Facing up to the competition

[Dave Birch] The news is full of Facebook again. The digital money community, just like every other community, must spend time working out what the rise of Facebook means to them.

If Facebook were a country, it would be the third largest in the world, so it figures that the social networking giant is trying to develop its own currency – Facebook Credits.

[From Facebook Credits starting to make some real money]

It isn’t a country, of course, and we shouldn’t get too carried away with that kind of thinking.

The privately held Facebook does not disclose its financials, but according to one estimate from 2009, it was generating $550 million of annual revenue, of which $75 million came from virtual payments.

[From Facebook and Google Encroach on Banks Turf - US Banker Article]

That’s going to go up substantially if the estimates for Facebook Credits usage now are anything like accurate, but I still think some of the comments about them (and other alternative payment schemes) can be a little misplaced. For example, here’s something from Information Week.

For example, if Facebook adds the ability to transfer Credits among users, which was speculated as something under development in 2010, it will do three things practically overnight: create the largest money laundering network in the world since PayPal; become the largest bank in the world; and establish itself as the largest credit card processor.

[From Dangerous Intersection Of Mobility And Credit - - Mobile Security - Informationweek]

All three of these statements are incorrect.

Money Laundering. About $1.5 billion in Facebook Credits will be in circulation this year. This is so small as to be insignificant in global money laundering statistics. Money is laundered via cash and through the banking network, not through PayPal (the account limits are too low), M-PESA or Walmart gift cards. There’s more money flowing through virtual world and game networks in Asia (look at China where prisoners are used to mine virtual gold) than through Facebook Credits.

Biggest Bank. Payments are not banking. They might be called “Credits” but they are not credit. I’ve never thought that Facebook might want to be a bank and there is no possibility of it having more money on deposit than, say, Citi in any foreseeable future.

If you look at this short video “The Bank of Facebook” from Thomas Power, you can see how more of this kind of thinking. I don’t agree with Thomas about Facebook becoming a bank — that is, a heavily regulated credit institution — but I do agree that it can become a payment institution and, as Thomas point out, a facilitator of peer-to-peer finance.

[From Digital Money: Complacent or short-sighted?]

Card Processor. Even if Facebook Credits purchase volume doubled to $3 billion, this is tiny compared to the overall card processing market.

The US credit card processing industry includes about 2,000 companies with combined annual revenue of about $40 billion.

[From Research and Markets: Updated 2011 Report on the $40 Billion US Financial Transaction Processing Industry - pymnts.com]

Research & Markets estimate the US credit card processing industry is 2,000 companies with a combined annual turnover of $40 billion. But the amount of value they process is absolutely gigantic. Last year, for example, American Express alone handled half a trillion dollars in purchase volume. I just checked in the Nilson Report (March 2011) and it says that the biggest acquirer in the US, First Data, handled 15 billion transactions worth $700 billion.

Facebook Credits are small beer compared to the incumbents, but they are interesting because of what they represent:

The real point here however, is that Facebook is on course to generate $1 billion in revenue this year from social gaming. If that is the case, the social gaming market on Facebook alone is worth at least $3 billion, as they’re taking a 30% cut. This is an ecosystem that is only a couple of years old. And it’s just for gaming and not commerce.

[From BAI | Banking Strategies | Payments | Remote Payments | Facebook Credits as the Bank of the Future]

They work in places where the alternatives are expensive, inconvenient or absent. And since they work, and customers like them, they are already spreading.

BBC Worldwide will allow Facebook users to rent 29 Doctor Who episodes… Viewers will pay for the digital videos using Facebook Credits

[From BBC Worldwide to show Doctor Who on Facebook - FT.com]

With a 30% (or whatever) fee, they are currently more suited to digital goods rather than physical goods, but as volume builds and the merchant services charges fall, it will change.

Payvment launched a Facebook Mall two weeks ago, where consumers can shop among 50,000 retailers and add items to a single shopping cart. Payvment is signing up around 300 new storefronts daily and has roughly 1.2 million items in the mall today.

[From Will Facebook Be the Mall of the Future? | Tricia Duryee | eMoney | AllThingsD]

But as I say, it’s what it represents that is important. And what it represents is a population scale, non-bank payment solution.

Facebook then also has the potential to draw in the unbanked or the underbanked around the world, where the entire infrastructure of having physical money and a place to store it can be leapfrogged in place of a virtual system and marketplace.

[From Telcos become banks. Facebook next? « emergent by design]

Facebook isn’t going to become a telco, I’m sure, but they could become an M-PESA. They did make an interesting comment about their strategy yesterday.

Erick Tseng, head of mobile products at Facebook, reinforced the theme of mobility at the Mobilize conference he was speaking at when he said, “We’re going to become a mobile company.” He said that Facebook has more than 350 million mobile users (out of 800 million total), and that the proportion will swing to more than 50 percent within the next year

[From Facebook's mobile czar: We're a mobile company, but no iPad app...yet | Rafe's Radar - CNET News]

Just as Eric Schmidt at Google said, if you don’t have a mobile strategy then you don’t have a strategy. There’s a lot to be discussed about mobile commerce and which organisations might take up which positions in the emerging value networks, but if we just focus back down on payments for a bit…

Not surprisingly, consumers trust incumbent payment brands when they think about the future of mobile payments. Facebook is the least trusted, despite big numbers of consumer who spend a lot time sharing personal information on the site.

[From Facebook is the least trusted brand when it comes to payments – The Sepharim Group]

What the figures actually show is that about a third of consumers say they would trust Visa, MasterCard and Amex with mobile payments, about a quarter would trust Apple, Microsoft and Google and half of that number would trust eBay or Facebook. Personally I don’t care what the public say about anything, but it is a little puzzling to me that the payment brand trust figures are so low. Any theories? Are they tainted by association with banks? If they stay that low, and the trust in Facebook stays high, then maybe Facebook Credits will be more of a competitor than the incumbents currently imagine.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

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