Facebook and Google Encroach on Banks' Turf

Facebook Inc. and Google Inc. are poised to go head to head with established financial services companies in online payments.

Both Internet companies have developed alternative payment networks that observers say could undermine the scale of dominant payments providers like MasterCard Inc. and Visa Inc.

The Google and Facebook payments initiatives are potentially a "major disruptor to existing payment systems that have been so established for such a long time," said Jacob Jegher, a senior analyst at the research firm Celent.

Google has assembled pieces of a payment network through its Google Checkout and through last year's acquisition of Jambool Inc., whose Social Gold is used by application developers as currency to make payments within apps. Facebook is challenging the incumbents of the space with its Facebook Credits and a new subsidiary called Facebook Payments Inc.

Industry experts say the current payment environment is reminiscent of the early days of Web commerce, when dozens of companies emerged — and quickly perished — in an attempt to become the Web equivalent of cash.

Though credit cards ultimately became the preferred method of payment online, PayPal Inc., now a unit of eBay Inc. of San Jose, Calif., emerged as an important alternative payment provider, and it controls one in five payments on the Web today.

Recent moves by Facebook and Google demonstrate that there is room even in today's mature Internet for new players to snare a portion of online spending.

Demonstrating that Facebook is serious about developing the payments market for its Credits, the company quietly established its Facebook Payments subsidiary in Tallahassee, Fla., on Dec. 10. Facebook would not elaborate on the purpose of the subsidiary other than to say the company planned to use it for processing Credits, its online currency.

"As is common in many company structures, we have established a subsidiary called Facebook Payments Inc. that helps handle payments to developers related to our Facebook Credits program," a Facebook spokesman said.

Analysts said that Facebook Payments may also be part of a strategic plan to disintermediate the banks, which handle the estimated hundreds of millions of dollars worth of payments that Facebook gets from its advertisers.

"Facebook wants to monetize the potential commerce that will happen, or that it wants to have happen, on its platform," said Ron Shevlin, a senior analyst at Aite Group LLC in Boston.

And Facebook plans to have a lot more activity on its payment platform besides advertising. Starting in July, it will also require game developers to accept in-game payments in Credits.

That, experts said, is potentially a significant money-making opportunity because, according to Facebook, it extracts 30% for all transactions that use Credits.

"That is a very hefty premium for a payment service; this is really Facebook providing an environment that allows vendors … to essentially bring their products to market to a ready-made group of customers 100 million strong," said Steve Ledford, a partner at the consulting firm Novantas LLC in New York. Ledford said that while the Credits marketplace is dominated by game vendors, Facebook could easily recruit other merchants.

The privately held Facebook does not disclose its financials, but according to one estimate from 2009, it was generating $550 million of annual revenue, of which $75 million came from virtual payments.

Google's strategy appears more consistent than Facebook's, experts say, but no outsiders claim to fully understand what the search engine juggernaut is planning.

Although Google froze Jambool's operations when it acquired it in August, it has announced on the in-app payment company's website that it plans to reactivate the business in September.

"Google has been playing in the smartphone space … and it is working in near-field communication and mobile payments," said Brian Riley, a research director in the bank cards practice at TowerGroup. "This is a logical progression."

Google said by email that it would not discuss Jambool or Social Gold at this time.

Industry analysts said Google could easily combine its Checkout function, which exists as a payment option for hundreds of thousands of merchants, with Social Gold.

"With the purchase of Jambool, we will assume [Google] will roll this functionality with Checkout," said David Furlonger, a fellow and vice president of industries research at Gartner Inc. in Stamford, Conn.

Google announced in late March that developers on its Android smartphone platform could begin charging for upgrades from within the application using Google Checkout.

Celent's Jegher said the ability to pay from within an application is critical and that it would benefit Google to have control of those payments. Without Social Gold, smartphone users might use a rival's service, such as PayPal.

Furlonger said Google and Facebook may become a bigger threat to banks if their payment systems develop into options at the point of sale.

In September, Target Corp. began selling Facebook Credits on gift cards. Today, these cards are available at Wal-Mart Stores Inc., Best Buy Co. Inc., Safeway Inc., RadioShack Corp. and GameStop Corp., Facebook said.

And in March, Warner Bros. Digital Distribution began accepting Facebook Credits for online movie rentals.

"Banks continue to view traditional money as the only medium for exchange, and they need to think carefully if that traditional medium is the only one that is most important to their client base," Furlonger said. "They might want to demonstrate to their clients that they can coordinate the different financial assets, or equivalent assets."

Facebook and Google's payments strategies have significant differences, which will determine how each develops alternative payments. Experts said people generally visit Google to go somewhere else. But they visit Facebook as a destination, and more than 500 million use the site. As such, Facebook has a huge captive audience, Ledford of Novantas said.

Five hundred million "is a lot of people," Ledford said. "It is a place in its own right where banks will want to offer their services."

By contrast, Google might position its payments as an alternative to Facebook's, enabling smaller social networks like Foursquare, LinkedIn and Myspace to conduct transactions without having to set up their own payment networks.

"Google certainly has the capability and scope to be the common currency for the other social networks," said Nicole Sturgill, a research director at TowerGroup in Needham, Mass.

"If they want to sell, they will have to have a way of moving money, and if it is going to be virtual, they will need an organization that spans the Web," Sturgill said.