Facebook's latest payment announcement, which focuses sharply on mobile devices, shows how the company draws inspiration from the industry's success stories — and signals where the payments industry as a whole might be headed.
The expansion of Facebook Credits to mobile isn't about the point of sale, where more experienced players have seen rocky results. The Menlo Park, Calif.-based social media giant said June 6 that the mobile version of Facebook Credits would instead facilitate the sale of digital content.
Its system puts charges on a user's phone bill, echoing the methods that proved profitable for ringtone sellers long before smartphones became mainstream consumer devices. This method also resembles that of Apple Inc.'s wildly successful iTunes and App Store, which sell digital content exclusively.
Facebook has teamed up with numerous telecommunications companies to establish direct-to-carrier billing. It has arrangements with AT&T, Sprint Nextel Corp., T-Mobile USA Inc. and Verizon Wireless in the U.S. It also works with O2 (Telefonica UK Ltd.), Orange, T-Mobile U.K., Three UK and Vodafone Ltd. in the United Kingdom.
In the coming months, Facebook says it will partner with mobile operators in 30 countries.
Payments industry observers began to get a better grasp of Facebook's payments intentions this year. During the first day of the Mobile World Congress in Barcelona, Spain, Facebook foreshadowed this week's announcement by saying it would become the "middle man" between Web developers and wireless carriers.
Consumers are likely to find the Facebook mobile pay process quite easy. Its new two-step process for initiating and confirming a mobile transaction eliminates the risk of consumer drop-off that occurs so often with more complex mobile payment options.
Facebook's S-1 filing prior to its public offering revealed that 15% of the social network's $3.7 billion in revenue in 2011 came from payments. Facebook was also obtaining money transmitter licenses throughout the U.S., setting the stage for it to transform its digital currency into a form accepted for payments elsewhere (see story).
The new payment option comes on the heels of the company's announcement last month about the new Facebook App Center. Now, Facebook has a central application location, as well as a way for consumers to easily pay for those applications.
These steps may position Facebook to leapfrog the mobile payment efforts of Google Inc., PayPal Inc. and Apple.
But industry analysts aren't ready to make that bold prediction just yet.
"Everyone wants to be part of mobile payments, so it is not a surprise and it makes sense that Facebook would try to develop a way to extend its Facebook Credits system," Gil Luria, analyst with Los Angeles-based Wedbush Securities, tells PaymentsSource.
However, Facebook can't compare its Credits system to any legitimate payments process, Luria contends. "It's really more of a 'toll' that Facebook collects for playing games on Facebook," he says. "They are not processing or handling payments in the real sense."
Because Facebook's involvement in the payment process is still so limited, "this will be an uphill climb, as it is for any company trying to enter the payments industry that is not a payments company," Luria says. "Somebody still needs to screen the transactions for fraud and handle charge-backs because those are important things that go on behind the scenes."
While the Facebook venture into mobile payments illustrates "how big the opportunity is," Luria says, the company's setup for cell-phone billing will likely limit Facebook Credits' immediate growth to the digital or small-ticket items.
The fact that Facebook chose to pursue a mobile payments option through telcos, rather than conventional payment infrastructures such as EFT or the card-processing networks, could spark a revenue tug-of-war, Maria Arminio, president of Avenue B Consulting Inc., a Redondo Beach, Calif.-based payments management consulting firm, tells PaymentsSource.
"Those telco companies don't want to give up their share of profitability in the mobile and online space," Arminio suggests.
The other obstacle for social networks plunging into payments is whether consumers trust them, Arminio says.
"I have seen recent studies in which consumer confidence in social networks for handling mobile payments was rated well below the major card networks and even the U.S. Postal Service, which doesn't even offer a mobile payment option," she notes.
Facebook did not respond to PaymentsSource inquiries by deadline.
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