Facebook and Google are poised to challenge the banking industry in online payments. Both Internet giants have developed alternative payment networks that observers say could come to undermine the likes of MasterCard and Visa.
Jacob Jegher, a senior analyst at the research firm Celent, says the competitive threat is significant. "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," he says. "These firms are clearly well entrenched in the online space and have the ability to attract consumers and steer transaction flows away from traditional payment vehicles."
Google operates its own payments service called Checkout, which enables merchants to accept most any card transaction from consumers who sign up to use it. Google says it has facilitated billions of dollars worth of transactions since launching a few years ago. And last year Google bought Jambool, whose Social Gold is used by application developers as currency to make payments within apps.
Facebook has "credits," which it made available to its customers several years ago. Credits are sold for cash—Facebook accepts 15 different currencies and 20 alternative payment types. This allows users from around the world to play games on the social network without the headache of exchanging currency. Facebook also has a new subsidiary called Facebook Payments, about which it is being extremely tight-lipped.
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. (Some examples include Beenz and Flooz, which both vanished around the time the Internet bubble burst in 2000.)
Though credit cards ultimately became the preferred method of payment online, PayPal, now a unit of eBay, 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 Internet market 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 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 plans to use it for processing credits, its online currency.
Analysts speculate that Facebook Payments could be part of a strategic plan to disintermediate 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," says Ron Shevlin, a senior analyst at Aite Group 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. Such credits are typically used by consumers as they are playing a game—say, to purchase a weapon in Mafia Wars or fancy decorations for a virtual bakery in Baking Life.
But game developers also might accept credits for application upgrades they want consumers to pay for. That, experts say, is potentially a significant money-making opportunity because, according to Facebook, it extracts 30 percent for all transactions that use credits.
"That is a very hefty premium for a payment service," says Steve Ledford, a partner at the consulting firm Novantas in New York. "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." Ledford says 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.
Observers say Google's strategy appears more consistent than Facebook's, but none claim to fully understand what the search engine juggernaut is planning.
Google froze Jambool's operations after acquiring it in August, but announced plans to reactivate the business in December, via a post on the in-app payment company's website.
"Google has been playing in the smartphone space," in addition to near-field communications and mobile payments, says Brian Riley, a research director in the bank cards practice at TowerGroup. "This is a logical progression."
Industry analysts say Google could easily combine its Checkout function, which exists as a payment option for hundreds of thousands of merchants, with Social Gold. "Google Checkout is very transactional, and like Paypal, it is not traditional cash but an equivalent form," says David Furlonger, a fellow and vice president of industries research at Gartner.
Google announced in late March that application developers on its Android smartphone platform could start charging their customers for upgrades from within the application using Google Checkout.
Celent's Jegher says 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 says Google and Facebook may become a bigger threat if their payment systems develop into point-of-sale options. In September, Target began selling Facebook credits on gift cards. Today, these cards are available at Wal-Mart Stores, Best Buy, Safeway, RadioShack and GameStop. Warner Bros. Digital Distribution also accepts 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 says.
The implications of that point are wide-ranging. In theory, consumers could deposit other things—rewards for spending, for example—at their banks, just like cash. "[Banks] might want to demonstrate to their clients that they can coordinate the different financial assets, or equivalent assets," Furlonger says.
The Facebook and Google payments strategies have big differences, in part because of how consumers use their online services. For now, people typically visit Google as a gateway to somewhere else, but visit Facebook as a destination, with more than 500 million using the site. "It is a place in its own right where banks will want to offer their services." says Ledford, of Novantas.
By contrast, Google might position its payments as an enabler for smaller social networks like Foursquare, LinkedIn and Myspace to conduct transactions without setting up payment networks. "Google certainly has the capability and scope to be the common currency for the other social networks," says 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."
