Why Facebook’s Payments Strategy Isn’t About Payments

If you want to know how and where a company will strategically spend its time, money and efforts, then look no further than how it makes its money. So, tomorrow when Facebook’s Developer Conference, dubbed F8, kicks off, don’t be surprised if payments isn’t the star of the show.

Except for when …

For that, you’ll have to read on. I’ve read that cliffhangers that build slowly are all the rage now.

Named after Facebook’s infamous dusk-to-dawn, eight-hour Hackathons, F8 is an annual confab intended to give developers a look at new tools that will help them reach and engage the 1.9 billion and 1.2 billion unique people who now visit Facebook every month and every day, respectively.

Over those two days, it seems a near certainty that those developers will hear more about the things that Mark Zuckerberg laid out in his F8 keynote last year: how to make video more plentiful and engaging, how to use AI to make user experiences more meaningful and personalized, how to use AR/VR to create new user experiences and what Facebook is doing to give the 4 billion people in the world who don’t have internet access today the chance to get it inexpensively.

All things intended to support Facebook’s core mission of “giving people the power to share and remain open and connected.”

Those people also include advertisers — and giving that group of people the ability to share their messages supports another core Facebook mission: generating a return for their shareholders. Those are the people who generate Facebook’s revenue. So that will make the star(s) of the show tomorrow those things that Facebook can do to tie those people ever closer to its ecosystem — without alienating the users who spend nearly an hour every day scrolling through their news feed and whose eyeballs they monetize.

From Social Network to Advertising Network

Facebook may still be described by its users as a social network, but it’s far from that — 13 years after it was launched and five years since it went public. Facebook is a gigantic advertising platform, the second largest in the world behind Google. Facebook’s total 2016 revenue, at $27.6 billion, was almost entirely the result of selling ads to brands that wanted to get their message in front of its massive and highly engaged user base. (By way of comparison, Google’s ad revenue was $79 billion in 2016.)

Payments accounted for a relatively paltry $753 million in revenue by comparison, down from the $849 million the year before. The decline of 11 percent year over year didn’t exactly blow much of a hole in Facebook’s bottom line or dampen investor interest.

What would — and has in years past — is falling short on Facebook’s ability to feed the ad beast. When Facebook announced that it was dangerously close to running out of ad inventory on its platform last fall, its share price dropped sharply. That’s because the market rightfully pegs Facebook’s biggest adversary as Google and its competitive playing field as advertising.

Not payments.

That didn’t stop everyone — and maybe even Facebook at one point — from thinking that Facebook wanted to be a payments platform. Once upon a time and back when “FarmVille” and“CityVille” were the rage, payments drove an interesting revenue stream for Facebook. Millions of people buying chickens and cherry trees for their FarmVille farms, in turn, sparked a payments ambition — remember Facebook credits? But once gaming moved to apps, Facebook lost those eyeballs and that revenue stream and, appropriately, any interest in creating a new form of currency for the Facebook platform.

Its vision of turning Facebook into a giant shopping mall where people would shop and pay on the Facebook platform never materialized either. Remember Payvment and the social commerce movement? The notion that brands could launch Facebook storefronts and turn hundreds of millions of Facebook fans into buyers flopped, too. Consumers didn’t want to shop on their social network, and those storefront operators — even those with tens of thousands of fans — found that unless they bought ads that directed people to those storefronts, Facebook’s news feed algorithms made conversions abysmal and the ROI unappealing. Even selling gift cards on Facebook fizzled.

But if one needed any further proof that “getting into” and monetizing payments inside of Facebook was an experiment that has long outlived its strategic purpose, one need to look no further than Facebook COO Sheryl Sandberg’s response to an analyst question about buy buttons during February’s Q4 2016 earnings call.

“The core of our focus is still very much focused on ads and how we can do ads at the product level,” was her answer.

A strategy that means that Facebook has moved away from thinking of itself as the place where commerce happens and payment is monetized inside of its ecosystem — but as an ecosystem that builds contextual and targeted ad-driven experiences that engage its users and direct them off Facebook to the brand’s website to buy.

Because advertising — and not payments — is how Facebook makes it money. And their own website is where brands want their users to conduct business.

Facebook and Its Massive Ad Engine

It makes perfect sense.

Platforms — the ones that scale and survive — figure out ways to build and monetize their platform assets. Facebook’s assets are its users, the data they share about themselves and the time that they spend soaking up content in their news feeds.

Facebook, therefore, knows a lot about its users — and that knowledge is highly monetizable as their ~$20 ARPU suggests. Facebook keeps track of every post their users like, every group they belong to, every update they make to their favorites, every change in their status, every comment they make and about what or who, places they tag and people with whom they are tagged.

Facebook enriches that data set — which is already pretty valuable — with information from data aggregators. Data on users’ income, marital status, loans, mortgages, credit cards, how much their house is worth, where they were born, where they went to school, how many kids they have and their ages, what kind of car they drive, where they work and the town in which they live (and much more) is mashed up with information Facebook gets from sites that its users visit that have the Facebook sharing button and what those users are looking at and clicking on. Facebook can then offer advertisers more than 1,300 attributes to reach a very relevant set of eyeballs.

