Facebook, Your Future Bank

Fall behind in the game FarmVille and the poor crops inside your Facebook window wither. Remedies include biplanes or rejuvenating your "farm coins," but if you're out of those, there's another solution: Buy Facebook Credits with cold, hard cash.

Nongamers may have missed Facebook's clever foray into the world of "virtual currency," where Facebook Credits cost 10 cents each and can be exchanged for game points or cartoony gifts. Those dimes are adding up—the U.S. market for virtual goods will reach $2.1 billion in 2011, according to research firm Inside Network. Facebook's currency, while just part of that market, is getting real. You can now purchase gift cards for Facebook Credits at Wal-Mart (WMT), Target (TGT), and Best Buy (BBY).

So why couldn't Facebook use them as real currency, too? In fact, why couldn't Facebook become your bank?

Money Is A-Changing

At first blush, this seems like a crazy idea. Facebook would need to overcome consumer privacy concerns, expand its Credits into a payment system that works everywhere, and surmount regulatory hurdles to handle businesses such as deposits and mortgage servicing. Crazy, until you realize how smartphones are changing the world of money.

Jack Dorsey, co-creator of Twitter, started Square in 2009 to help local merchants accept credit cards with iPhones. AT&T (T), T-Mobile, and Verizon (VZ) have formed Isis to turn smartphones into mobile wallets. And American Express (AXP) launched Serve on Mar. 28 to link checking accounts, credit cards, or debit cards to phones and computers. All of this interest is spurred by fees—billions of dollars in the global payments industry that now flow to Visa (V), MasterCard (MA), and American Express. Every time you swipe a credit card, the merchant must pay a few percentage points to the credit firm. Change card processor, and all those fees could go somewhere else.

PayPal did exactly this on the Web about a decade ago, when it pioneered a simpler way for eBay (EBAY) users to transfer funds securely; PayPal now has 94 million active accounts and is nearing $4 billion in annual revenue from $92 billion in PayPal transactions—about 18 percent of all global e-commerce. The next payment platform is no farther than that glass gadget in your pocket.

Move Over, PayPal

Who could supplant PayPal for a piece of the currency pie? The most logical bet is leading communication networks that work on mobile devices with millions of active customers. Beyond cell carriers, Apple (AAPL) has a consumer base through iTunes. Google (GOOG), busy defending search as consumers shift to mobile, recently partnered with MasterCard and Citigroup (C) to put mobile payment functionality into Android phones.

But Facebook today both owns the Web—where 500 million-plus users now spend more time there than on any other site—and is a dominant app on smartphones. Beyond this customer base, Facebook has embedded "Like" buttons on almost every major website, becoming the only real product praise utility. Facebook has persuaded large retailers to build sites, called Facebook Pages, within its platform. Facebook already has a currency, its Credits. And Facebook recently expanded its monetary systems with Facebook Payments, purportedly for paying app developers. But the incorporation documents state that Payments is "organized for the purpose of transacting any or all lawful business." Hmmm.

If only one of every five Facebook users adopted Credits to buy things, Facebook would be as big as PayPal. And once Facebook makes us comfortable with Credits, it could then transition to a "traditional" global bank, storing your financial assets like gem points in Bejeweled Blitz.

More than a billion-dollar prize, the finance industry would also be a brilliant defensive move for Facebook. The company's main challenge is that it may be overvalued, based on investors hoping for future growth, while current revenue models do not scale exponentially. As more Facebook users migrate to smaller mobile screens, the visual space for ads will shrink and ad revenue may fall per user. Facebook can't make much selling consumer data, because its current privacy policy states it won't share personally identifiable information to advertisers without user permission. Facebook Credits, by comparison, faces few natural limits.

A Checkbook Friend Is Forever

Becoming a financial powerhouse would help Facebook avoid the fate of many once-popular networks. Prodigy, AOL (AOL), Friendster, Second Life, and MySpace (NWS) all dreamed of growing forever, too. To survive, Facebook must become more than glorified e-mail. Sharing photos and gossip with friends might make Facebook hard to leave. But upload your checking account and Facebook may just be forever.

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