Facebook Inc.'s payments revenue is growing dramatically each year, and its digital currency soon could threaten banks as it moves into more traditional channels.

Facebook's revenue from "payments and other fees" is thriving, up more than 400% in the past year alone. This growing amount of funds comes from selling Facebook Credits, a digital currency, for 10 cents each. Individuals may exchange credits for digital items to display on users' Facebook pages or for upgrades in games played on the social networking site.

As Facebook nurtures it, "Facebook Credits might grow, and banks might lose some of the relationships they … now have," says Gwenn Bézard, research director at Aite Group.

If consumers adopt Facebook Credits for more of their spending, it would distintermediate banks, distancing them from valuable spending data they could use to cross-sell products and deepen customer relationships. Facebook also could become a prominent brand on checkout pages and eventually at the point of sale, further displacing credit and debit cards.

And that future might be closer than banks realize.

Facebook generated about $557 million, or roughly 15% of its revenue, last year from "payments and other fees," according to its S-1 filing Feb. 1 (see story). That figure is a massive increase from its $106 million in payments revenue from 2010, which was itself a dramatic improvement from the $13 million that business took in the year before.

With this exponential growth, the Menlo Park, Calif., company is confronting regulatory implications. "Payments on the Facebook Platform could be considered a financial product; … we could be deemed a financial institution," Facebook said in its filing.

This doesn't necessarily mean Facebook plans to become a bank. It is applying for state money-transmitter licenses, which would put it in the same league as PayPal Inc. Facebook could follow the same path that PayPal did, displacing banks and payment networks in the process. (Facebook did not respond to a Feb. 2 interview request.)

PayPal, which eBay Inc. bought in 2002, had its initial success among merchants that used the online auction site. In subsequent years, PayPal sought the business of traditional retailers. It recently began testing a point of sale payment system with Home Depot and Office Depot, invading the home turf of traditional credit-card issuers (see story).

"Like with PayPal and with eBay, people might end up using a Facebook Credit Wallet," Bézard says.

Eventually, Facebook could gain the same prominence as Google within financial services by serving up personalized ads, as well as marketing intelligence, says James Van Dyke, the president and founder of Javelin Strategy and Research.

The bulk of Facebook's revenue comes from advertising, according to its filing.

"This is where Facebook could uniquely deliver," Van Dyke says. "The network effect could be huge, give a Google-like advantage to Facebook that trumps even Google itself because [Facebook] runs … a much more personalized and activity-intensive network than does Google."

Facebook has been enforcing the use of its payment system on its site. Though other companies developed separate ways to accept payments within Facebook apps, the social network cracked down on third-party payment systems and largely forced them out. As of July 1, nearly all game developers accepting funds in a Facebook app must use Facebook Credits.

A deal with Zynga, the game developer behind the hit Facebook game Farmville, grants Facebook up to 30% of the face value of purchases made within any Zynga games that are played on Facebook's site, Facebook said in its filing.

Despite the growth of Facebook's payment system, there are some obstacles it must overcome, particularly with regulators. To keep its Credits system running, Facebook might have to come into compliance with regulations in China, the U.S. and Europe all at once.

"[To] what extent could it have a ripple effect on the rest of the business?" says Bézard. Facebook often is criticized for how it exploits its users' personal information, but financial companies "have restrictions in how they can use their customer information."

If Facebook is willing to forge alliances with traditional players, there may yet be an opportunity for banks to benefit from the growth of Facebook Credits.

"How about a Facebook cobranded card, … is anyone doing that?" says Aaron McPherson, a research manager for payments at IDC Financial Insights. "If they aren't, they should be."

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