The author seems to confuse credit risk and fraud risk. Credit risk pertains to the probability of you being unable or unwilling to honour your commitments. Fraud, within this context, pertains to the unauthorised use of funds. Facebook's data may be a uniquely valuable to evaluating the former, but to fighting the latter it is less important than existing transaction history databases.
Financial fraud is an immensely complicated problem. An estimate quoted in The Economist recently put the fraud loss rate at approximately 0.35% of transactions and up to 1.8% for online payments [1]. Cross-border payments are a niche unto themselves - even with margins as high as 10%, the fraud risk still poses a high enough barrier to entry that even the banks handle just 5-10% of remittances [2].
It's 11AM and so far Visa and American Express already have 1-3 data points of swipe activity on me. Over the day they'll get 5-10 swipes apiece (+1 NYC). Facebook has a tremendous amount of value in its dataset, but think for a moment about how much Visa, Mastercard, American Express, or your primary bank know about where you live, what you spend on (and by virtue when and where you spend it), and, by aggregating that data, who you tend to spend with. That is what's valuable for anti-fraud and by proxy payments processing.
For the ~$2 trillion[1] going through online payments, bringing down the online fraud loss by every 0.1% is equal to $2B, if over time Facebook can reduce that online fraud rate by 0.5% or more there is your $10B.
Using your real identity to make online payments could reduce that to real world levels.
If this is the case then reducing the fraud rate from 1.8% to 0.35% in online payments (a reduction of 1.45%) would calculate to a savings of $29B for this industry.
Thus, if Facebook is able to be a major part of that reduction by using real identities then they will get much of this transaction business. If they are able to pull this off there is no stopping them...
Feel free to rip me apart, but there is some validity to may arguments :)
[1] http://www.edgardunn.com/uploads/100012_english/100385.pdf
How many of your friends have had their facebook accounts stolen? For me, it's a few percent. "Oh look, another random acquaintance is stuck in Abu Dhabi and needs me to wire them some money"
Facebook security isn't nearly good enough to be handed my wallet. Actually it's not my wallet that's the problem, it's the wallet of everybody who uses "password" as a password.
Although it is controversial, banks seem to be starting to look at this.
Visa/Mastercard/Amex only have your transactions to go on so naturally they have spent billions building fraud tools around this data; that's not to say there are not a lot of other data points to build these tools.
They don't have to worry about stolen cards used in the high street, they don't have to do cash advances, they don't have pin pads skimming people's pins in stores.
I barely trust Paypal, you think I'm gonna trust FB with my CC details. You gotta be kidding.
There are a few steps FB must do before I'll trust them with anything other than bs about what games I'm playing now:
1. Convince me they take my security and privacy seriously. 2. Convince me they aren't selling my personal data (statistical or not) without my permission. 3. Allow me to export (backup) ALL my data to my drive easily. 4. All me to cancel my account (not that I would). And by cancel I mean remove all my data. No questions, no sales pitches to stay - just delete everything in my profile (and off their, FB, drives). FB says they do this, But there are plenty dead folk with active profiles. Despite families begging FB to delete them.
Until all this happens, FB gets nothing from me except an occasional post about my Skyrim adventures. Oh and commenting on the latest high school gossip (the latter being funny. I mean, there's a reason I left town 25 years ago and hardly kept in touch. But here we all are, FB friends.)
For most of them, paying with Facebook would just be easier than using something else / remembering more details etc etc. And they probably trust FB more than they trust other companies with far less visibility (although most them have used their CC without any thought or concern on a load of different websites).
FWIW and personally, I completely echo your thoughts - although I'm sure I'd end up giving my CC details to FB as soon as a website that I needed to buy from offered no other method to pay than the FB one.
I'll offer a counter anecdote. I've been impressed by their targeted ads more than once and clicked!
It has to get hyper-specific though. Not like gender-targeting, for me it read that I liked linguistics at one point in my profile and offered me an add to by a Wug shirt. I was super impressed and spent time in their online store.
