Facebook Wants to be Your Wallet: Are You Ready?
Nov 26 2014
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Facebook already handles your social life; now it wants to handle your money. Hacked screenshots leaked in October show a hidden payment option inside Facebook’s popular Messenger app, which is currently used by 200 million people around the world. The feature would let ordinary users—but not retailers or companies—send money to one another in a message using debit card information. (Facebook hasn’t commented on the hack or on when it might activate the service.)
The big question here is, why would Facebook—the world’s largest social network,worth an estimated $200 billion—even consider going down this road at all? Existing peer-to-peer payment apps are generally free to use, i.e. there’s no immediate profit to gain for the service provider. And rumor has it that Facebook Messenger’s version will be free, too, at least initially. It’s even been reported that Square Cash, a similar service from Twitter co-founder Jack Dorsey, actually loses Square around 25 cents each time it’s used, since someone has to swallow the debit card transfer fees charged by the banks.
The answer lies in the fact that Facebook knows its current foray into payments could result in a potentially enormous longer-term payoff. The social network may be gearing up for a future showdown with the world’s largest credit card companies, with a potentially massive jackpot at stake: the $40-$50 billion a year (in the U.S. alone) that credit card-issuing banks make off the so-called interchange rate, i.e. the hefty transaction fee that merchants have to cough up whenever customers use credit cards.
But do a few hacked screenshots really spell the upheaval of the entire payments industry?
Maybe. For starters, Facebook hasn’t exactly been coy about its interest in payments. Back in June, the company poached PayPal president and payments guru David Marcus to head up Messenger, a move that now makes a lot of sense. Meanwhile, in a Q2 earnings call, as reported in TechCrunch, Facebook CEO Mark Zuckerberg was quite explicit in saying that “over time there will be some overlap between [Messenger] and payments.” The groundwork for a Facebook payment service, in other words, has already been laid.
But—and here’s where things get really interesting—there’s nothing stopping Facebook from ultimately opening up the payment service to merchants, as well, allowing them to accept debit card payments from customers via Messenger. (Zuckerberg has hinted as much, noting that the planned tool will ultimately “help people share with each other and interact with businesses.”) For merchants, this would have some huge advantages. While credit cards, not to mention PayPal, Stripe, Square and other services, all charge interchange fees ranging from around 2- to 4-percent of total purchase price (an amount considered exorbitant by critics), debit card swipe fees in the U.S. are currently capped at a mere 21 cents.
With this kind of savings hanging in the balance, it’s not difficult to image millions of merchants and potentially hundreds of millions of consumers signing on. Consider that there are currently 79 million MasterCard credit card holders in the U.S.—a sizeable number. But there are nearly 200 million monthly active Facebook users in the country. Facebook, in other words, has the potential to create a payment network that rivals—and, in some cases, dwarfs—the major credit cards, virtually overnight.
Once merchants and consumers are hooked, Facebook may ultimately turn its focus to profits. Again, Zuckerberg has already signalled this aspiration, explaining to revenue-hungry investors in July that the company is planning “to take the time to do this in the way that is going to be right over multiple years.” With credit card interchange fees currently set so high, Facebook would have plenty of room to make money from merchants while still undercutting traditional credit cards by a wide margin. If the network were to eventually charge a $1 fee (as has been suggested) or even retain just a fraction of a percent of each transaction, the revenue stream could be enormous.
All of this might seem a bit far-fetched, if some of tech’s biggest players weren’t already pursuing similar strategies. Last week, for instance, rising ephemeral social network Snapchat teamed up with Square to launch Snapcash (via a snappy little video). The new feature allows Snapchat’s 100 million users to quickly and seamlessly send cash to one another after a one-time process of adding bank details to their existing profiles.
Meanwhile, in September, Apple unveiled Apple Pay, a mobile wallet app that lets users store credit card information and then “tap and pay” with their iPhones. For the moment, Apple is content to act as something of a middleman in this process, making it easier for customers to use their existing credit cards while collecting a tiny fee from the banks in the process. But with time, consumers and merchants may get used to the idea of using Apple for their transactions, with credit cards playing an ever diminishing role and—maybe one day—slipping out of the picture entirely.
