Experts Challenge Payments Execs to Get Ready for Social Media

Banks, merchants, and others scratching their heads over the exploding popularity of social networking and its close cousin, social gaming, can harness the online phenomenon for payments but will likely have to jettison decades of settled thinking, experts say. Banks, in particular, will have to wrestle with knotty problems surrounding pricing, risk, exchange rates, and speed of settlement, observers warn. “This is an impatient consumer base—people are living in the now,” Sayantan Chakraborty, director for North American payments at Citigroup Inc., told an audience at a recent electronic-payments trade show.

Social media sites like Facebook and MySpace, and related gaming sites like Farmville, are attracting tens of millions of users who are looking for ways to buy from the sites and from each other, speakers at the conference said. The conference, sponsored by NACHA, the regulator of the automated clearing house network, featured fully three sessions on social media.

The trend has given rise to a wide range of alternative-payment methods, including systems that handle micropayments, that let users have products for free if they agree to try a sponsor’s product, and that let users shop their payments around with friends and family in the hope that others will pick up the cost. In some cases, these payments might be picked up by the user’s parents, as with a system called BillMyParents, or by people the user knows, as with another method called Kwedit, said Russ Jones, an analyst at Glenbrook Partners, a speaker at one of the sessions. He characterized such payment systems as “social payments,” or payments for which a group, not just the user, takes responsibility.

Jones acknowledged the concept of social payments takes some getting used to for traditional banks and merchants. “Social payments are a new payments domain,” he told his audience. “They reflect the way people in social networks want payments to work. It’s an industry challenge, in a way.”

Other speakers, indeed, warned that traditional thinking about payments will interfere with an organization’s ability to tap into the trend and get ready for the next generation of payments users. For example, people who use social media are accustomed to changing things on the sites in ways that suit them individually—and that can include corporate designs, said George Warfel, managing director and global payments consultant at Fiserv Inc. He advised banks and merchants to be tolerant of this, even if it horrifies marketing officers. “Let people on MySpace change the color of your logo,” he advised. “That’s not vandalism. It’s customer acceptance.”

But Citi’s Chakraborty warned that banks and regulators have a lot of work to do. Social media are borderless, he said, raising risks for fraud. Also, transaction pricing and settlement times will both have to be reduced to appeal to users’ demands for low cost and immediacy. He pointed to the mentality of users of person-to-person payments through social networks. “I’m not going to pay $1 or even 50 cents to pay [somebody] $10,” he noted. “Also, I’m not going to wait until tomorrow to settle the debt. We’re going to square it up right away.”

And Glenbrook’s Jones cautions against dismissing social media as short term, or, as some think of it, a “sham,” since in some cases the experience is entirely virtual and goods exchanged digital. Such sites, he says, are simply new marketplaces. “I don’t think people are hesitant to spend money and exchange value among friends,” said Jones. “That happens all the time.”