The world's largest social network is in talks to add banking to its list of services (alongside hosting vacation pictures and birthday reminders), according to the Financial Times. Unnamed sources claim Facebook Inc. is about to win approval from Ireland's central bank to operate a Europewide digital wallet that will let users store and exchange money online. So, why would Facebook want to offer payment services?
FB needs the money
As Carl Mortished points out in our subscriber-only ROB Insight section: "Facebook needs to make the gradual transition from media phenomenon to dull utility and Mr. Zuckerberg appears to have chosen the soft underbelly of the financial system as his target." The advertising money Facebook wrings from its 1.2 billion users is nice and all, but if it could turn those users into customers it could really start making money on that resource. How much? Reuters reports: "Global mobile transactions are expected to grow at an average 35 percent per year between 2012 and 2017, according to a report by research firm Gartner. The June 2013 report forecast a $721 billion market with more than 450 million users by 2017."
Let's also credit Mr. Mortishead for coining the best name for the planned service: "Facebank."
This is a natural extension
When you think about it, players such as Apple and Google are already doing online and mobile payments for apps, music, movies and books; Amazon will take just about any form of payment and send you stuff (including digital content like books and movies); and Square tries to be that bridge that connects even low-revenue real-world sellers to the world of online payments. Facebook sells gift cards and in-app purchases, but a Facebank would encourage you to start using Facebook money to buy non-Facebook things (or just to transfer money to friends and family). If they make it safe and convenient, people just might.
The next billion users
You heard that Facebook was going to buy some Internet-beaming, solar-powered drones to connect those parts of the developing world that still can't easily access the Web (Google actually ended up with those)? Never mind that our own Iain Marlow thinks that idea is harebrained and potentially more harmful than helpful, the plan for the drone-ternet is to sign up Facebook's next billion users. The ability for those new users to connect with a global payment network might help the "Why should I join Facebook?" sales pitch.
The chance to be the central bank of the Internet
When tech firms and banks talk about the potential for mobile payments to take over commerce in the developing world, they are hoping to emulate or replace African mobile payment sensation M-Pesa, launched in 2007: "It has evolved since then to be the currency of Kenya, used in 70 per cent of all transactions. You can pay your water bill, your TV bill, take money out of an ATM," says Michael Joseph, director of mobile money for British telecommunications giant Vodafone Group PLC.
M-Pesa works for two reasons: It doesn't require bank or telecom infrastructure (mobile phones are often more widely available than landlines) and the fees are shockingly low (transactions can be as small as a few dollars, making the 1 per cent fee pretty reasonable). Expect Facebank's fee structure to look similar.
The banks haven't locked this market down yet
It's not like the world's financial institutions are unaware of the interest in their turf from such players as Google, Apple, BlackBerry and Facebook (as well as every telecom operator) but no one has emerged as a winner. "I've heard the 'Apple is going to eat-your-lunch story' for the past four or five years," Todd Roberts, senior vice-president of payments and innovation Canadian Imperial Bank of Commerce, told Tim Kiladze last month in our Streetwise subscriber section. Nevertheless, the incumbents will have to pour billions into mobile solutions to compete, and as Mr. Kiladze wrote that includes a lot of expensive infrastructure upgrades before they can leverage their marketing and customer relationship advantages. Working with tech partners is one way banks are hoping to stay in the game, and to avoid a repeat of history: "During the last tech boom, financial institutions ignored eBay's rise, allowing PayPal to elbow its way into the market."
With files from Reuters, Globe Staff