Category Archives: Payments regulation

Facebook’s cryptocurrency Libra provokes a firestorm on Capitol Hill

Facebook’s cryptocurrency Libra has the potential to increase currency and payment-system competition globally. Not surprisingly it’s provoked a firestorm of concern and protest from regulators, politicians, and a medley of activists.

Addressing the House Financial Services Committee July 10th Fed Chairman Jerome Powell declared Libra potentially a “systemic risk” raising “serious concerns regarding privacy, money laundering, consumer protection and financial stability.” Bank of England governor Mark Carney warned it wasn’t going to start unless it was “rock solid.” French Finance Minister Bruno Le Maire thundered he would prevent Libra from becoming “a sovereign currency that could compete with the currency of states.”

Governments protect their currency monopolies. Liberty Dollar founder Bernard von NotHaus was prosecuted and convicted of making and distributing coins resembling U.S. coins. The North Carolina Western District U.S. Attorney lambasted Liberty Dollar as “a unique form of domestic terrorism” attempting “to undermine the legitimate currency of this country.”

Facebook has managed to attract political ire on both sides of the political aisle.

Senate Banking Committee Ranking Member Sherrod Brown mocked Libra as “monopoly money.” House Financial Services Chair Maxine Waters worries it might be intended “to establish a parallel banking and monetary policy system to rival the dollar.”

The day after Powell’s comments President Trump weighed in tweeting “We have only one real currency in the USA,” “it will always stay that way” and that “Facebook Libra’s ‘virtual currency’ will have little standing or dependability.”

Friends of Earth-US, U.S. PIRG, the powerful public-sector union SEIU, et al demanded a moratorium on Libra pending addressing a laundry list of concerns. Some contended Libra was “too dangerous to be permitted to proceed.”

Few argue against more payment-system competition. Currency competition, however, doesn’t square with monetary economic orthodoxy, and, is alien to most Americans. But, the dollar circulates in countries like Ecuador, Panama and Zimbabwe. Hong Kong’s currency is tied to the dollar through a currency board. In Denationalisation of Money: The Argument Refined, Nobel-Prize-winning economist Friedrich Hayek advocated permitting private currencies to compete with government fiat money.

Designed as a global digital currency Libra could do just that. It will be a “stablecoin” backed by a reserve of fiat currencies deposited at banks and short-duration government securities. Tying it to a hard asset like gold would have been bolder but also more threatening to central banks. In contrast, Bitcoin is backed by nothing more than the hope there’s a greater fool willing to buy it for more. Cryptocurrencies Tether and Pax promise to redeem each token for a dollar. Libra, however, is designed more like a mutual fund than demand-deposit liability, perhaps to reduce the risk of being regulated as a bank.

Libra’s manifesto recites a litany of do-good pieties. One doesn’t have to be a cynic, however, to understand Facebook’s commercial motivation. Libra could enable the social-media giant to increase engagement, advertising effectiveness and commerce velocity. It could pay users Libra to watch ads and discount ads and payment fees paid in its digital currency.

Notwithstanding for the moment often weak smart-phone penetration, emerging markets with weak currencies,  banking and payments systems present an enticing opportunity to boost commerce.  In Venezuela with a million-percent-plus inflation Libra might be an attractive store of value, unit of account and means of payment. Activists worry about Libra’s impact on developing countries’ monetary policies. One of the best things that could happen to countries with debased fiat money would be robust currency competition and losing control of their monetary policy.

Libra will be controlled by a Geneva-based association, not directly by Facebook. Geneva conveys neutrality. Washington prevents US-headquartered Visa, Mastercard and PayPal from operating in North Korea, Iran, Syria and Crimea. The governance model is intended to allay fears it’ll be controlled by the social-media Gargantua and create a broad ecosystem of support and participation.

Authorized resellers will buy and sell Libra, supporting processing exchanges and institutions. In the US resellers and processors at a minimum are likely to be regulated as money transmitters.

Facebook will have its own digital wallet for Libra Calibra, integrated with Messenger and Whatsapp. If Libra gets traction Google Pay, Apple Pay, Samsung Pay and PayPal will likely support it.

The two genuinely global retail-payment networks Mastercard and Visa joined the Libra association. While a new currency per se wouldn’t hurt them, a widely-adopted electronic-payment system would. In the tent they signal they’re open to payments innovation and give a di rigueur nod to Facebook’s litany to more financial inclusion. Attaching Mastercard and Visa debit cards to Libra accounts would give it instant global acceptance, albeit in fiat currencies. But, if several billion Facebook users used Libra for retail payments and to transfer funds to friends and family, it’d be catastrophic for traditional retail-payment and money-transfer systems.

If Libra runs the regulatory gauntlet in enough jurisdictions, it still faces an enormous challenge. Unless and until Libra achieves network critical mass it offers little value to anybody. In payments finding a path to critical mass isn’t easy, particularly in markets well-served by established systems. Most new payment systems, notwithstanding being putatively more secure, cheaper, or in some other respect superior, fail.

