Facebook Credits: Should Payment companies be worried?

What are they ?

Facebook credits are a wallet and a currency.

How do they work ?

There's a "Facebook Payments" tab on the left-hand side of a user's account settings in Facebook. When you click on that you are taken to a screen where you can buy Facebook Credits.

Once there, there are several ways to pay. You can enter your mobile phone number and PayPal's Zong will send you a PIN, which you then enter to get your Credits. It takes a few seconds for the round trip. Or, you can use PayPal itself. Once you enter your account and password, you don't even need to leave the page. There's a credit card option and even a Facebook gift card.

The next time you want to buy Credits, Facebook remembers how you paid the last time and that's the default for buying more. There's a little "change" button at the bottom of the screen that allows you to switch to another payment instrument if you want. Facebook remembers all the different funding methods you used so you can easily switch between them.

You might have gone through this process because you knew you were going to need Facebook Credits and went to your account settings directly. For the moment, most consumers probably go through this process because they are playing a game on Facebook, and the only way they can do that is to buy Facebook Credits.

You may also have Facebook Credits because Facebook or applications on Facebook might have deposited some in your account as a reward or an inducement to take an action on Facebook.

Should payment companies be worried? Part One: Facebook Credits are based on wallet

Any consumer who buys Facebook Credits has a wallet on Facebook. That wallet contains one or more funding sources. The wallet provides a one-click method to buy more Credits. Click, Buy, Spend.

At the moment this wallet is only useful for buying Facebook Credits. And it is a pretty limited wallet. It could even be argued that it is not a wallet at all as there is no widely accepted definition of a wallet.

Should payment companies be worried? Part Two: Facebook Credits Is a Currency

Although the Facebook Credits are no different to how we use our cards today to pay into Amazon, iTunes, PayPal, or any other accounts, the concern is that the wallet isn't being used to directly buy a good or service. It is being used to buy a currency-Facebook Credits-which can then be used by consumers to purchase things (currently only virtual goods for social games) on Facebook and for entities to reward consumers.

The standard definition of "money" is that it is a medium of exchange, a store of value, and a unit of account. Facebook Credits is all of those things.

Money is pretty indestructible but even more so when it is electronic! Once money is created people can keep using it. At the moment this isn't significant since the social game companies that are being paid with Facebook Credits are going to want to cash it in for real currency to satisfy their investors. So they are happy Facebook is sending them real money every couple of weeks.

How that changes over time depends on whether Facebook Credits becomes a broad medium of exchange as a result of commerce taking place on Facebook and as a result of enough people doing things that involve Facebook Credits that they don't mind being paid this way. If that happens, it's a game changer.

Here's an example. Social game companies could pay developers around the world in Facebook Credits and small businesspeople could accept Facebook Credits because they could use them to buy other things that they need or reward customers with them. In some countries (especially those with national debts that are greater than their GDPs) Facebook Credits could become a safer currency than the national currency.

Should payment companies be worried? Part Three: Facebook Credits Could Be a Really Smart-Currency

Existing currencies lack innovation.

The inhabitants of Silicone Valley could make Facebook Credits really smart. Facebook Credits could collect data as it changes hands, support sophisticated loyalty, reward programmes, and lack of enough cups of tea this morning prevent me from thinking of anything else.

Should payment companies be worried? Part Three: Facebook Credits Marginalizes Payments Companies

Existing payments business are basically intermediaries that move money between buyers and sellers. There are many and varied steps in this transactional process and the issue is multiplied when it comes to cross-border transactions.

If most merchants and consumers had accounts with a single provider would there still be any need for payment companies as the intermediary?

What does it all really mean ?

Whilst all the innovations in Facebook credits could be a long way off - what do the short term effects mean ?

• Facebook has a wallet for f-commerce. It can provide users with incentives to use whatever funding mechanism Facebook wants. It is hard to imagine they won't encourage people to fund it through the cheapest mechanism possible. For now though PayPal seems to be the preferred provider because it is easiest
• While that wallet and currency are only useful for virtual goods on social games today Facebook could easily (a) make the Facebook Credits a required tender type for other commerce activity on Facebook and have hinted they will; (b) make the Facebook wallet available to merchants on Facebook even without requiring them to use Facebook Credits; and (c) require merchants that are either on Facebook and that connect to Facebook to use the Facebook wallet or the accept Facebook Credits for payment
• As the use of Facebook Credits and the Facebook wallet for f-commerce expands, Facebook's decisions on funding mechanisms for Facebook wallet have significant ramifications for payments companies. One can imagine Facebook going for payment methods that are really simple or really cheap. Traditional credit and debit cards do not do well in those dimensions in relation to the alternatives
• Once a significant portion of Facebook users have Facebook wallets and Facebook Credits, Facebook could become a very efficient global money transfer platform.

For as long as Facebook Credits remain the currency for a relatively small f-commerce economy there is not much reason for payment companies to take notice. They would lose their commission on a small piece of the action.

The not-so-far-fetched worry for payments companies is that Facebook will plug into a significant portion of online and offline commerce.

Most significant businesses have Facebook fan pages. Facebook and these merchants have a strong interest in moving commerce on to Facebook. The former because that's where the money is, and the latter because that's where their customers are.

There is also Facebook's move to mobile to consider which could provide a link to physical sales. A significant amount of Facebook traffic is coming from mobile devices and the company sees mobile as very much in its future. Whilst mobile devices are not great for selling advertising per se, they are useful for facilitating commerce. Facebook Credits could become a payment method at the physical point of sale and linked in a variety of ways to Facebook fan pages.

Whilst these goals are highly ambitious and somewhat futuristic, they are not beyond the capabilities of the Facebook gurus.

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