I'm not sure it's a good idea to dismiss Facebook's chances at making money from ads yet. I've never clicked on a TV ad either, but stations make hundreds of billions of dollars from those ads every year. That industry took many decades to grow to that point though.
One big reason I trust Paypal for everyday transactions is because they make money off of each transaction directly, whether through direct fees or merchant fees. I can understand their business model, and the service has a certain simplicity.
The OP wants me to give financial data to a company where my data is their product, and who is always trying to prise more "openness" from me through a byzantine privacy UI and borderline surreptitious app installations? I'll pass, thanks.
Realistically speaking, 1 may never happen, 2 is already there (even if you're only liable for $50 from unauthorized cc transactions).
FB has several billions of revenue from ads.
What makes you think you are not an insignificant outlier and that this move or any other doesn't concern you?
Just think people, if everybody did what I do on FB, would FB still exist? If the answer is no, then what you might or might not do, doesn't matter with regards to FB.
I think the answer is obvious: people prefer no ads. "Advertisement" is a dirty word. People want a free, ad-less product, despite the fact that it's economically unfeasible.
That's a problem. What happens when it becomes more widespread or easier to install things like adblock? What happens if a browser comes along that blocks Facebook cookies and ads by default, but still allows the basic functionality of FB? Don't say it can't happen. We're just getting to the point in society where having everything about us on someone's server is "normal". Wait until there's a disaster of some sort, a major security breach, and see how fast people change their habits. It can happen overnight.
FB has several billions of revenue from ads.
So far I haven't seen statistics or proof to indicate that advertising on Facebook is effective, although I've heard anecdotes to the contrary.
If advertising on Facebook proves to be ineffective, then they are in big trouble.
If everyone's facebook account has CC details attached and a 1 click "pay now" button you are only 1 XSS vulnerability from fraud on an unprecedented scale.
http://www.wired.com/magazine/2010/02/ff_futureofmoney/all/1
The consumer doesn't give two flying fucks about any of this. This is a very important point.
In order to do that FB would be looking at setting up massive infrastructure and essentially having a "banking division" that would get bogged down in regulations and bureaucracy.
If I want to use my ccard online, away from home I need to have all kinds of codes remembered or written down, my normal bank card and this little device.
Using my ccard online has become quite the pain in the ass.
I should never have to type in a password, credit card number, or address if I don't want to... yet nobody except a few proprietary browser plugin vendors treats this as a problem worth solving.
What might make more sense would be for FB to allow linking a paypal account with a FB account which could then allow users to login to Paypal via FB.
This would mean they could use paypal's more mature backend and let them deal with the messy stuff, while facebook could still potentially get all the fun of spying on your purchases.
If something does go wrong cc have very good insurance on them. The problem does seem to be a general resentment and paranoia of large companies. I dont think fb are going to cook up a half baked solution for anything like this, there's every likelihood they will do it as securely as the next especially with the strict laws and regulations around implementing such systems.
Everyone with a cc has probably used it in far less secure environments than fb could ever be, for example pubs, bars, resteraunts, independent shops etc.
If fb did a payment system it would annoy me briefly as another payment system I'd inevitably have to register with at some point but that's realistically as far as the problems would go.
It makes about as much sense as looking at facebook with their billion users and saying "You know what all these people have in common? They eat food!" And concluding that facebook should become a grocery store.
Payments is a non-trivial business to enter. Paypal has a nearly 15 year headstart, 100 million active accounts and does a tremendous amount of business in a great many countries, yet it is still only a $4 billion a year company.
Certainly it is a difficult market to enter, but a few billion dollars can buy you a lot of expertise, relationships, and time to build experience.
The reason Facebook should go into transactions is the same reason Willie Sutton robbed banks: "because that's where the money is".
Facebook: ~ 1 billion customers
Visa: ~2 billion cards out there.
Facebook: ? merchants.