Libra threatens and stresses existing systems. No bad thing. A credible, lightly-regulated, new global currency and payment system would force existing currencies and payment systems to perform better.

Putting sunlight on currency-conversion fees to protect consumers from being fleeced

March 19, 2019 the EU mandated enhanced disclosure requirements on currency-conversion fees for banks, merchants and ATMs. The landmark pro-consumer reform will take effect in April, 2020 and should reduce the number of consumers fleeced by Dynamic Currency Conversion (DCC).

Competition and inadequate disclosure requirements have fueled an explosion of DCC, a service permitting cardholders for a fee to pay in their familiar home rather than the local currency. Between 2013 and 2017 the number and value of DCC transactions in the EU increased 118% and 65% respectively. The average EU DCC transaction declined from €128 to €85, reflecting it’s becoming increasingly mainstream.

DCC is a scourge for unsuspecting consumers. The Norwegian Consumer Council blasted DCC as “of hardly any value or benefit to consumers.” Its survey of DCC users found 99.7% were worse off (paid more), with the highest DCC markup being a whopping 12.4%. If there’s a scintilla of consumer value, it’s in the momentary false comfort consumers may take immediately seeing payment in their native currency, not knowing the markup over what they would have paid in the local currency.

With most payment products and services sufficiently transparent market competition ruthlessly polices the industry, continually reallocating resources to those delivering more value. The market self-corrects, purging products consumers don’t value. However, under the current DCC-disclosure regime, competition renders the problem worse, rewarding payment processors, merchants and ATMs for fleecing consumers and punishing those that don’t. DCC payments are quick one-off transactions. Cardholders are fleeced and none the wiser.  Consumers don’t know they’ve been gouged. Consequently, merchants and ATMs not offering DCC leave money on the table, typically 400 to 500 basis points, but often considerably more, as much as merchants think they can get away with. Acquirers not offering it would lose merchants and forego profits.

Behavioral nudges like highlighting the preferred DCC option in green encourage use. Presenting a payment option in consumers’ native currency is a behavioral shove.

DCC preys on consumers’ greater comfort transacting in their familiar native currency, and ignorance of the economics of their alternative, paying in the local currency. Paying in merchants’ currency they would enjoy close to the wholesale exchange rate through networks like American Express, Mastercard and Visa, and then, depending on their issuer, possibly, pay a disclosed foreign-exchange markup or cross-border fee.   When DCC is offered the price in both the cardholder’s and the local currencies and the exchange rate are displayed at the point of sale or ATM.

Most regulators haven’t been interested in DCC because it’s foreigners being fleeced and national merchants and processors profiting. The supranational EU took an interest because with 11 currencies millions of EU consumers are fleeced by DCC by merchants and ATMs in the EU every year.  Plus, DCC increases the cost of intra-EU payments, and, is thereby a deadweight loss for its economy.

The EU will require DCC markups be disclosed as a percentage over the ECB’s benchmark foreign-exchange rate, and, that issuers, separately, notify cardholders of any foreign-exchange markups as percentage over the central bank’s benchmark rate. It’s an improvement. Better yet however would have been to insist on side-by-side markup disclosures of bank and DCC markups before payment. Banks contended providing their foreign-exchange fees at the point of sale would be burdensome. Fair enough. But just disclosing markups as percentages – arguably more useful for comparison purposes – would be a relatively modest effort. Tables with issuer markups, kept at the networks and/or merchant processors offering DCC.

Consumers have relationships with their banks. Cross-border fees and foreign-exchange markups are disclosed on statements, and subject to considered review. Issuing banks outside the EU substituted cross-border for currency-conversion fees on payments abroad to avoid being disintermediated by DCC. Some issuers offer and advertise no cross-border fees. Within the EU some but not all issuers charge foreign-exchange fees. For its Freedom Rewards Visa credit card Barclays charges a 2.99% fee for nonsterling transactionsClydesdale’s B Mastercard credit card charges no foreign-exchange fees. Santander’s Zero Mastercard credit card similarly has no foreign-exchange fees. Cardholders have choices.

While the EU has taken a step to protect consumers from DCC, industry self-policing is the only viable global solution. Only global networks Mastercard and Visa can protect cardholders worldwide.

Mastercard banned DCC on multi-currency prepaid cards issued for use abroad loaded with the merchant’s currency. April 13th Visa went a step further banning DCC on all consumer travel prepaid and debit cards, including multi-currency prepaid cards, no matter the currencies loaded. Nonetheless, the global payment networks have been reluctant to use their market power to ban DCC, fearing it would provoke anti-trust complaints. It would however be well-nigh impossible for regulators to object to their mandating pricing-transparency for consumers.

The more sunlight put on DCC on both sides of the network the fewer consumers will be gouged. Sufficient sunlight will destroy the DCC industry.