Facebook payments: Think virtual

It's become increasingly clear in recent weeks that Facebook is finally inching toward the launch of a micropayment platform.
Written by Caroline McCarthy, Contributor
It's become increasingly clear in recent weeks that Facebook is finally inching toward the launch of a micropayment platform. The social site has been expanding the presence of its virtual currency, which Facebook debuted last November when it changed the monetary units for its "Gifts" product into "credits" rather than U.S. dollars.

Credits are now bundled with some promotional items in the Gifts app. And soon, select developers on the Facebook Platform will be able to start working "credits" into their own applications, in a move that could lead to a lucrative new revenue stream for Facebook, which currently relies on an advertising-based business model. First reported by a number of tech blogs, the company has confirmed this development.

There's been talk of Facebook's planned foray into the e-commerce sector for well over a year now. But the "credits" product that's being released to developers soon appears to be quite different from the Facebook payment platform that followers of the company have anticipated. As recently as last fall, Facebook's plans--reportedly called "Facebook Wallet"--were something much more like a straight-up, PayPal-like transaction platform.

At least initially, that's likely not the case.

Facebook's official comment on whether this is a shift in company strategy is coy. "We think enabling developers to accept these credits as a form of payment has the potential to create exciting new use cases for users and developers," spokesman David Swain said in an e-mail. "We do not have details to share at the moment because this will be a very small alpha, only a handful of developers, but will likely share more as we evaluate the results of the test."

Swain declined to comment on whether Facebook would ever pursue a more standard e-commerce product like what many had assumed the "wallet" would be. But sources with knowledge of Facebook's product development say that what started as the "wallet" eventually turned into the "credits" system. According to one well-placed source in the virtual-currency sector, there's been a clear change from Facebook's earlier plans to foray into the transaction and payment space.

"It's an absolute change in strategy," the source said. "So, they're not competing with PayPal now."

Virtual currencies, with silly, often casino-inspired names and an unfortunate reputation in the mainstream as the way to buy enchanted swords and potions in fantasy role-playing games or to bling out your virtual penguin, don't carry the serious-business gravitas of services such as PayPal. But shifting strategy to a virtual goods platform is a savvy and forward-thinking move on Facebook's part. Since it launched two years ago, Facebook's developer platform has changed and matured a lot.

Most notably, a few app development companies are making an astonishing amount of money without paying Facebook a cent--and most of these are on the games and entertainment side of things. It's probably not a coincidence that those apps--from poker games to virtual pets to the seemingly endless parade of Mafia Wars and Zombie Wars applications--are the ones that would benefit the most from a virtual currency system. In turn, they're the ones from which Facebook could profit the most by taking a cut of revenue.

Facebook's global reach
But the decision to launch a virtual currency is bigger than simply to appeal to games. More importantly, the credits system is a necessary response to Facebook's newfound role as what's effectively a functioning sovereignty. With well over 200 million members now, Facebook has extended its reach well outside the U.S., and the Palo Alto, Calif., company has said that over three-quarters of membership registrations now come from overseas. The concept of "Facebook Wallet" might have sufficed when the majority of its users were dealing in U.S. dollars. That's far from the case now.

"There are currency implications, there are buying power implications, and there are payment provider implications," said Mike Trigg, vice president of marketing at social network Hi5, when asked in an interview about balancing the physical world's diverse economic systems. Hi5 launched a virtual currency called Hi5 Coins late last year.

For Hi5, launching a virtual currency early on was a logical conclusion because much of its user base is international, particularly in Latin America. "You really see market differences, especially for youth, which is really our target audience, in how they can pay for stuff online," Trigg said. "In some countries (credit cards and PayPal) aren't used at all. We see other markets where paying by SMS is the way to get into the system, and we see markets where cash cards and game cards and wire transfers and mailing cash through the mail even are ways that people get real currency into the virtual currency system."

With Facebook's reach significantly broader than Hi5's, the complications are even greater. And with hundreds of millions of people able to use this currency when it's available to all users, this is no enchanted-swords-and-penguins affair. Economists and Web developers alike will want to keep tabs on the expansion of Facebook credits, as they could quickly become the closest thing the Web has seen to a standard monetary unit.

"I think the universal currency wars are going to be on soon," said Lisa Rutherford, president of Twofish, a company that helps developers and companies manage virtual currencies by providing data and analytics.

There are plenty of start-ups that have attempted to launch virtual currencies that would be interoperable across participating developers' and companies' games and other applications. None of them have become legitimate Web sensations, perhaps because of the inherent security concerns in online payments. Facebook already has millions of users' credit card numbers on file from transactions through the Gifts app--its "credits" are in the lead before they even launch in full.

"When everyone was launching, when Spare Change and Jambool were launching virtual currencies three or four months ago, we had an opportunity to jump on the bandwagon," Rutherford said. "We just thought that universal currency needed to come from a big, robust, more stable player. It shouldn't come from a start-up."

At the same time, Facebook's massive size and name brand aren't going to make it immune from the concerns that surround any other e-commerce player. Facebook, suffering from a rash of phishing attacks and the occasional bad press about user privacy and safety, is going to have to be more careful than ever when it comes to security. Virtual economies in general have endured their fair share of scrutiny, too: one of the best known, Second Life's "Linden dollars," took a blow when a wave of scams prompted the virtual world to shut down user-run banks. Regulations still keep them a shadow of their former selves.

Still, if anyone can do this, it's Facebook.

"They might all have grand visions," Rutherford continued, "but you're asking people to trust what's essentially a sovereign banking system, and yeah, it should come from one of the big guys."

This article was originally posted on CNET News.

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