Can Facebook make mobile payments work?

The social network would like to see its one-click mobile payment service compete with the likes of PayPal and Amazon, but payments are about trust and that's where Facebook runs into trouble.

Facebook is quietly testing a new mobile feature that will provide users with a one-click payment service for mobile shopping applications. This makes sense, given the growth in mobile payment revenues, the size of Facebook’s mobile base, and the importance of mobile advertising to the social network. But the social network will need to surmount a couple of critical hurdles.

The user transaction data generated by Facebook’s mobile payment feature will be invaluable for advertising, and will be used to bolster revenues on this front. However, Facebook will have to work hard if it is to make a success of its mobile payment service.

Its track record with payments is poor, consisting as it does of the failed Facebook Credits and the lacklustre Facebook Gifts. The biggest challenge by far is that many users may not trust Facebook with sensitive financial information, making it hard for the social network to compete with established, trusted payment providers such as PayPal and Amazon that already have millions of card details on file.

A good fit for Facebook

Facebook’s payment feature works by drawing on users’ financial information already stored on the network, enabling those users to automatically fill in a payment form when buying products via mobile shopping applications.

It’s clearly designed to provide a convenient payment experience on mobile that is similar to Amazon’s 1-Click option, and also builds on the way that many consumers already use Facebook to log in to a variety of websites and applications. The payment service is enabled and controlled by Facebook, although at this point it is not processing the transactions itself, but instead relying on third parties.

Facebook’s growing strength in mobile means that it makes sense for it to focus on the fast-growing mobile payments market. Its mobile base is experiencing dramatic growth: in Q213 it had 819 million mobile monthly active users. Ovum estimates that total global mobile transaction revenues will grow from $67.62 billion in 2013 to $930.89 billion in 2017.

Payments boost for advertising

Perhaps the most important factor for Facebook is the way mobile payments have the potential to complement and enhance mobile advertising, a key driver for the social network’s revenue growth. Mobile advertising accounted for 41 per cent ($656 million) of Facebook’s total advertising revenues in 2Q13.

Facebook’s mobile payments initiative will give it another means of gathering information about its users, and financial data is particularly valuable. Purchase information and history are useful in supporting more targeted and personalised advertising.

The social network could, in theory, show advertisers a link between Facebook advertising and purchases enabled via its mobile payments service, providing those advertisers with a clear return-on-investment metric. This could boost Facebook’s appeal to advertisers considerably.

The biggest weak spot

Should Facebook’s mobile payment service prove successful it will help it to strengthen its commerce operation, which is an ongoing weak spot for the company. Its revenues from commerce activities, which are dominated by payments from games and Facebook Gifts, have been unimpressive so far: $214 million in Q213, a fraction of Facebook’s total Q213 revenues of $1.8 billion.

Facebook has been experimenting with payments for some time, but with little success. In September 2012 it launched Facebook Gifts, a service that lets friends buy one other real-world gifts, but that has so far received a muted response. The social network is also winding down its Facebook Credits virtual currency, which failed to resonate with consumers or application developers, and is under pressure to devise a coherent payments strategy.

Who do you trust?

Facebook would like to see its one-click mobile payment service compete with the likes of PayPal and Amazon, but this will not be easy. It is unclear just how many payment details Facebook currently has on file, but we can be sure that it has far fewer than Amazon and PayPal.

However, the biggest threat to Facebook’s ability to succeed in mobile payments concerns trust. Many consumers are already uncomfortable with the way that Facebook handles privacy and security, and will be wary of storing sensitive financial information with the social network.

Payments are about trust, and Facebook is at a disadvantage here compared to PayPal and Amazon, and also the growing number of trusted financial institutions now offering mobile payments (including Visa and MasterCard). 

Eden Zoller is a principal analyst in Ovum Telecom’s Consumer Practice, covering communications, content, applications, and social media.