Facebook Is Setting Up Stage For Online Payment Business – A Threat to PayPal ?

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Facebook seems to be very “wide-open” when it comes to strengthen its revenue stream. Besides online advertisement – the major source of revenue – Facebook is broadening the other wing of revenue source which comes from the sales of “Facebook Credits” in form of virtual currency.

Social Media giant has recently formed a subsidiary – Facebook Payments Inc – for accepting online payments directly without the help of any mid layer processing engine like PayPal or 2CheckOut. Even to make it much more effective and flawless, Facebook has started registering it in a host of states.

Though, Facebook may not have any intent, currently, to move into the consumer facing online payment processing business analogous to PayPal – but this will setup stage for the company to roll in such type of business ‘anytime’ smoothly.

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The subsidiary was formed in Florida in December 2010. Facebook CFO David Ebersman, general counsel Ted Ullyot, and vice president of business development Dan Rose from the entity’s board. Facebook is hiring a controller for the business, which it describes as a “rapid growth, very dynamic subsidiary.”

Does all this mean that Facebook is exploring the new business venture of Online Payment processing? Or it’s just a move to stretch the profit margin by “smart initiatives”. Let’s analyze few facts which, possibly, can justify Facebook’s latest initiative till an extent:

As per eMarketer, Facebook is expected to cross $4 Billion as revenue in 2011. Approximately, one forth of this comes from the sales of credits which help users to buy virtual good in games like Zynga’s Farm Ville and Crowdstar’s Happy Island. On very conservative note, if Facebook pays 1% of this revenue share to online payment processing engine providers, like PayPal or 2CheckOut, company will end up paying whooping $10 Million as transaction fees which itself is a big chunk of revenue.

However, if Facebook manages to omit these payments processing engines it will witness significant jump in profit. Though, company will have to have direct arrangements with Visa and MasterCard besides their own engine management, it will pay off enormously well in long terms scenario.

The other important aspect behind Facebook’s Payment processing system is “future expansion model” of Facebook Ad network. There are speculations from long time that Facebook may slant towards Google Adsense model and will start branching out their ads on third party websites known as “Publishers”. Facebook already has planted a presence across hundreds of thousands of websites with its “Like” and “Share” buttons, comment functions, and other social plugins. It would be easy for Facebook to sign those publishers up for an advertising network powered by Facebook’s detailed demographic information. But then it would have to start cutting checks on a massive scale — something that would be eased by a dedicated payments-processing operation.

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The third important fact behind setting up Facebook Payment processing system is the promising future of mobile payment. Infact, at MobileBest 2010 conference, Facebook mobile chief Erick Tseng expressed that company is willing to offer same features on mobile as its Web platform. That presumably includes Credits and other payments functionality.

Considering all above scenarios, possibilities and few speculations, one thing clearly stands out – Facebook is predominantly pushing e-commerce on its platform. Company is currently serving to more than 620 Million users worldwide – expected to reach close to 900 million users by year end – e-commerce activities are bound to grow, so the transactions. And there is something much more powerful which provide an extra edge to Facebook over possible future rivals like eBay, and Amazon.com– power to control transactional frauds.

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