In the Belly of the Facebook Ad Beast

Over the past several years, Facebook has innovated on how those brands can grab their targeted user’s attention. Dynamic ads on Facebook allow brands to present a carousel of their products from their product catalogue inside a user’s news feed. Facebook’s newly launched travel CityGuides give users information on what’s happening in cities like Boston and allow them to book hotel rooms and make other travel arrangements. Facebook reports that for brands using these dynamic formats, recall increases 20 percent and awareness by as much 11 percent.

Facebook’s Canvas product turns product ads into app-like experiences and gives advertisers new ways to showcase them. Western Union reported a 13 percent increase in brand recall and affinity and a 7 percent increase in purchase intent when such a campaign targets Hispanic consumers.

Shopping on Instagram offers brands a way to engage with users and show them new and/or curated products. Launched last fall as a trial, last month, that trial was expanded from its 20 pilot set of brands to many more brands. Kate Spade said that their customers loved the ability to seamlessly move from information to inspiration to purchase; one pilot retailer reported a 33 percent lift in conversions.

And in every case — via dynamic ads or Canvas or Shopping on Facebook — those conversions and sales lifts were measured by users who clicked through those ad experiences and off Facebook to the brand’s own websites to complete the purchase.

What’s Next

The opportunity for brands to engage with Facebook will expand as soon as Facebook expands the reach of its ad exchange — the Facebook Audience Network, or FAN — beyond Facebook and innovates the formats in which brands can promote their products and services on its platform.

Last month, Facebook announced its partnership with Amazon to take FAN off Facebook by leveraging Amazon’s header-bidding system to expand its inventory off Facebook. That partnership will help Facebook compete more effectively in the display ad business and give its brands the chance to be featured in those ads. It’s also a pretty big shot across Google’s bow, who’s now the de facto king of the header bidding business.

Video is another area of growth for Facebook — and another direct hit to Google’s YouTube. Facebook has said that it will focus its efforts, at least right now, on the 90-second spots that include advertising after 20 seconds has been watched. Those ads will also allow consumers to punch out to brand websites to make a buy. Video ads were cited as a success story in Facebook’s Q4 earnings call, as driving double-digit increases in brand recall and brand awareness for the launch of Hershey’s Cookie Layer Crunch and Nielsen data reported and a 3.5 percent lift in sales for Motorola when used in support of a new product launch.

Now, here’s where the crescendo starts to build.

More than 90 percent of Facebook’s users access it via mobile devices that direct those users to a mobile website. And we all know what happens when users end up on merchant sites via their mobile devices to make a purchase.

Checkout fail, a large number of times.

And that failure to convert a click to a sale is one of the reasons why Facebook ad rates are so low.

Payments and payments innovators can help.

What should be clear is that Facebook’s interest isn’t to payment-enable Facebook and commerce inside of its ecosystems, because payments isn’t how Facebook makes its money.

But it could make more of it if it found a way to streamline the checkout process once users clicked off a product page and onto the website of the brand.

And that’s where payments and the payments ecosystem can help – and the opportunity for the payments ecosystems as gigantic as the advertising opportunity that Facebook is enabling on its platform. Optimizing the payments experience for the brands that Facebook users interact with will help Facebook create even more value for the brands that turn to them to generate their leads. It will also increase the value of the Facebook advertising platform by more closely correlating clicks to sales — and giving Facebook the ammo it needs to increase the rates that it charges advertisers.

And from what our Checkout Conversion Index reflects, there’s a lot of work to be done by the brands to make their checkout process smoother.

Facebook has proven that it can lead the horse to water. Now it’s up to the payments ecosystem to get it to drink.

But What about Chatbots and Group Payments?

Yes, Facebook made news a few weeks ago when it launched group payments, and a year ago when it launched chatbots and payment-enabled them inside of Messenger.

Here’s my take on both.

Messenger has enabled P2P payments since July 2015 and that wasn’t about payments either. P2P payments are free to users and so are group payments — not exactly a monetization opportunity. But what is: creating a network inside of Messenger that would make Messenger more valuable to advertisers. Messenger is now starting to test ads inside of Messenger.

Chatbots, well, I think you know where I stand on those.

Yes, there are tens of thousands of them, and yes, some 30,000 of them are also payment-enabled. And no, not a whole lot of payments activity is happening inside of them, because, even by David Marcus’ admission, they are overhyped and they underdeliver.

I’ll spare you my “Poncho the Weather Cat” story.

Chatbots though, TechCrunch reported, will also make their debut at F8 (mostly, they say) as a way to keep groups informed of such mission-critical information like whether Dustin Pedoria’s hit was a home run recently. Chatbots, in my book, still have a long, long way to go — and like with anything else, are up against some stiff competition with a running head start — and where time and consumer patience in putting up with the not-so-intelligent chatbots inside of Messenger could quickly turn the tide against them.

I’m thinking here about voice-activated ecosystems and Amazon’s Alexa — but that’s another column for another Monday.

But, hey, even Facebook needs its moonshots — it bought Oculus Rift, didn’t it?