Visa: > 10 million merchants.
Facebook: potentially disruptive to the existing market
Visa: 50+ years experience with electronics payments processing, fraud detection, government relations and consumer credit marketing
Facebooks main competitive advantage is(was?) relatively cheap capital.
http://corporate.visa.com/_media/visa-fact-sheet.pdf
Edit: Corrected years, added reference
I sure can just whip out the CC, type in the 16 things, the special code, the expiration date, maybe a second screen the CC vendor presents to get my address or phone number for additional verification...
But I would never bother for a 3 or 5 cent article. And I firmly believe that's why there is no way to pay 3 or 5 cents for a view of something.
But there is a lot of cool stuff we could make or do with this. It should just be easy. Why doesn't it exist? There might be a big business answer that my fellows and myself don't get as we rant over coffee.
If your article is only worth 3 cents, just show it to me for free and put an ad on the page.
Google Adsense fills that niche. People who run a website get money from teeny little clicks that their vistors do.
With credit cards we have a number of "hidden alternatives". We've got multiple processors, multiple card companies, etc. It's a number of layers there. With Facebook and Paypal... you're not able to pay when they say you're not able to pay (or be paid). They're not even controlled banks, so there's little you can do about some issues.
Think about all the problems when Google cut someone off and didn't provide any way of contacting them. Do you have a good way to contact Paypal, or Facebook now? (besides forms that result in canned responses) What are the incentives for changing it?
That aside, I not only assumed Facebook had thought of the idea of payments, they might even be working on it. It seems like an extension of the "Like" button they already have on so many sites.
Certainly Facebook is certainly thinking about new ways to make money, but they did disclose that ads are a risk factor in their S-1, with special concern for increased mobile device use, where they don't currently display ads.
- Upon logging in Facebook lets me know my favourite band is playing in a few weeks, tickets are $25 and I can purchase with one click.
- A new episode of Dexter comes out, Facebook knows I love dexter and thus notifies me and allows me to watch instantly in my browser for just $1.
- A games company (steam, humblebundle, blizzard, whoever) is running a sale on games similar to ones I've already liked on Facebook, I can view and purchase the bundle through Facebook.
All of this is taken care of in one click by my credit card being linked up to Facebook, just like iTunes. They can basically combine the best bits of iTunes + Amazon + All the data they have on everyone on Facebook and build the ultimate relevant shopping directory completely personalized to me.
Sure there are sites that already cater for this but it's about the convenience and instant gratification. 50% of their users log into Facebook daily and won't even bother checking out other sites for these things if they're already right there in front of them available with one click.
They don't even have to do it themselves initially, just hook into Amazon / Ticketmaster / iTunes data and this shouldn't take too long to develop.
This is where the future is and if Facebook does this there's no reason they can't be the most profitable web company in the world.
While it may be easy to build the customer side of the equation you've got to build a vast network of merchants willing to accept payment and that's hard work. Especially if you're trying to convince them to re-price in Facebook Credits?
Sure, you could charge 1% but people have added credits to their Facebook account at some point and it probably cost you more than 1% to allow them to do that. How do people buy credits right now? All those cost Facebook more than 1%, right? I buy $100 of credits, it costs F8 a couple of bucks, I then spend $100 of credits and they recoup $1 of it in merchant fees? Doesn't sound like a good business model.
Beyond the need to create a financial model that makes sense and then go out to find merchants and convince them there's a massive risk of merchant fraud.
Fraudulent merchant X signs up for a F8 Merchant Account. Fraudulent customers A, B, C buy something with stolen credit cards for $100 each. Everyone disappears after merchant X receives settlement. F8 is out of pocket to the tune of the original $300, another $300 in reversals to their bank and then $30-$60 of chargeback fees. If that happens enough then F8 might even have its merchant account revoked... though they're probably big enough to avoid that.
It's an excellent money laundering channel too and there's a lot of financial regulation to navigate around that.
