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How Facebook Credits could replace traditional banking

I just made a comment this week about Facebook Credits being bigger than Amazon by 2020.

This was on the back of my favourite stories about Zynga becoming the biggest PayPal merchant in under a year on the back of Facebook games, and how QQ and Second Life currencies have been examples of how virtual currencies can and will work.

But I suspect Facebook might screwup this opportunity as they stiff their community with the 30% fee base and mandatory usage of credits.

It seems like restrictive practices that a monopolistic firm would apply, and does not fit the nature of community-based practices.

So, as I haven’t blogged in detail about this, here’s a quick round robin on what’s hot in the virtual currency world of Facebook.

From Facebook’s overview: “Facebook Credits are a virtual currency you can use to buy virtual goods in all games on the Facebook platform.  You can purchase Facebook Credits using your credit card, PayPal, a mobile phone and many other payment methods powered by PlaySpan.”

The basic idea is simple.

If you are playing games in Facebook, such as Zynga’s Farmville or Cityville, you can quickly and easily buy additional fun using the Credit system.

This interview with John Silverman, chief executive officer of Ifeelgoods Inc on Bloomberg on 1st July, puts it all in context:

The reason July 1st was a big day is that this was the day when Facebook made it mandatory to use Facebook Credits for any games or apps on Facebook.

Now this is where it gets interesting, as Facebook take a 30 percent cut from any payment made using Credits.  That’s a whacking big slice of the action.

By way of background, the 30 percent cut was introduced in February 2010, nine months after the Credits system was launched in May 2009, with the idea that 70 percent of the payment stays with the developers of games whilst the 30 percent allows Facebook to develop the games ecosystem.

Zynga is the biggest gaming firm on Facebook, and therefore critical to the success of Facebook Credits.

Zynga are the fuel that created a sustainable gaming system on the social network.

This is illustrated by the documents Zynga just filed for their IPO, with many believing their business will reach a valuation of around $20 billion.

Not bad for a firm that deals in virtual nothings.

But then read the numbers:

“From 2009 to 2010, Zynga’s revenue increased 392 percent. In 2010, Zynga made $27.9 million profit on revenue of $597.5 million. In the first quarter of 2011, the company had revenue of $235.4 million, a 133 percent increase from the previous year, putting it on track for well over $1 billion in sales this year.”

So you can see why Facebook needs Zynga and Zynga needs Facebook but, with Facebook stealing taking 30 percent of Zynga’s revenues, there would be some issues here surely.

And of course, there were until a deal was struck in May 2010, where Facebook and Zynga agreed a five year partnership for the use of Facebook Credits in Zynga games.

The deal would obviously be a sweet one, but what does it mean after 2015 for Zynga?

They’ve already thought of that.  From their IPO filing documents:

“In 2010 Facebook adopted a policy requiring applications on Facebook accept only its virtual currency, Facebook Credits, as payment from users. As a result of this change, which we completed in April 2011, Facebook receives a greater share of payments made by our players than it did when other payment options were allowed. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. Beginning in early 2010, Facebook changed its policies for application developers regarding use of its communication channels. These changes limited the level of communication among users about applications on the Facebook platform. As a result, the number of our players on Facebook declined. Any such changes in the future could significantly alter how players experience our games or interact within our games, which may harm our business.”

In other words, Zynga’s business is TOTALLY reliant on Facebook.

It is why Zynga filed documents with the Security and Exchange Commission last Friday, saying that it generated “substantially all our revenue” from Facebook and that a breakdown in the relationship could “harm business and adversely affect the value of our Class A common stock”.

Maybe Facebook should buy Zynga or something, but this is not the point of this piece.  The point of this piece is that Facebook is on course to generate $1 billion in revenue this year from social gaming.

If that is the case, the social gaming market on Facebook alone is worth at least $3 billion, as they’re taking a 30 percent cut.

This is an ecosystem that is only a couple of years old.

And it's just for gaming and not commerce.

Now think how it might play out further.

Facebook Credits are not just for games and apps in Facebook, as they are now being used to vote in reality TV contests and as rewards from American Express.

And sitting on Facebook is an Amazon-styled embryonic retailer called Payvment

Described as ‘the mall of the future’ , it has 60,000 retailers in its social store, with about 400 new etailers added every day.

So here’s why I think Facebook Credits is big news.

If Facebook gets its act together for using Credits for Commerce, then they could be bigger than PayPal and Google.

This is because, by 2020, Facebook – or it could be Google Circles or something else – will  be the internet.

People will go there first and stay there, visiting all of the destinations these ecosystems offer and trading with them in their currencies.

These social sites will house millions or even billions of people in a social ecosystem that embraces music, relationships, ideas, creativity, business … life basically.

And where there’s life, there’s commerce.

As a result, the dominant internet-hosted world of 2020 will encourage their credit system as the de facto standard.

Just like PayPal did for Web 1.0, Facebook or Google will try to become the de facto payment service for Web 2.0.

It may be in partnership with PayPal (Facebook) or a bank (Google), but all the user will see is their internet-hosted world.

The way Facebook could get into this space is by offering Credits as bonuses to retailers who transact through their service.

They may do this in partnership with someone like Payvment, and offer 1 Facebook Credit as a bonus for every $10 spent.

The credits can then be used by retailers to advertise on Facebook and so on and so forth.

In other words, it becomes a virtuous virtual circle.

Rather obvious really.

So the vision a bank should be considering, if they want to be relevant to this future life, is that if there’s a next generation world where everyone lives virtually, exchanging virtual goods and services with virtual credits, where is the relevance of the bank?

Right now, in the context of social worlds and virtual currencies, banks are irrelevant except as dumb pipes beneath.

After all, Zynga sits on Facebook Credits which sits on PayPal which sits on banks.

Everyone’s taking a cut to reinvent the system for the future world.

But what if the future world says “no”.

Tomorrow, Amazon just sits on Google Circles, and who needs anything else?


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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