too costly. Libra could replicate the success of WeChat Pay and AliPay for the rest of the world. This would create entire new use cases and customer behaviors including, for instance, tips for creators on Facebook Watch or Instagram.
Facebook owns virtual reality pioneer Oculus, and the technology is still in its infancy. Today, one of the main use cases is gaming. With just around 1 million users, Oculus usage is a far cry from the other Facebook properties’. But over time, as the technology improves and gains adoption, having a virtual currency to transact in virtual worlds will be a boon.
One of the world’s most successful games is Fortnite. Despite being free-to-play, last year it generated $2.4 billion in revenues. How? Players spent an average of $85 on outfits, characters, gliders, harvesting tools, emotes and dance moves. All of these are virtual goods which—by the way—can only be used inside Fortnite.
With Libra, gamers inside Oculus’ virtual worlds could purchase virtual goods they actually own, since they could be cryptographically stored on the blockchain (as they would be in a bank account).
Indeed, paintings are very much like virtual goods. The cost of the canvas might be $5, but a Basquiat could sell for over $100 million simply because someone else is willing to ascribe it value. In the future, there will be an entire economy built around scarce digital goods, and it’s a good bet they’ll live on the blockchain with the most widespread adoption.
Finally, Libra is designed in such a way that if users don’t want to trust Facebook, they don’t have to. They can simply opt to use another wallet rather than Facebook’s Calibra.
The creation of Libra begs the question: is it disruptive to the traditional card rails (Visa/Mastercard) and the companies that operate on top of it? The short answer is: probably not. Visa and Mastercard earn about 0.15 percent of every transaction; the bulk of the 2.9 percent charged per swipe accrues to the banks who issue the cards. (Note that both Visa and Mastercard are among the founding members of the Libra association. They want to participate in whatever comes next.) The traditional card rails are extremely convenient and reliable, and will likely be around for a very long time. Libra is likely to open up new payment use cases and draw more people into the financial system (like the 1.7 billion who are unbanked).
Amazon founder Jeff Bezos likes to say that if you lean against the future, the future will inevitably win. If you look far enough into the future, it’s possible that fully decentralized applications could threaten Facebook’s centralized dominance.
Only a visionary founder like Mark Zuckerberg could run towards that future and start experimenting. And Libra is one such experiment: it’s a big bet, with a reasonable chance of success. If it works, it’ll establish the platform on top of which Facebook can create enormous value (PayPal, which has 277 million active accounts, is valued at $140 billion). And with Calibra, Facebook is developing the institutional muscle required to build additional crypto-based services.
Speaking of running towards the future, I was in the audience in late April when Mark Zuckerberg took the stage at the Facebook developer conference to make this announcement:
The idea is that we have the public square, where everything we do is social; but we also have the living room, where we expect privacy. Zuckerberg noted that privacy provides freedom—freedom to be ourselves. So, it’s no surprise that the fastest ways in which people are communicating online are in private messages, small groups and Stories. And thus, the next chapter for Facebook is to build out the digital living room.
To start, Facebook will unify all of its messaging apps and encrypt them end-to-end. A user of WhatsApp will be able to message another on Messenger or Instagram. Head of Messenger Product Team Asha Sharma brought the point home: “If we were to rebuild the social network today, we would do so around messaging. For Messenger, our mission is that everyone communicates with the people they care about on a fast, private, interoperable network.”
Fast, private and interoperable. Sounds like Libra. Running towards the future.
In commerce, Facebook continues to add new features and capabilities, such as product catalogs in WhatsApp Business and shopping on Instagram. I follow a number of tennis players on Instagram. This is what my shopping page looks like, on the left:
On the right, you can see what happens when I tap on one of those images. I see the products; choosing one, I’m sent directly to the merchant’s website (in this case, Tennis Warehouse). This is a godsend for merchants large and small, especially those who acquire customers through organic posts on Instagram, or though paid influencers.
Over the next couple of days of the conference, I witnessed the huge impact that the Facebook platform has on businesses all around the world.
One session on Messenger showed how it’s not only a private communications tool, but also a great customer support channel. Sephora noted that through interactions with customers on Messenger, they’ve had a 42 percent uplift in show up rates for their in-store appointments. QVC saw a 5.3x increase in return on ad spend with its Messenger ads, which are direct response ads inside conversations. Volaris, a Mexican low-cost airline, handles 80 percent of its inbound calls on Messenger. Air France expects to increase its ticket sales on Messenger by 40 percent this year.
These are just a handful of examples. There were deep dive into all aspects of Facebook—from its trailblazing hardware Portal and Oculus Quest (if you don’t have them yet, go get one; the Quest in particular is one of the most delightful consumer experiences in a long time)—to advances in machine learning and all the work being put into election safety and content moderation.
The key takeaway: Facebook continues to invest heavily for the future, making big bets and taking risks. This is something that only comes naturally to a founder-led, mission-driven company. Mercenaries don’t have the stomach.
Financially, Facebook continues to blow out the barn doors. The size of Facebook’s overall community continues to grow, even though the company has reached nearly every adult around the world with an internet connection (ex-China, where Facebook and many other western companies are blocked). Revenues grew 30 percent in Q4 and 26 percent in Q1 of this year, both on a year-over-year basis. Despite growing headcount by 36 percent to nearly 38,000 employees, margins remain exceptional and the company continues to print cash. At the time of writing, Facebook shares are up 53 percent year-to-date.
[Note: this post is an excerpt from one of our letters to investors, originally published on July 12, 2019. To learn more, check out our investors section.]