What’s clear from these efforts is that the stodgy old payments space, dominated for so long by traditional banks and their credit cards, is finally beginning to face some serious challengers. The good news for consumers and merchants, is that there’s much to gain and little to lose aside from high fees as the payments race heats up over the next few years. It’s all pretty exciting stuff.
The big question here is, why would Facebook—the world’s largest social network,worth an estimated $200 billion—even consider going down this road at all? Existing peer-to-peer payment apps are generally free to use, i.e. there’s no immediate profit to gain for the service provider. And rumor has it that Facebook Messenger’s version will be free, too, at least initially. It’s even been reported that Square Cash, a similar service from Twitter co-founder Jack Dorsey, actually loses Square around 25 cents each time it’s used, since someone has to swallow the debit card transfer fees charged by the banks.
The answer lies in the fact that Facebook knows its current foray into payments could result in a potentially enormous longer-term payoff. The social network may be gearing up for a future showdown with the world’s largest credit card companies, with a potentially massive jackpot at stake: the $40-$50 billion a year (in the U.S. alone) that credit card-issuing banks make off the so-called interchange rate, i.e. the hefty transaction fee that merchants have to cough up whenever customers use credit cards.
But do a few hacked screenshots really spell the upheaval of the entire payments industry?
Maybe. For starters, Facebook hasn’t exactly been coy about its interest in payments. Back in June, the company poached PayPal president and payments guru David Marcus to head up Messenger, a move that now makes a lot of sense. Meanwhile, in a Q2 earnings call, as reported in TechCrunch, Facebook CEO Mark Zuckerberg was quite explicit in saying that “over time there will be some overlap between [Messenger] and payments.” The groundwork for a Facebook payment service, in other words, has already been laid.
But—and here’s where things get really interesting—there’s nothing stopping Facebook from ultimately opening up the payment service to merchants, as well, allowing them to accept debit card payments from customers via Messenger. (Zuckerberg has hinted as much, noting that the planned tool will ultimately “help people share with each other and interact with businesses.”) For merchants, this would have some huge advantages. While credit cards, not to mention PayPal, Stripe, Square and other services, all charge interchange fees ranging from around 2- to 4-percent of total purchase price (an amount considered exorbitant by critics), debit card swipe fees in the U.S. are currently capped at a mere 21 cents.
With this kind of savings hanging in the balance, it’s not difficult to image millions of merchants and potentially hundreds of millions of consumers signing on. Consider that there are currently 79 million MasterCard credit card holders in the U.S.—a sizeable number. But there are nearly 200 million monthly active Facebook users in the country. Facebook, in other words, has the potential to create a payment network that rivals—and, in some cases, dwarfs—the major credit cards, virtually overnight.
Once merchants and consumers are hooked, Facebook may ultimately turn its focus to profits. Again, Zuckerberg has already signalled this aspiration, explaining to revenue-hungry investors in July that the company is planning “to take the time to do this in the way that is going to be right over multiple years.” With credit card interchange fees currently set so high, Facebook would have plenty of room to make money from merchants while still undercutting traditional credit cards by a wide margin. If the network were to eventually charge a $1 fee (as has been suggested) or even retain just a fraction of a percent of each transaction, the revenue stream could be enormous.
All of this might seem a bit far-fetched, if some of tech’s biggest players weren’t already pursuing similar strategies. Last week, for instance, rising ephemeral social network Snapchat teamed up with Square to launch Snapcash (via a snappy little video). The new feature allows Snapchat’s 100 million users to quickly and seamlessly send cash to one another after a one-time process of adding bank details to their existing profiles.
Meanwhile, in September, Apple unveiled Apple Pay, a mobile wallet app that lets users store credit card information and then “tap and pay” with their iPhones. For the moment, Apple is content to act as something of a middleman in this process, making it easier for customers to use their existing credit cards while collecting a tiny fee from the banks in the process. But with time, consumers and merchants may get used to the idea of using Apple for their transactions, with credit cards playing an ever diminishing role and—maybe one day—slipping out of the picture entirely.
What’s clear from these efforts is that the stodgy old payments space, dominated for so long by traditional banks and their credit cards, is finally beginning to face some serious challengers. The good news for consumers and merchants, is that there’s much to gain and little to lose aside from high fees as the payments race heats up over the next few years. It’s all pretty exciting stuff.
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