It’s a wallet, it’s a currency, and it leaps tall buildings in a single bound, it’s: Facebook Credits. And, yes, unless you have green kryptonite, if you’re in the payments business you need to worry.
To understand why you need to worry if you’re in the payments business you must first grasp how Facebook Credits work. For those of you who are active social gamers, you probably know all this and so you can skip ahead.
There’s a “Facebook Payments” tab on the left-hand side of a user’s account settings in Facebook. Yep, there surely is. Click on that and you’re taken to a screen where you can buy Facebook Credits.
Once there, there are several ways to pay. And, PayPal is at the head of the class but in two different ways. You can enter your mobile phone number and PayPal’s Zong will send you a PIN, which you then enter to get your Credits. It takes a few seconds for the round trip. Or, you can use PayPal itself. Once you enter your account and password, you don’t even need to leave the page. There’s a credit card option and even a Facebook gift card.
The next time you want to buy Credits, Facebook remembers how you paid the last time and that’s the default for buying more. There’s a little “change” button at the bottom of the screen that allows you to switch to another payment instrument if you want. Facebook remembers all the different funding methods you used so you can easily switch between them.
You might have gone through this process because you knew you were going to need Facebook Credits and went to your account settings directly. At least for now most consumers probably do this process because they are playing a game on Facebook, and the only way you can do that is to buy Facebook Credits.
You may also have Facebook Credits because Facebook or applications on Facebook might have deposited some in your account as a reward or an inducement to take an action on Facebook.
What to Worry About #1: Facebook Credits Is Based on Wallet
Any consumer who buys Facebook Credits has a wallet on Facebook. That wallet contains one or more funding sources. My wallet now has my mobile phone provider, my MasterCard, and my PayPal account (which is linked to my American Express card). This wallet provides a one-click method to buy more Credits. Click, Buy, Spend.
At the moment this wallet is only useful for buying Facebook Credits. And it is a pretty limited wallet. (And some of you will say it isn’t a wallet at all. There’s no widely accepted definition of a wallet. As a Supreme Court Justice famously said about adult fare, you know it when you see it. The problem is that people see different things. As for me, I see a wallet.)
What to Worry About #2: Facebook Credits Is a Currency
Currency was the subject of my first article on Facebook Credits.
What I’ve just described isn’t any different than people sticking their payment info into their Amazon, iTunes, PayPal, or many other accounts that make subsequent purchases easy. So what’s the big deal?
The answer is that the wallet isn’t being used to directly buy a good or service. It is being used to buy a currency—Facebook Credits—which can then be used by consumers to purchase things (for now just virtual goods for social games) on Facebook and for entities to reward consumers.
The standard definition of “money” is that it is a medium of exchange, a store of value, and a unit of account. Facebook Credits is all of those things.
Money is pretty indestructible but even more so when it is electronic! Once money is created people can keep using it. At the moment this isn’t significant since the social game companies that are being paid with Facebook Credits are going to want to cash it in for real currency to satisfy their investors. So they are happy Facebook is sending them real money every couple of weeks.
How that changes over time depends on whether Facebook Credits becomes a broad medium of exchange as a result of commerce taking place on Facebook and as a result of enough people doing things that involve Facebook Credits that they don’t mind being paid this way. If that happens, it’s a game changer.
Here’s an example. Social game companies could pay developers around the world in Facebook Credits and small businesspeople could accept Facebook Credits because they could use them to buy other things that they need or reward customers with them. In some countries (especially those with national debts that are greater than their GDPs) Facebook Credits could become a safer currency than the national currency.
What to Worry About #3: Facebook Credits Could Be a Really Smart-Currency
Existing currencies are incredibly useful but as intelligent as a wooden door. Even an electronic unit of account isn’t very smart. Of course the problem with all currencies is they’ve been designed by governments, which are not exactly fountains of innovation.
Software developers could make Facebook Credits really smart. Facebook Credits could collect data as it changes hands, support sophisticated loyalty and reward programs, and who knows what else.
What to Worry About #4: Facebook Credits Marginalizes Payments Companies
Existing payments business are intermediaries that move money between buyers and sellers. Suppose a consumer pays a merchant with her Visa card. Visa working with a bunch of payments companies moves money into the merchant account, and Visa working with a bunch of payments companies moves money out of the consumer’s account. There are a lot to steps to this process and even more with cross-border transactions.
If most merchants and consumers had accounts with a single provider there wouldn’t be any need for Visa as the intermediary. I have some colleagues in the government who complain how inefficient the payments system is and have suggested all we need is a simple way to move money between accounts. True enough, but the payments industry has arisen entirely because governments haven’t done much innovation in payments since the government of Lydia knocked out the first coin three millennia ago. But Facebook could pull this off.
The Implications
Of course that day is a ways away so let’s talk about things that are a bit more realistic in the near term.
• Facebook has a wallet for f-commerce. It can provide users with incentives to use whatever funding mechanism Facebook wants. It is hard to imagine they won’t encourage people to fund it through the cheapest mechanism possible. For now though PayPal seems to be the preferred provider because it is easiest.
• While that wallet and currency are only useful for virtual goods on social games today Facebook could easily (a) make the Facebook Credits a required tender type for other commerce activity on Facebook and have hinted they will; (b) make the Facebook wallet available to merchants on Facebook even without requiring them to use Facebook Credits; and (c) require merchants that are either on Facebook and that connect to Facebook to use the Facebook wallet or the accept Facebook Credits for payment.
• As the use of Facebook Credits and the Facebook wallet for f-commerce expands, Facebook’s decisions on funding mechanisms for Facebook wallet have significant ramifications for payments companies. One can imagine Facebook going for payment methods that are really simple or really cheap. Traditional credit and debit cards do not do well in those dimensions relative to the alternatives.
• Once a significant portion of Facebook users has Facebook wallets and Facebook Credits, Facebook could become a very efficient global money transfer platform. Several current and wannabe players in this space should be getting heartburn just about now.
So long as Facebook Credits remains the currency for a relatively small f-commerce economy there’s not much reason for payment companies to take notice. They would lose their commission on a small piece of the action.
The not-so-far-fetched worry for payments companies is that Facebook sucks in a significant portion of online and offline commerce. In fact that’s where I’m putting my money.
Most significant businesses have Facebook fan pages. Facebook and these merchants have a strong interest in moving commerce on to Facebook: Facebook because that’s where the money is, and merchants because that’s where their customers are.
People who say Facebook will never be an e-commerce platform remind me of the people who predicted a few years ago that Facebook would never be a great advertising platform. One sophisticated media company executive told me a couple of years ago, echoing the wisdom at that time, that Facebook wouldn’t be worth more than $1 billion because it had turned out to be such a lousy ad platform. Aside from two zeroes they were right on the money.
Then there is Facebook’s move to mobile which could provide a link to physical sales. As Facebook’s S-1 highlights, a significant amount of Facebook traffic is coming from mobile devices and the company sees mobile as very much in its future. Mobile devices aren’t great for selling advertising per se, but they are useful for facilitating commerce. Facebook Credits could become a payment method at the physical point of sale and linked in a variety of ways to Facebook fan pages.
Anyone who understands Facebook’s assets should recognize that while these are highly ambitious and daunting goals they are not impossible ones for this company.
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.
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