Banking's future could be on Facebook

It's been announced that Facebook is going to start phasing out their Facebook Credits system. If you've been watching my commentary over the last few years, I had entertained Facebook becoming a sort of default currency for the web because of the platform's ubiquity. However, like many things online, users and developers collaborated to create something different than intended. Soon Zynga and others were embedding their own currencies in their games like FarmVille, linked to real-world currencies like the US Dollar and Japanese Yen. That may have been to avoid the virtual ‘tax' of the Facebook Credits system, or simply copying the intent of Facebook themselves, to create retained value or value stores of cash as part of the game ecosystem.

Facebook Credits, World of Warcraft Gold, Drag Racing Respect Points, FarmVille Cash and other online currencies have emerged not just as a way for developers to make more money (although that is a key driver), primarily I believe these currencies allow you to play your game with far less friction when it comes to monetary interactions. These virtual currencies have an interesting psychology behind them because of our tendency to view these currencies as not ‘real' cash, our tendency to spend them without concern in-game is increased, we then just have to make a top-up decision when our credits run low.

Moving Facebook away from ‘Fremium'

You can't really call the shift away from Facebook credits a ‘pivot‘, as some are classifying the recent shifts in start-ups who need to change their business model to turn their business from “fremium” to revenue and profitability, or from an underperforming revenue model to a new direction. This shift by Facebook is more of a course correction in respect to core value of their platform to the community.

Facebook has first of all realised that they are better positioning themselves as a platform to reach consumers, rather than trying to restrict the flow of currency coming into the Facebook economy through a regulated system.

There's a fine line between having a closed loop system like iTunes, gaining widespread support from developers and advertisers, and at the same time encouraging consumer participation. iTunes has the success of the iPad, iPhone and such that stimulate utilisation of their Apps store. Facebook doesn't have the device specialisation or the same drivers for growth as Apple. If they want participation, openness and ease of use of the platform to create community become more important than closed-loop systems that monetise at the margin. Facebook Credits threatened to restrict that participation and utilisation, and while offering some financial gain from the stored value deposits held and those that went underutilised, the better opportunity for Facebook as a public company is to encourage greater participation to boost the platform's potential for great ARPU (Average Revenue Per User).

The value for Banks is the platform

Movenbank's Scott Bales was on hand at CommunicAsia 2012 in Singapore this week discussing the value of Facebook in the mobile payments and banking landscape. There appears to be two fundamental views of the Facebook world when it comes to KYC and fraud. The first instinct of most is to avoid any use of the platform within the banking domain and to ‘train' customers not to expose their personal details on Facebook because it could create opportunities for Identity Theft. The second is to realise that customers are already on the platform, so it becomes a great enabler for banking services and can be a positive tool in KYC itself. Scott eloquently put it this way…

“Facebook is the ultimate tool for know-your-customer” 

For those of your customers on Facebook, it is indeed an invaluable KYC tool. It takes very little analysis to work out that a persona or identity on Facebook is real and active, as compared with a synthetic identity presented through a standard KYC check. Surely, being able to tell if a person is real, has friends and is regularly communicating with them, is better than a printed utility bill that looks real, but could be completely doctored, or a driver's licence that is cleverly faked. In fact, there is a whole underground industry in the manufacturing of fake Ids – you can even order fake US drivers licenses online from China these days.

KYC standards have remained pretty much the same over the last two decades, albeit with the tendency for more paper checks and balances since the Patriot Act and the CIP program was introduced. The problem is, any paper document and physical ID artefact can essentially be synthetically reproduced, or real documents like bank statements, etc can be used to apply for real ID artefacts. This is why the US still deals with around 280,000 cases of identity theft annually (although that number is reducing annually). The ability to identify a real ‘live' person via social media activity, is a massively underutilised tool today.

But more importantly, people are connected via social media. Thus for activity like person-to-person payments or even person-to-business commerce, platforms like Facebook can reduce friction and provide faster, simpler engagement experiences.

This is why we're seeing an increase in the use of Facebook in the banking experience. This week alone both Alior bank in Poland, and ASB Bank in New Zealand have opted to utilise the Facebook platform to enhance and simplify P2P payments. Apps like Chase QuickPay, and Barclays PingIt already allow you to send to a friend via an email address or mobile phone number, so why not send to a Facebook friend that you can simply select from your friends list. PayPal was one of the first to integrate this into their platform, and we see only benefits in smart integration of Facebook into the customer experience.

Facebook adds huge value to the customer experience in being able to simplify and fast-track day-to-day financial interactions between people and businesses. The benefits outweigh the risks; in fact, use of Facebook can reduce risk of fraud if done right.

Brett King is a financial services consultant and author of the best selling book Banking 2.0.