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Is Facebook a Massive Payments Company?

You’d think so given its amended S-1.  It is on track to earn almost $1 billion from payments in 2012.  In the first quarter of 2012 it earned $186 million in payments and other fees. That was almost double what it earned in the first quarter of 2011.  If Facebook’s payments revenues continue to grow at this rate the company would have payments revenue of $978 million for 2012 and exceed $1 billion in 2013. And even if growth stopped dead in its tracks, and payments revenues just continued at the $186 million a quarter clip of the first quarter of 2012, Facebook would have payments revenue of $744 million at the end of this year.

Remarkably Facebook payments are growing much more rapidly than advertising. Comparing the first quarters of 2012 and 2011, advertising revenues grew by 37 percent while payments revenues grew by 98 percent.

With a $186 million a year in payments revenues Facebook is only about a seventh the size of PayPal, which had March 2012 revenue of $1.3 billion.  But then Facebook has been at this for about a year compared with 13 years for PayPal. Next year, it looks like Facebook, at its current rate of payments growth, could be more than a quarter the size of PayPal based on revenue.

So is Facebook a massive new payments company? No, at least not yet, and here’s why.

Facebook earns these “payments revenues” by:

  • requiring social game providers on Facebook to use Facebook credits for selling virtual goods;
  • enabling consumers to buy Facebook credits that they can use as virtual currency for these games;
  • paying social game providers 70 percent of the value of the credits they’ve been paid; and,
  • keeping 30 percent of the value of the credits social game providers have been paid for itself.

This business model should sound pretty familiar to you. It is similar to Apple’s policy of charging developers 30 percent of the revenues they earn from applications sold in the Apple iPhone store. The only difference is that Apple doesn’t have the stutter step of selling virtual currency to people and requiring its sellers to take it.

Both Facebook and Apple are charging developers a fee for using their software platforms.  They aren’t the only ones. That’s what the video game console makers such as Sony PlayStation do too—they charge game providers a royalty (a percent of revenue) on every game they license to consumers.  Other platform businesses do too. Shopping malls, for example, charge stores rent plus sometimes a slice of revenue for space at the mall.

Facebook, Apple, and these other companies are charging “software platform fees” for giving developers access to the software platform codebase (including APIs, SDKs, and other tools) and access to the users that they software platform has assembled.

This isn’t just semantics.  Payments companies earn revenue from providing payment services to consumers and merchants. They aren’t providing any underlying good or service. They are simply helping buyers and sellers settle up.

Facebook is doing that too. But if that’s all it was doing for sellers it wouldn’t be getting 30 percent and it wouldn’t have to require game providers to use its currency.

Facebook is on track to earn about $1 billion as a software platform provider to developers of applications. It turns out that these revenues are mainly from social games. But there’ll be more applications and probably other killer applications in the future.

Words matter perhaps more than they should. 30% of revenue sounds like an awfully onerous payments charge. It makes the 2% or so that issuers get in interchange fees sound like chump change.  Facebook should drop the payments revenue label like a hot potato before some class action lawyer makes that misleading comparison. (“Ladies and gentlemen of the jury: 1500 percent more than even those evil monopoly credit card networks charge!”)

So does this mean Facebook isn’t going to be a big payments company?  Well, no, that’s a different question.  As I’ve argued in previous articles Facebook Credits could become a very interesting currency used for online and offline transactions. Facebook could make money from that as a payments provider.  But that’s in the future, it’s not now.

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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