I know that this stuff can be overcome but it is hard to do and would be a major piece of work. This type of thing nearly sank PayPal back in the day.
Perhaps I'm missing the point here though?
As far as I know, it did not really lift off, but this could be because Facebook overtook Hyves as the most popular social network shortly afterwards.
You put an ad on Facebook. People click on it an buy with FB-pay. You then get a ton of marketing data to better aim your ads. Tine of purchase, day, credit card type, marital status (confirmed versus Fb status), income information, billing address, etc.
All in one convenient place. How much would businesses pay for that? A lot. Evidence? Call your local mailing list broker and ask for a quote.
Of course, this will set off what I call "the privacy wars". Where the government will step in after some single mother of three is scammed and the story is picked up by some mommy-blogger who then sells the story to the huffington post, who then sells the article to CNN, who then puts it on TV. Then FOX makes a deal out of it, republicans notice, and make some lobbyist-impregnated bill that includes the "single-mommy law for online privacy".
But, we've had this coming for a while.
This is partly because of the fraud risk, partly because of VISA and MasterCard's duopoly. Facebook is pretty well situated to deal with both IMO.
And it's not just online payments: The current state-of-the-art in mobile-phone POS payments ("It's exactly like a credit-card! Except it's in your phone!") seems like a dead-end to me. Facebook is in a unique position to move into this area.
Do you really think Facebook doesn't have reams of data and analysis on this exact idea? I bet they've been analyzing the crap out of it for years and for whatever very good reason they have they haven't done it yet.
Now, I predict the company who will make a trillion on payments is Apple. They're set up quite nicely to tell the credit card companies to take a hike.
And then Facebook would know everything I buy.
What I would expect to see however is discounts offered if you use FB payments and allow your purchases to be automatically shared with your friends.
Facebook has scared off a lot of the "moms" out there by their bad bad bad privacy history. Do you really want to pay for things using their service?
The real problem is regulation. It is so, so much easier to sell ads than to navigate the international financial markets.
Which keeps them from using that hypothetical service, because they don't want to risk losing the account over a transaction that went wrong.
Or maybe not. Who knows?
It would definitely be the next step in user lock-in, but you'd start competing with banks and everyone else who offers a way to pay.
Now, I wouldn't complain if they bought some "bypass the credit card companies" service like Dwolla...
I have both an American Express and a Visa (because Amex just isn't accepted some places). The customer service has been nothing but amazing, even when dealing fraudulent charges. And the cards are accepted everywhere.
What I'm saying is, I don't feel any need whatsoever to bypass my credit card company to pass my information off to a start up.
However, it can become some kind of market place. It already knows user locality, it already has people flocking to it. It already has big brand stores sharing discounts and coupons to consumers.
All it needs to do is finish the last mile and allow those brands to actually have a "Facebook-only Sale", for example.
Also, it can become a great "local market place", and can help local businesses to sell to local customers.
TLDR: not just ads, and not necessarily a payment gateway, but a niche market place could be it.
1) I don't trust Facebook to transact payments quickly or safely.
2) I don't want Facebook to take my money. I'm guessing Facebook would capitalize on this by exacting a higher rate than other options. Because they can. I want the max amount of money to go to the creators of a product, not to Facebook.
3) As it says, Facebook already knows everything about people. Should they really have access to our credit cards as well?
They could first allow people to exchange any amount of money with friends for free, add it to their mobile app so that everyone has it anytime. Other apps are doing that, and that's very useful.
And they should buy Stripe, bind everything together, displace amex, visa and mastercard.
Or may be that's the plan, but it's best to be silent ?
They have a good place to do that, but I doubt that they'll go that way.
But Steve isn't there, and Apple moves might be unexpected.
Nerds and Geeks never trust facebook, but their moms and sisters do !
Not really viable on the desktop, but certainly on phones.
There's no reason that I can think of why I can't be identified by my own mobile network and either charged at the end of the month or via my airtime.
