Facebook Credits: Small Tokens With Big Commercial Potential

Facebook's recently inked partnership with online payment giant PayPal (EBAY) created a new and easier way for the popular social network's members to buy Facebook Credits, a virtual currency for buying virtual gifts and services.

Today, those credits can be used in games such as FarmVille, an agriculture-theme challenge, in which players can buy virtual golden chickens, soybean seeds and hot-rod tractors.

But a more powerful use of the credit technology may be just over the horizon. In the not too distant future, the same technical infrastructure could support real-world commerce, linking the social network to the consumption of a wide variety of consumer goods.

If Facebook does enable its credits as payment for real-world goods, the company could create supercharged link between data-rich Facebook profiles and real-world purchases that would be not only interesting for users but extremely valuable to advertisers.

Virtual Today, Real Tomorrow?

To be clear, the Facebook Credits program is still in early testing, and Facebook says it has no plans to expand the application of the credits as payment for real-world goods.

"We are focused on meeting the unique requirements of a virtual goods economy on Facebook and have built Facebook Credits with that in mind. Beyond what's already possible in our Gift Shop, we have no plans to extend Facebook Credits as a way to pay for physical goods," the company says.

But the infrastructure to make such a move is already partly in place. Facebook Connect allows users to log on to non-Facebook sites using their Facebook email address and password. With that link established, certain applications can already interact with a user's Facebook news feed.

Such connections allow users of the iPhone application RunKeeper, for example, to automatically post the duration and distance of their latest run to their feed. But there seems to be little reason why, with relatively small adjustments, the system couldn't be made to automatically post a photo of a new outfit just purchased from the Gap (GPS) using Facebook Credits.

A Win-Win-Win Situation

"Virtual currencies are going to move more and more into a mainstream environment and attract more attention," says Beth Robertson, director of payments research at Javelin Strategy & Research, a financial services and security consultancy.

"I definitely think they might look into communities beyond the Facebook community." says Beth Robertson, director of payments research at Javelin Strategy. Once there is broader usage of Facebook Credits, more more people might be interested in having them for non-Facebook purposes and be interested in trading them for other virtual or real transactions," she adds.

Take a hypothetical scenario in which a young woman buys a new outfit from the Gap using Facebook Credits: Facebook wins by taking a cut of the transaction. (It currently takes 30% of transactions using Facebook Credits.) Gap wins by getting free or cheap advertising on Facebook; the purchaser wins because Gap might give her a small discount on the purchase as a thank-you for pushing the photo on her news feed -- essentially a Gap advertisement -- to her Facebook friends.

Global Reach

The potential economic ecosystem for socially linked transactions is huge, and PayPal is, in terms of reach, probably a perfect match for making such a scenario happen. Facebook claims to reach 400 million people, 70% of whom live outside the U.S. PayPal's global payment service reaches 190 markets and supports 24 currencies around the world.

That reach is the real driving force behind Facebook's partnership with PayPal: The social network wants to make it easier for advertisers to pay for ad campaigns on the site, which at present provide a far more substantial source of revenue than the sale of virtual currency and goods.

The company is also interested in helping developers of Facebook-based games turn more casual game players into paying customers, an area that analysts have identified as fertile ground for revenue growth.

InsideFacebook, which tracks the company, estimates that direct Facebook Credits account for only $10 million in sales at the company annually, but says industry sources have indicated that figure could jump to as much as $75 million as games and other Credit-linked applications are built around Facebook's network.

But, at least for now, those millions people spend on Facebook Credits will sit locked in the Facebook ecosystem.