PayPal bails on Facebook immediately after becoming first foreign payment company in China; betting on China’s digital coin over Libra?
Just four days after PayPal announced it became the first foreign company to acquire a payments licence in China, it ditched the Facebook Libra consortium it was in. The Libra Association is composed of Facebook and 27 other companies and organizations, which includes PayPal’s rival Stripe.
Two days before PayPal bailed, The Wall Street Journal reported that Visa, Mastercard and other members of the consortium, were also “reconsidering their involvement following a backlash from U.S. and European government officials”.
PayPal’s vote in favor of Chinese communism?
Government regulation is the biggest stumbling block for Libra. A CNBC article that broke the PayPal withdrawal news said that Federal Reserve Chairman Jerome Powell raised “serious concerns regarding privacy, money laundering, consumer protection, financial stability” and that Maxine Waters, Chairwoman of the U.S. House Committee on Financial Services, said that Congress would “move aggressively” on the Libra issue so that it can be stopped until they “get a handle on this”.
In contrast, shortly after Facebook announced Libra, China sped up its own plans to issue a central bank backed digital currency, which is now “almost ready for launch”. Given Libra’s current troubles, China’s digital currency could become the first in the world.
“We look forward to partnering with China’s financial institutions and technology platforms, providing a more comprehensive set of payment solutions to businesses and consumers, both in China and globally.”
— Dan Schulman, President and CEO of PayPal
In the last four decades of economic reform, one of China’s biggest advantage has been its ability to implement market reforms and force conformance within the private industry.
Indeed, besides mobile wallets, China’s brand of government controlled capitalist economy has resulted in the only domestic payments network — UnionPay, that can rival Mastercard and Visa. This, combined with its massive consumer base, also makes it the only country that could possibly challenge the US and western financial institutions for dominance in global e-commerce and online payments.
Is China using PayPal to dominate digital currencies?
PayPal is the most significant western player in the online payments space. The only market it has never succeeded in penetrating is China, where Alipay (Alibaba) and WeChat Pay (Tencents) still rules in e-commerce. No doubt the blocking of entry to western players — who had a much earlier head start —helped the ascendance of local ones.
Now that has changed. The number one western player is being let in; barely four months after Libra was announced. And immediately after being given access, PayPal ditches Facebook.
I smell a pact made at the China/PayPal bargaining table.
According to a recent China Daily article, “In terms of the cross-border usage, it could be a challenge for other countries’ monetary authorities to accept (the) Chinese central bank digital currency.”
Allowing PayPal’s entry into the Chinese payments ecosystem could be a strategic move to use it to bridge this gap.
Perhaps…the great Libra abortion?
Facebook has always wanted to create the ability for its users to transact easily on its instant messaging and social apps — Facebook Messenger, WhatsApp and Instagram.
This will not only create user stickiness, but more importantly, a new source of massive revenue at a time when scandals over data privacy was damaging its ability to capitalize on advertising — its key revenue source.
Creating Libra, its own digital currency, would have been the answer to frictionless and cheap online payments for its platforms. But the baby is in danger of miscarriage.
According to The Wall Street Journal, Visa Chief Executive Al Kelly said at the company’s earnings conference call in July, “No one has yet officially joined.” She was referring to the Libra Association.
The article also said some of Libra’s backers have “declined Facebook’s requests to publicly support the project...”
It is unclear how many of the initial Libra Association members ultimately will commit to the network. So far, association members have signed nonbinding letters of intent, and they haven’t yet handed over the $10 million that Facebook requested from each member to fund the creation of the digital coin.
Looks like Facebook’s attempt to become the world’s biggest central bank could be a dream killed at conception.