Facebook Crashes the Payments Party
Facebook is now allowing its users to send money to friends via its mobile Messenger app. The feature has been anticipated ever since PayPal executive David Marcus joined the company last June to lead its mobile messaging business. Why else would a PayPal guy move to Facebook unless it was to create a payments business?
We had further confirmation that we’d see in-app payments last November, when Marcus said during an interview at the Techonomy conference that he’d been looking at messaging apps in Asia. (Customers who use Tencent's WeChat in China, or KakaoTalk in South Korea, or Line in Japan can do everything from hail cabs to pay friends, all while chatting with friends).
I’m gonna come right out and say that I think Facebook can really succeed here, even though every company on the planet wants to get into payments.
On the retail side, Apple and Google are fighting it out for domination over the payments we make when we buy things in stores, in apps and online. But in the peer-to-peer market, which Facebook has entered, the leading competitors are much smaller players, including Square, a late-stage startup, and Venmo, the popular payments app that PayPal owns.
While smaller players have beaten Facebook before (Snapchat, with its disappearing messages, comes to mind), Venmo and Square are both saddled with some problems.
Square is, by all accounts, still figuring out a way to turn hardware (the Square credit reader), cash register software and a working capital program for small businesses into a cohesive business model.
Venmo is owned by a payments giant with money and expertise, but that owner, PayPal, is also undergoing a split with its parent, eBay, that has created -- for the time being, at least -- uncertainty about how it will fare apart from the mothership.
Venmo has already shown that people are willing to embrace the idea of paying their friends with the touch of a button. According to a Bloomberg Businessweek feature, Venmo processed $700 million in payments in the third quarter of 2014, up from $141 million over the same period the year before.
Much like any social platform, the network effect around peer-to-peer payments is important. You can’t pay your friends if they’re not using the product. And when it comes to networks, it’s hard to compete with Facebook.
After Facebook decided to make Messenger a standalone app last April, Business Insider said that monthly active users soared from 200 million to 500 million. (Just imagine what might happen if WhatsApp, a huge network with 700 million users, gets a payments product too.)
Venmo lacks Facebook's dominant global reach. Square is trying to create a network by teaming up with Snapchat and its estimated 100 million users, but that experiment has yet to pan out.
Another huge advantage that Facebook has, especially over the unprofitable Square, is that it doesn’t have to worry about whether its peer-to-payment systems generate revenue. Businessweek noted that Venmo isn't profitable (although PayPal certainly is).
Facebook makes most of its money by selling ads to users, so it can spend time developing an enormous user base for a payments product and not worry (for now) about generating revenue. That will also allow it to let Facebook users get comfortable with mobile transactions.
Some caveats. Facebook has gone down the payments road before, with little success. Most famously, the Credits product that it wound down at the end of 2013 was a dud. It was plagued with tech issues and no one really used it. As I wrote back then:
Credits was a currency of sorts that people on Facebook could use instead of credit cards. The product was designed to make money for Facebook, but it got little traction. The company forced game developers to use it in 2011, much to their chagrin. But Credits was clunky, particularly when it came to currency exchange. The last ditch effort to make the currency catch on just didn't work.
Facebook has had better luck deploying free tools that make it easier for users to connect with others, such as Newsfeed and “Log In With Facebook" – products that keep you coming back to the Facebook ecosystem and that quietly make Facebook an essential nexus.
Offering Facebook users a free, easy payments button seems of a piece with this strategy. If it works, it could be a big win for a company that’s tried for years to figure out a way into the payments game.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Timothy L. O'Brien at email@example.com