Snapchat's P2P Project Signals a Growing Trend

Snapchat, in unveiling a person-to-person payment function this week through a partnership with Square Inc., joins a growing number of companies treating social media accounts as payment instruments.

Snapchat's main product is a popular instant photo messaging system that deletes photos shortly after they are sent. The addition of a money-sending feature, called Snapcash, turns the service into something more like PayPal's Venmo, which functions as both a P2P service and a messaging app.

Facebook may be planning a similar approach for its Messenger app, especially now that it has former PayPal president David Marcus heading its Messenger business. But Facebook's earlier efforts in consumer payments have seen mixed results. It began to sunset its virtual currency, Facebook Credits, in 2012, and it also phased out a process for selling physical gifts through the social network.

Other examples include Google's Gmail, which added a money transfer button last year; and Square's own Square Cash app, which recently added features that let users build personal profiles and locate other users via Bluetooth.

"All of these companies are trying to embed payments through digital capabilities," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "P2P as a first-generation business was sort of ho-hum, and nobody made any money on it, probably not even PayPal, and they've been doing it for 10 years."

Snapchat CEO Evan Spiegel turned down a $3 billion cash acquisition offer from Facebook late last year, and his company's approach to payments stands in sharp contrast to Facebook's in that it is building very little of its service in-house.

Snapchat's decision to rely on Square, a well-known payments company, may be particularly savvy in light of a recent breach of Snapchat user data. Under the Snapcash process, Square handles the payment through its Square Cash P2P service.

Whether Square's involvement is enough to convince users about security remains to be seen, said Jeff Crawford, senior consultant with First Annapolis Consulting LLC.

"People are really reluctant to send money or use cards without a trusted payment provider, and that really comes down to the banks and the networks," Crawford said. "To segregate that relationship can be problematic."

Even though Snapcash is aimed at a younger demographic, trust is "not necessarily a given," Crawford said. "I would be a healthy skeptic about Snapcash for various reasons, including the security element."

But Square comes to the table with experience in payment processing and money movement. "We've seen continued customer adoption and growth with the addition of these new communication channels, and we've already handled hundreds of millions of dollars in payments," said Square spokesperson Katie Baynes.

Square's support for Snapchat is based on the photo messaging service's quick adoption.

"Millions of individuals use Snapchat to communicate with their friends and family, and it's a natural gathering place to talk about events and activities that often require the exchange of money," Baynes said.

Financial terms of the agreement were not made public, but technology site Re/code speculated that Snapchat is paying Square a small fee for each transaction it handles. PaymentsSource could not reach Snapchat CEO Spiegel for comment.

In an interview with Re/code, Spiegel indicated his company didn't intend to compete with similar services offered through Venmo and PayPal, instead viewing Snapcash simply as an added service for users.

But Snapchat and others could be in the right place at the right time if P2P suddenly takes off, Mott said.

By nature of its fast messaging that "disintegrates" after 10 seconds, Snapchat has a chance to lure impulse buyers or those seeking to complete transactions in which there is no need for "a long audit file of what they have spent," Mott said.

In that regard, Snapcash may be the perfect place for an individual to pay off bets, a share of a dinner tab, or for photos of antique cars or other items he may be interested in purchasing, Mott added.

If nothing substantial occurs initially with consumer adoption, the Snapcash process at least provides an example of P2P partners using a different distribution channel, Crawford said. It may also prove to be a significant test for Square, he added.

"In addition to their stand-alone Square Cash app, they are looking to make P2P more valuable on something people are already using to share photos," Crawford said.