Facebook On Track To Becoming A Major Player In Payments

Summary

• Facebook announced that it would trial a Facebook Buy initiative on the Facebook platform, which will allow users to purchase merchandise.
• Facebook will allow users to purchase goods with their existing payment credentials, and offer users the ability to store these credentials for future purchases.
• If Facebook Buy is successful, Facebook will have assembled some key assets to be a major player in payments.

Facebook (NASDAQ:FB) recently announced that it would be playing a more active role as a social commerce broker. Following in Twitter's footsteps, the company announced that it would be offering a Facebook buy button on certain ads that would allow users to purchase merchandise featured in selective ads. While trials have been ongoing since mid July, it was recently revealed that Stripe is the company behind the trials and powering the Facebook buy button.

While Facebook facilitating digital commerce is in and of itself quite interesting, also intriguing is how they will be brokering transactions on the site. Within the scope of the Facebook trial announcement, Facebook indicated that it will allow users to enter their existing credit card and debit card to complete transactions. These transactions can then be stored by users for future purchases that they wish to make.

The significance of how Facebook is executing commerce is that they are working within the existing payments ecosystem to facilitate transactions. This is a major departure from the original Facebook approach to payments, which was to leverage its own proprietary currency, Facebook credits, to facilitate transactions. Facebook credits was subsequently disbanded in 2012.

The advantage of working with existing payment instruments is that it lowers barriers for user adoption. This should help make the Facebook Buy program more of a success than had Facebook used its own proprietary currency for transactions. The other major advantage for Facebook in executing its Buy program in such a manner is that it enables it to be a major player in the payments ecosystem.

Facebook first has to get users comfortable with storing their payment credentials on the Facebook platform. Promising not to share credit card credentials with merchants is a good start. While older generations may be more skeptical in allowing their payment credentials to be stored with the site, I suspect this won't be such a major issue for millenials, particularly if Facebook can offer compelling, exclusive offers in partnership with its merchant base.

With increasing user acceptance, Facebook will slowly start to amass a library of user payment credentials on file, in a manner very similar to how Apple has built up its database of 800 million iTunes accounts and 800 million credit cards. With over 1.3B Facebook users, that represents a treasure trove of potential cardholder data.

Once Facebook has achieved reasonable momentum with its Facebook Buy initiative and managed to capture a reasonable user base of payment credentials, I would expect that the company will then expand its role in payments to facilitate online checkout with Facebook credentials on file. The way this would work would be very similar to how services like PayPal and Amazon Payments work today. Websites would support Facebook user credentials at checkout, and allow users to pay with their default card on file instrument.

Such a Facebook checkout experience would solve a large problem for online merchants. It would help reduce the rate of transaction abandonment which has been reported at between 70-80%. Transaction abandonment occurs when users get to the check out page, and then have sudden doubts about entering the payment information with unknown merchants.