Why Social Nets are Shying Away from Payments

I was reading Justin Smith’s good post on Faecbook’s delayed payment system and I thought I’d share a slightly longer version of what I left in the comments on his blog:

I do think most of the major social networks have looked at payments and decided it’s a tricky business for them to tackle for the following reasons:

Payments generally don’t work as a side business – It’s pretty hard to run payments as a side business. Most people who have tried to do it have met with some real challenges. There is a lot of management overhead, regulatory requirements, and domain-specific knowledge required to run a payments business. Most companies don’t have the expertise to be good at what they’re doing as their core business and bootstrap an in-house payments initiative at the same time.

Facebook Connect can and should reduce friction for developers looking to accept payments- I do think there’s potential for Facebook Connect to reduce the friction associated with taking payments on social networks by allowing user to use their social network IDs to authenticate themselves when using payment mechanisms. I expect that most of the major monetization engines on social networks today (incentivized offers, micropayments, PayPal, PayByCash, etc.) are all looking at whether Facebook Connect can lead to a more seamless payment experience on social networks.

Developers are already cracking the payments nut without help from the platforms – Developers are actively experimenting with payments products today. Most of the top social games on social networks are already using some combination of MyOfferPal, SuperRewards, PayPal, SpareChange, Zong, Mobillcash, and other alternative payment technologies to enable their users to pay them directly. Unless there is some strong incentive to adopt a solution provided directly by the platform provider (Facebook, MySpace, hi5, etc), I’m not sure that most developers would adopt it.

In spite of all of that, I do think there are some real benefits to seeing a payments offering blessed and endorsed by the social networks themselves:

The current methods of payment on social networking applications are not well integrated into the flow of user behavior. Topping up a wallet, buying something, or otherwise transacting in many games is an out-of-band experience that often times takes the user out of whatever he or she was doing in order to transact. Presumably the payments offerings from platform providers would enable developers to tighter integrations into application flows. Make transactions more integrated into the flow of the game / app has been shown to improve conversion in more classic web e-commerce and gaming applications – why should it be any different on social networks?

Having a wallet or payment system offered and promoted by one of the major social networking providers would help lift the boat of any app developer who chose to integrate with it. Presumably Facebook / MySpace would provide meaningful promotion for whatever payment product they endorsed. Having an official payments solution being promoted by the social network itself should increase the number of payment-enabled customers on social networks. I have to assume that there are some users who are not transacting with app developers today but would transact if there were a blessed, trusted solution for payments provided by the social network itself.

We shall see how this all turns out in 2009.

  • Nathan D

    Seems the eBay/PayPal experience may be instructive for Facebook (etc) — if there is a healthy ecosystem of 3rd parties forming, let them fight it out and see which emerges as most popular. Still, I have to believe that unlike eBay in the earlier days, Facebook is under tremendous pressure to drive revenue growth to justify sky-high valuations, so perhaps they will need to accelerate standardization.

  • http://www.charleshudson.net chudson

    Not only is Facebook under more short-term revenue pressure than eBay was at the time, the eBay marketplace business model required a more coherent payments solution to power its growth. It's unclear to me what Facebook's ultimate aim is (marketplace? social network? ad network?) and hence how important it is to “own” the payments piece.

  • http://insiden.blogspot.com denis

    great post. We may add that the payment on twitter like twitpay, tipit or tipjoy are good examples that payment is out of the media itself.

  • http://500hats.typepad.com davemc500hats

    good post. not sure i agree with all parts of it, but it is true that payments requires focus to be successful. arguably it's important enough that FB could choose to make it such a priority, but at the moment i'd agree not clear they've made that bet (or maybe we just don't know to what extent).

    otoh, i do think your last 2 observations are also correct, and that “blessing” 1 or more payment solutions on platform / with Connect would help improve conversion for 3rd-party developers, possibly even on other retail / e-commerce sites.

    an alternative way to think about this issues is this:

    * do you believe that a payments system based on “social identity” (one where portable identity & friend lists exist & are available features) is superior to a normal payments system?

    if you think it isn't, then your logic probably holds.

    if you think it is, then it's likely that all the investment in features & support is worth the ROI.

    thinking about Facebook as a social network with payment features is one perspective. another would be to think about Facebook as an identity & payments & applications platform with social networking features ;)

  • http://www.dcfemella.com/blog dcfemella

    I can't imagine companies who are in this kind of area. They have to deal with so many other issues that even banks don't have to deal with. If I were Facebook, I would hold back indefinitely and let other companies deal with the flow of cash around the internet. Great post!

  • http://500hats.typepad.com davemc500hats

    good post. not sure i agree with all parts of it, but it is true that payments requires focus to be successful. arguably it’s important enough that FB could choose to make it such a priority, but at the moment i’d agree not clear they’ve made that bet (or maybe we just don’t know to what extent).rnrnotoh, i do think your last 2 observations are also correct, and that “blessing” 1 or more payment solutions on platform / with Connect would help improve conversion for 3rd-party developers, possibly even on other retail / e-commerce sites.rnrnan alternative way to think about this issues is this:rnrn* do you believe that a payments system based on “social identity” (one where portable identity & friend lists exist & are available features) is superior to a normal payments system? rnrnif you think it isn’t, then your logic probably holds. rnrnif you think it is, then it’s likely that all the investment in features & support is worth the ROI.rnrnthinking about Facebook as a social network with payment features is one perspective. another would be to think about Facebook as an identity & payments & applications platform with social networking features ;)

  • http://www.dcfemella.com dcfemella

    I can’t imagine companies who are in this kind of area. They have to deal with so many other issues that even banks don’t have to deal with. If I were Facebook, I would hold back indefinitely and let other companies deal with the flow of cash around the internet. Great post!

  • http://www.charleshudson.net chudson

    Dave,

    Thanks for the comment! I don't actually think a payments system based on social identity is necessarily superior. I think the best payment system is one where the person accepting payment has a high degree of confidence that the user is in fact authorized, where there's a low probability of repudiation, and where there's minimal friction. It's clear that Facebook has more “real” people than other social networks, there are still plenty of fake accounts.

  • http://www.charleshudson.net chudson

    Dave,rnrnThanks for the comment! I don’t actually think a payments system based on social identity is necessarily superior. I think the best payment system is one where the person accepting payment has a high degree of confidence that the user is in fact authorized, where there’s a low probability of repudiation, and where there’s minimal friction. It’s clear that Facebook has more “real” people than other social networks, there are still plenty of fake accounts.