How Facebook Payments Will Become A Micro-Merchant Payment System And Change Everything.
That Person To Person Payment, Well It Just May Be A Business Transaction
It is estimated that there are over 25 million micro-merchants and about 5.5 million small merchants. There are a number of defining criteria:
- Micro-merchants- Less than $1,000 per month. Less than 100 transactions per month. Example, Gardeners, Baby Sitters, Fitness Trainers, Hair Stylists, Accountants, Lunch Trucks, Coffee Shops, Farmers Market stand.
- Small merchants- Greater than $1,000 per month. Greater than 100 transactions per month. Example: Landscaping companies, Nanny services, Health Clubs, Salons, Accounting firms, Restaurants, Cafes, Farmers Market store.
Although the micro-merchant market is mostly untapped by any company, Square, PayPal, Amazon, Intuit and others have focused a tremendous amount of energy on this sector. No single company can claim a majority of these 25 million micro merchants, however it is clear that Square has spent a tremendous amount of time, talent and money acquiring merchants in this sector.
Facebook Payments
Yesterday Facebook announced a new, free payments service [1] that on the surface seems to be nothing more then a handy way to send money to friends and family for the ever-so-quoted-obligatory, paying your half of dinner. Frankly in research studies I have conducted over the last three decades it turns out that only 3% of users really use person to person payments for this purpose. The research data suggests there are far more transactions, that under closer review, are really not the typical person to person payments we assume in the final analysis. Of course there is a lot of friend and family money running through these systems but there are also other types of transactions.
It This Business Or Personal?
The very interesting aspect of Facebook Payments is the Social Graph, the quite literal directory of just about everyone you know, including many businesses. It turns out that many person to person transactions, when you really explore the cause and effect of how many people in the same country use these systems, turn out to have a business purpose. Paying apartment rent, even paying for your half of dinner is, in the end a business transaction. I am not addressing remittance payments to destinations outside the US, as this is a completely different use case.
Understand that we can conclude a person to person transaction is really a business payment when the end results are a business service or product. There is, of course, a rather thin line at the convergence of person to person and micro-merchant transactions.
One can study other person to person payment platforms in other counties, for example the mighty Alipay and Tenpay in China. Those platforms began for the most part as person to person payment systems. Both rapidly became business payment platforms, first for micro-merchants then moved to any type of merchant. Now there are some elements that clearly do not match the US market, for example very few people have a debit card, let alone a credit card in the areas of high use. However even with this in mind, we can see an example of how a widely available communication platform can become a huge payment platform.
In the US, Venmo is an example where a partial communication system is connected to a person to person payments platform. The comments that one can leave when sending payments range from the mundane to the fantastic. One can conclude from many of the messages that pass along with payments that indeed there was business activity. Some insiders have concluded that more than 40% of transactions on the Venmo platform are business related.
Data from a few PayPal studies also show this very nebulous line between person to person payments and business payments. In fact, one can argue that PayPal is the quintessential example. This may be true, however PayPal’s business is a bit more complex. Even so, there are a tremendous amount of micro-merchant payments on this platform that could also be called a person to person transaction.
It Is Hard To Beat Free
The foundation is set, it is clear that Facebook will explore this path as others in this space. The foundation for Facebook payments is the ubiquitous nature of Facebook accounts and the social graph. With over 1.2 billion users worldwide about half of whom are in the US, one can easily assume that a vast majority of the 25 million micro-merchants would have at the very least a personal Facebook account.
Facebook is currently eliminating all costs to send money between people on Facebook Payments, they absorb these costs. There is no doubt that Facebook negotiated with the debit card network to lower their wholesale costs to far less than any person to person payment company thus far. This means that even though Facebook is subsidizing this program, they also are paying less then any competing system and also have other business models to offset these costs, like advertising.
Facebook Payments will rapidly become a major platform for micro-merchants looking to save money with a $0 cost to process payments. This savings is quite significant for even the lowest volume use cases. Saving up 2.75% -4.00% even on a few hundred dollars quickly adds up and is a huge motivation to switch. Certainly the baby sitter and other small service based businesses will be the first to jump aboard.
The use cases for micro-merchants for Facebook Payments is no accident. There is no doubt that this element was thought about and helped motivate the business case. This will impact existing companies that have almost exclusively focused on micro-merchants:
- Square
- PayPal
- Amazon
- Intuit
- others
It will be very hard to convince many micro-merchants to continue with cost based payment acceptance it is very likely that a vast majority of the first few rungs of micro-merchants will abandon these companies for the lower fees and easy use of Facebook payments, especially service based businesses.
There are things that these payment companies can do today to make their services far more valuable. Sadly not even one is close to addressing the very real options available. I can say with certainty, that merchant cash advance, data insights, redundant web sales or delivery services are not the directions I am speaking of, nor are they the direction customers and merchants are headed.
It is not at all hard to imagine how Facebook Payments will continue to move up stream with micro-merchants to small merchants. The potential savings to larger merchants, if only a small percentage use Facebook Payments will be substantial, in some cases thousands of dollars per year.
The Facebook Payments API
Through APIs Facebook will allow apps to initiate a payment and this will drive online and retail transactions. A universal payments API can offer utility that thus far has not been seen other then in-app purchases via Apple Pay. The Facebook Payments API will unleash a storm of creativity and new use cases.
I am certain that at some point Facebook will establish a basic cost to small merchants. The cost could very well be lower than standard merchant rates. This means that as usage expands to larger merchants, Facebook will see revenue streams directly from Facebook Payments. I am certain Facebook will court key large merchants to participate in and widely promote this new payment system. This revenue stream will completely offset the costs Facebook incurred from the actual person to person use cases.
Thus Facebook Payments will become over time:
- Person to person payments
- Micro-merchant payments
- Small merchant payments
- Large merchant payments
- Retail payments
- In-app payments
- API based payments
In less than 12 months, the entire payments industry has completely transformed. From Bitcoin to Apple Pay to an independent PayPal and now Facebook Payments there has never been a point in history that compares. The results will be far more options and far more solutions for both consumers and merchants no matter how large or small their business may be.