For example, a lot of brands and agencies register many,many pages on facebook, and even post content there. And Britney Spears is not really on Facebook, she just has someone have post stuff for her.
I'm sure Facebook is huge. But if they say a billion, it is probably closer to 500m.
Not really. You just need different kind of priorities. For example Diaspora challenges Facebook on the grounds where FB is the weakest - privacy. Facebook can't compete on privacy no matter how hard they try (and they simply won't even try since the whole FB is built on selling off privacy).
= Inital Idea = You're perpetually logged into a social network, why not pair up a payment method and leverage that connection. Always be connected to a payment method/global checkout - authorised by a 4 digit pin.
There's an array of pro's as cons for this.
= Issues for Facebook (and Twitter) =
The hurdles to get setup as a Payment Service Provider, and have the capability to preform cross-border, cross-country transactions, dealing with multiple currencies, as well as boarding merchants outside of the US, is a complete bitch.
It would be completely out of Facebook's internal focus to build and maintain this - outsourcing/partnering is a different story.
= Facebook's Cut =
Facebook takes a 1/3 cut from developers for FB Credits. They can't take a 1/3 cut from credit card processing.
They'll realistically take 2.75 - 3.5% and that would just piss off their developers who are being charged a 1/3, unless FB reduce their 1/3 cut - which I doubt they'd do.
Facebook would (probably) make more cash using FB Credits than processing credit cards - The margins are rediculously low with card processing (varies on card type) - It's game of volume.
Unless you're PayPal who charge you 2/3% for sending money between PayPal accounts. When all they're doing is ACH transfers between "dynamic bank accounts" they've setup, which costs them under 5 cents to preform.
= The trust factor = with Facebook (Guy/Girl's in Social Commerce take notice here).
Consumer's/Users whatever you want to call them simply would not trust Facebook with their super sensitive data (Credit Card & Billing Information). They don't have the best reputation when it comes to users data.
They might experience some success and sign up a few tech savy users - but ultimately - even if they sort out all of the technical & logistical issues they will constantly face this one.
This is why social commerce isn't full circle, or shouldnt be. When was the last time you entered your credit card details into a Facebook app? would you?
Social Commerce is really the discovery of products, but when it comes to facilitating the transaction, consumers need to be out of the ecosystem where "public" data is flowing, their friends are talking to them, or irrelevant social data is distracting them.
Consumers feel incredibily uncomfortable entering sensetive data into a platform which they use with the mindset of "sharing".
Unless of course it could be masked under a "Pay by Facebook" option which doesnt require the user to type in and sesntive information - ha.
Those are just my thoughts, and of course you have risk, disputes, charge backs, being the ultimate target for russian hackers etc.
I could be completly wrong, but I think a third party needs to step in here.
Facebook and a Dwolla/GoCardless partnership - now that would be intresting - you can fake a credit card but you cant fake a bank account.
VISA: $3.36 billion profit | DFS: $2.2 billion profit | AXP: $4.9 billion profit | MA: $1.9 billion profit
That's Visa, Discover, American Express, and MasterCard.
That's a $12.4 billion profit, if you take every aspect of all their businesses away from them across the board and basically acquire a complete monopoly in transactions. Their businesses go far beyond processing of course, so you'd really need to not only take over all transaction processing but then double the business.
Facebook processing payments is maybe a billion profit opportunity for them. Not chump change, but very far away from $10 billion.
Visa has a $80 billion market cap, $9b in sales, and $3.6b in profit with a mere 7,500 employees. One of the best ratios of any major company. In fact, it's better than Facebook's current employee to sales ratio (and it's worth pointing out that they're nearly at a $10b sales run rate, and $4b in annual profit).
Visa has around a 40% net margin, that's beyond extraordinary. There's almost zero chance Facebook can be any less bloated than what Visa is already doing.
Discover also has a stellar ratio, 11k employees to $8.5 billion in sales.
Ditto MasterCard, with 6,700 employees and $6.7b in sales.