Can Facebook Grasp the Payments Opportunity Now in Front of It?

This is the fifth installment of a six-part series on how Web 2.0 is likely to transform the payments business. Prior articles focused on how new providers are leading the transition from the first generation of e-commerce, where a buyer had a one-way relationship with a seller's Web site and search results, to social networks, blogs, and wiki sites, where consumers are now increasingly engaged in extensive two-way relationships with other consumers?and, potentially, all the people who want to sell something to them. With its worldwide community of 150 million users, Facebook is the poster child for the era of Web 2.0 technology and interactive venues, where people relating to other people matters much, much more than the mere retrieval of information that characterized the first generation of e-commerce. Looking at all the unprecedented opportunities Facebook has to monetize this bounty of interactive usage, this Web site in another five years could become the future of both e-commerce and mobile commerce. Or not. This fork in the road for Facebook and the rest of the Web 2.0 revolution might well turn on how these social networks decide to do payments; and what they decide to do about payments will define the next generation of digital transacting. Let's begin with the existing business model. Facebook is where people spend an increasing amount of their time online and using mobile devices. Besides converging communications into a highly interactive environment, the Web site allows users to send virtual gifts to each other (like a birthday cake graphic for a buck); post free classified ads on “Marketplace;” notify their friends about upcoming concerts on “Events;” and share homemade videos with each other on, you guessed it, “Video.” All these activities generated an estimated $250 million in advertising last year, but this isn't close to driving the effective $15 billion valuation that Microsoft bought into with a minor investment in 2007. Creating an ecosystem of application developers to spawn even more activities and usage seems promising. There are more than 35,000 applications available from more than 400,000 registered developers, such as interactive games like chess and Scrabble. Advertisers pay to accompany downloads of popular applications, providing developers with growing financial remuneration for their efforts. Getting users to pay for these offerings has some upside for Facebook, as an estimated $30 million to 40 million in gift revenues last year has demonstrated. With a modest transactional service just introduced, called Spare Change, Facebook developers can now get paid via PayPal for their wares. In fact, developers' ability to monetize their offerings has grown to such a point that Facebook is reported to be readying a plan to charge them commissions on their sales. But Facebook's economic future (and its ultimate market valuation) might well come down to how it does payments?just like eBay's did, when it bought PayPal (and last year, BillMeLater). For eBay, its payments business has become the sustaining engine of its growth. The similarities with eBay and PayPal don't stop there. Peter Thiel, a founder of PayPal, was Zuckerberg's initial investor. So it was no surprise that in December 2007, Facebook announced a beta test version of its own payments platform?said to be a modern version of PayPal's. Besides providing a means for assessing commissions on application developers' sales, this new platform was intended provide the ability for Facebook users to buy virtual and physical goods and services inside the multitude of available applications without resorting to third-party providers (such as PayPal). It was also designed to collect data about users that could be used to provide more targeted advertising and solicitations. One year later, though, Facebook reported that development of the payments platform had been suspended?no details to follow. On the heels of this announcement, mobile payment provider Obopay announced the availability of its payment widgets (person-to-person transfers, donations to charities, and online purchases) to Facebook and several other popular social-network and blogging venues. What happened? Did Facebook find payments too difficult to master? After all, it took Amazon.com a ton of money and several years to build its “PayPal killer.” And if Facebook has punted on payments, is it missing the business opportunity of a generation? For in the Web 2.0 era, payments become simply enablers for a much more intense level of transactional interactions; if you control the payment, you set the terms of the transaction. Take targeted advertising, which is great, but it's clumsy in its current form. Just ask Google, which has a devil of a time identifying searchers at a sufficiently granular level to warrant higher fees from paid search and click-through advertisers. But on Facebook, and other social-network venues, users give up incredible amounts of information about themselves for free in hopes of sharing that personalized data with friends, family, and colleagues. What if this new generation of online (and mobile) users could present data about themselves (demographics, preferences, intentions to buy, etc.) but still protect their privacy (through so-called permissioning exchanges of information with advertisers that preserves their anonymity for as long as they want)? That would afford them access to customized one-to-one offers from only the advertisers they choose to expose themselves to. Not only would they benefit from the special offers and deals that will likely result, but it's conceivable that many advertisers would be willing pay for the opportunity to market on a one-to-one basis (with Facebook able to capture some of that new value created). Monetization of the interactive user could be further enabled by use of referral fees and bounties for product and service recommendations via the social interactions. Why wouldn't Facebook users be willing to submit requests on their “walls,” and accept commissioned recommendations from friends, family, and associates, since these are people they know and trust? Users could be enabled with an embedded payment capability, where enrollment preferences on which payment account to use would be obtained upon registration. This purchase (and rewards) account could have aliases, so that no exposure of account credentials would occur with merchants (or processors!) downstream. Facebook could manage all of these value exchanges and enjoy the float. Sort of like a PayPal for social networks. Such a next-generation, interactive, two-way transactional platform would also work for other Web 2.0 venues, including digital-content sellers, blogging sites, and wiki pages, where contributors could conceivably monetize their value to these enterprises. In the process, payments per se become transparent, and a new basis for transactional economics gets established. Facebook itself might not be up to this business-redefining opportunity, but somebody will be. And then the fun begins, as the conventional payments industry scrambles to try to pick up the pieces. More about that in the sixth and final installment in this series, appearing in the February issue of Digital Transactions magazine, now in the mail.–Steve Mott