Facebook Ditches Credits, Keeps the 30% Payment Processing Fee

Facebook is phasing out its digital currency, choosing instead to allow transactions on its domain to be denominated and processed in the sellers’ local currencies, Prashant Fuloria, a Facebook product management director is telling us on the company’s Developer Blog. The shift away from Facebook Credits and toward real money has already begun and is expected to be completed in the next few months.

Even as Facebook Credits are being scrapped, however, the social network is keeping its payment processing pricing model intact. So all transactions, in whatever currency they may be processed, would still be subject to a 30-percent fee, charged to the seller’s account. All the while, payment fees are becoming a huge revenue source for the social media giant, quickly making up ever more ground on the still dominant advertising channel. And there is a lot at stake.

Facebook Credits Scrapped

Here is what Facebook’s Fuloria has to say about his company’s transition from Credits to real money:

Since we introduced Credits in 2009, most games on Facebook have implemented their own virtual currencies, reducing the need for a platform-wide virtual currency. As a result, we are updating our payments product to support pricing in local currency (ex: US dollar, British pound and Japanese yen) instead of Credits.

By supporting pricing in local currency, we hope to simplify the purchase experience, give you more flexibility, and make it easier to reach a global audience of Facebook users who want a way to pay for your apps and games in their local currency. With local pricing, you will be able to set more granular and consistent prices for non-US users and price the same item differently on a market-by-market basis.

This decision makes perfect sense to me. Credits did make the transaction process more cumbersome than necessary, especially considering the fact that app developers also tended to introduce their own currency. So, to buy a digital chicken on FarmVille, one would first need to buy Facebook Credits with real money and then convert them to Farm Cash, the in-game currency used by Zynga, FarmVille’s maker. I think that all these in-game currencies should go too, which would benefit everyone involved, including, by the way, the developers who might well find that a simplified transaction process leads to increased sales. On the other hand, I cannot see a single benefit of having one’s own digital currency. Evidently, Facebook executives share my view point.

The 30-Percent Payment Processing Fee

Credits may be gone, but Facebook’s “underlying payments product, along with support for global payment methods, and policies will remain the same,” Fuloria tells us. So the developers would still be charged a fee of 30-percent of the transaction amount for each payment they accept on Facebook. That is a huge price to pay, but there is no alternative. To get an idea of just how high Facebook’s processing fee is, consider that, if a developer were selling his digital wares on his own website, his payment fees would never have been higher than three percent or so and most of his transactions would have been processed at a considerably lower rate.

However, as far as Facebook is concerned, its payment fee structure is just fine. In the first quarter of this year, payment fees comprised 18 percent of the social network’s total revenue, up from 15 percent in 2011 and less than five percent in 2010. At this rate, a couple of years from now payment processing could surpass advertisement as the top revenue producer for the company. Yet, there are potential pitfalls along this road and the biggest one among them is Facebook’s dependence on Zynga, as the social network itself acknowledged in its Prospectus:

In 2011 and the first quarter of 2012, we estimate that up to 19% and 15% of our revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.

So the lion’s share of Facebook’s fee revenue was generated by Zynga and that should indeed be a source of concern.

The Takeaway

I expect that, over time, Facebook’s dependence on Zynga’s performance will diminish. The issue that I see is that the social network’s transaction rate is just too high to be sustainable in the long run. For now developers are quietly, albeit grudgingly, going along with it, but that is unlikely to last for too long. I suspect that, sooner or later, people will start voicing their frustration with the 30-percent rate, just as retailers are constantly protesting against credit and debit card fees (and they won a big victory on the debit card front last year!). Eventually Facebook will have to lower its rate or it may well find itself ion the wrong end of an antitrust law suit. After all, the social network is exploiting its monopolistic status.

Image credit: Nickburcher.com.