Facebook Hits the Payvment

So, here's a development: Paypal has opened up its payments platform to enable developers to easily integrate payment apps into their Facebook apps using PayPal as the enabling payments mechanism. This solution is designed to open up commerce on social networks and tap into the tens of millions of people who hang out there each month. The solution creates many, many winners, some unintended consequences, and one big loser.

Let's talk first about the winners. First, any retail outlet that wants to be on Facebook has to be psyched about this. The PayPal API eliminates the need to do the nasty work associated with creating eCommerce functionality AND making it work on Facebook. Two birds with one stone – which means a faster development process, too. And, smaller retailers without a web presence and who haven't a chance in H-E-Double Hockey Sticks to get a commerce-enabled app on Facebook now have just as much of an opportunity as any other merchant to hawk their wares.

PayPal is a huge winner, for obvious reasons. Any retailer whose app developer integrates with the API has a built in PayPal payment method. That means that sales made via that app run thru the PayPal network, subject to the PayPal fees, now and into the future. This also helps PayPal also crack the acceptance issue off eBay that they have struggled with for so long, if ABC retailer on the web wants to erect a storefront on Facebook, it is a pretty good way for them to get acceptance on their stand alone web site since they can now point to customers of that retailer who use their payment application.

Now for the unintended consequences. These retail storefronts are creating lots of new customers for PayPal. Sure the merchants get the sales, but PayPal gets the data, the merchant transaction fees and the right to interact with the customer on an ongoing basis. Remember how PayPal works? They act as a trusted intermediary and shield payment information from the merchant. That means that a transaction that happens on ABC retailer's storefront is enabling a sale for that retailer, but actually cultivating a relationship with PayPal. If you've ever bought something on PayPal, you'll remember never getting a solicitation from any of the sellers you may have purchased from, but PayPal. Plus consumers have to set up (or have) a PayPal account. Not a big deal, but another step for those who aren't now on the network.

It's also not clear that retail storefronts that operate as nothing more than satellite access points on social networks are worth the time and the money that developers are spending to create them. There are storefronts on Facebook today, good ones, but no one is really buying. The jury may still be out on whether using Facebook as satellite web site will be any more effective than advertising on social networks has been (e.g. lots of hype but no real traction).

And, now for the loser. Facebook. The Facebook platform has enabled a ton of new businesses and from the sounds of it, has just enabled one more big one. It is not obvious that they stand to make one dime (or capture any of the residual benefits from the data behind these transactions) off of these payment-enabled storefronts, absent any advertising that retailers may do to drive business to their storefronts. Sure, they've launched Credits as a virtual currency designed to enable the purchase of birthday cakes and other virtual goods, and will drive revenue, but it's chump change when compared to what PayPal will collect as a result of this new move.

I am very bullish on social commerce, and if nothing else, PayPal's move cemented the notion that there is gold in them there hills. I still contend that no one, yet, has delivered the sort of solution that captures the dynamics of social, marries it with a compelling value proposition for retailer to sell merchandise and network member to buy, and has an incentive for the social network to support it. There's something out there in stealth mode that comes the closest we've seen, so, it only gets more interesting from here, I think.

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