Rumors about the imminent demise of credit cards and their replacement with a more up-to-date payment form have circulated at regular intervals for a very long time, only to inevitably prove greatly exaggerated at the end. The rise of social media over the course of the past several years has contributed its fair share to the rumor factory and, unsurprisingly, Facebook has been the name mentioned most often.
BTN’s Sean Sposito is giving us the outlines of the plot that he says may lead to the displacement of credit and debit cards by Facebook Credits — the social network’s currency that is used for the purchasing of an array of digital items that can be used for various purposes within Facebook’s domain. It’s an interesting story that makes for great reading, but unfortunately it is also one that is replete with errors, which shouldn’t be made by someone writing for a publication with the name of “American Banker.” More importantly, once again credit cards will survive the challenge, although payment processing companies may find themselves competing in a new environment and will be forced to find ways to adjust.
The social network introduced its digital currency in 2009 to be used for payment in some Facebook games and Zynga, the creator of FarmVille and top developer of Facebook applications, quickly made the credits, which sell at $0.10 apiece, the exclusive payment method for most of its games. That is big business in its own right, which, together with the credits’ other uses, accounts for a substantial chunk of the social network’s revenues. As Sposito reminds us:
Facebook generated about $557 million, or roughly 15% of its revenues, from “payments and other fees” last year. That figure is a five-fold increase from its $106 million in payments revenues in 2010, which was itself up from the $13 million the year before.
And there is no doubt that the growth will continue, as Facebook finds other uses for its currency. One of these uses is very likely to be a checkout method at online and physical stores, but here is where Sposito treads on shaky ground.
Facebook Credits vs. Credit Cards
So Sposito commits a fallacy that many have fallen into before him and, I have no doubt, many others will be repeating for a long time to come. He misplaces the credit cards’ position in the transaction process. Here is the gist of his argument:
Facebook could also become a prominent brand on checkout pages and eventually at the point of sale, further displacing credit and debit cards.
No, Facebook will not displace credit and debit cards, as these payment methods will be used for the purchasing of a large share of the social network’s credits. In other words, in the payment process the bank cards come before the credits.
Sposito goes on to compare, correctly, the putative future Facebook payment platform to PayPal, but he again draws the wrong conclusions:
PayPal was acquired by eBay Inc. in 2002 and had its initial success among merchants who used the online auction site. PayPal later aggressively went after business with traditional retailers. It recently began testing a point of sale payment system that invades the home turf of traditional credit card issuers.
While the first two sentences are correct, the third one is completely wrong. Neither online, nor at physical checkouts, does PayPal compete directly with the card issuers. As is the case with the hypothetical Facebook scenario above, PayPal transactions, whether virtual or physical, are merely facilitated by eBay’s payment outfit. The payments, however, are made with bank cards or checking accounts. So how is PayPal displacing the issuers? It does not, it promotes them.
So PayPal is a payment processor and as such it competes with other payment processors, not the issuers. Ditto with Facebook.
Just as PayPal did a decade ago and Square is doing at present, Facebook’s foray into the payment processing world will force changes in how things are done in our industry. But these changes will be different from what Sposito and many others envisage. They will have nothing to do with the card issuers, although the latter will still have plenty to worry about. The ones who will have to adapt to the new reality are the payment processors. And, as always, it will only be the fittest who will survive.
Image credit: Industrygamers.com.