Social Currencies to Disrupt Payments – Part 2 of 3

Last week, I provided background on Google and Facebook’s social media intentions. In this second installment of the three-part blog series we take a look at the different payments business models of Google and Facebook…

Google’s Payments Business Model

As I previously mentioned, games integrated into the social network experience would propel Google’s payments growth strategy and help drive the adoption of Android Operating System, Chrome Web Store, and Google Checkout. Back in 2006, Google launched its PayPal-like alternative payments method, Google Checkout, funded by the major card brands. It was the search giant’s initial venture in a one-stop mechanism for purchasing from stores across the web. Although Google Checkout already exists as a payment function for hundreds of merchants, adoption rates have been sluggish. In incorporating Google Checkout in its Chrome Web Store, Google plans to accelerate adoption of its mobile applications, and looking to emulate the success of Apple’s business model.

Indeed, Google first began playing in the mobile space with its Android smartphone Operating System in direct competition with the immensely popular Apple iphone. Coupled with the Google Wallet, which was introduced this month, Google is pursuing a dual payments strategy targeted at both the online and retail point-of-sale environments. By integrating Google Checkout in its Chrome Web Store, Google will be able to control payments over a rival’s payment option. Google also has the potential to become a payments alternative for smaller social networks like FourSquare and LinkedIn.

Facebook’s Move

Facebook’s approach to payments is somewhat different from that of Google. In December 2010, Facebook quietly formed a subsidiary, Facebook Payments, Inc. signaling its intentions to move into the payments space. If history is an illustration, Facebook’s strategic plan is eerily similar to the early days of web commerce when dozens of companies emerged – and disappeared – while PayPal became the dominant alternative payments provider. With parent company eBay offering PayPal as the only alternative payment option on its site, eBay’s size and reach enabled PayPal to grow rapidly. Just as PayPal established itself in online payments, Facebook with 750 million account holders has an impressive customer base and revenue potential.

Starting July 1, 2011, the social currency, Facebook Credits became the exclusive currency for all Facebook applications. Currently credits are primarily used to purchase digital downloads such as social games that account for 40% of all Facebook usage. Indeed, according to one estimate from 2009, $75 million of Facebook’s $550 million annual revenue came from virtual payments. Facebook Credits can be purchased using PayPal, credit cards, debit cards, and mobile transactions. These credits can also be bought at brick and mortar stores: Target, Wal-Mart, Best Buy, Safeway, RadioShack Corp, and GameStop Corp., and presently available in 15 currencies. With a payment vehicle that can be used across the entire platform, and as a global currency, Facebook Credits has the potential to become a dominant medium of exchange.

An added advantage of Facebook is the audience base that merchants would not otherwise reach. Facebook is especially well-suited for promotions. Social deal sites like Groupon generally take 50 percent from businesses (40% for Living Social) that are willing to take the deep discount in exchange for volume and exposure. The lower expense, along with the exposure and user base of Facebook, makes it an attractive value proposition.

But it’s not all roses for these tech giants. Facebook and Google face some considerable hurdles, …which will be the topic of my third and final installment of this 3-part blog series.

[Original blog post can be found here]

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