Facebook's Plan for Messenger, WhatsApp, and Payments Revealed
Rumors of Facebook aggressively entering the payments business on desktop and mobile have circulated on the web for quite some time and really amplified following the hire of ex-PayPal Chief David Marcus to be Messenger's lead guy. That said, a recent discovery by a Stanford student proves that payments via Messenger may be a near-term reality, which combined with other payment initiatives could have a profound effect on the company's revenue growth.
Here comes mobile payments for Facebook
Stanford computer science major Andrew Aude got his five minutes of fame earlier this month when he discovered a hidden digital payments feature buried within the iOS source code of the Messenger app. This essentially confirms Facebook's plans to use Messenger as a tool for processing payments via text.
When combining Messenger's user base and strong U.S. presence with WhatsApp's dominating international use, Facebook now has a mobile payments platform that can reach roughly 800 million users. Earlier this year reports of a Facebook Buy button were also unveiled, giving the company a payments platform on desktop as well.
That said, there are a couple different ways that Facebook might use payments as a way to grow its revenue significantly higher. The first is with a per-transaction model, and the second is by simply increasing the value of advertisements.
The per-transaction business model
Aude not only discovered the payments feature, but was also able to test and explore its functions. He noted in a Tech Crunch article that there was no mention of a fee to send money. He said, "it's probably free, at least initially."
It makes sense that Facebook would give this service away following its initial launch. Facebook CEO Mark Zuckerburg was slow to launch advertisements on both desktop and mobile, even as the site gained significant traffic several years back. This is one example of how Facebook likes to draw the user in before implementing changes. Even the Messenger app, which is now required for conversations on Facebook mobile, has lacked advertisements or monetization features until this point.
However, with Facebook likely to accrue charges as a transaction processor, from payment processors like Visa and Mastercard, it would be difficult for Facebook to keep the service free long-term. That is unless it can strike a deal like Apple and earn money from the payment processors, instead of paying them like PayPal.
Speaking of PayPal, their system charges users a per-transaction fee. PayPal has 152 million users, generating nearly $7.2 billion in revenue during the last 12 months. Therefore, investors can determine that the average PayPal user contributed $47.36 to PayPal's revenue during the last 12 months.
In comparison, Facebook's Messenger app and WhatsApp have over 200 million monthly users and more than 600 million users, respectively. This gives Facebook access to more than 800 million users. Even if we remove 100 million users that may use both WhatsApp and Messenger regularly, Facebook still has far more users on its mobile messaging platform than competing apps.
While Facebook has offered no hints at how it will monetize its payments business, it seems most logical that it will charge a fee of sorts eventually. Even if Facebook's average user contributes just $1 annually on both its Messenger and WhatsApp platforms, it could create $700-$800 million in additional 12-month revenue.
Increasing the value of advertising
Clearly, the revenue creation potential that lies in a per-transaction business model is huge, but the real value in Facebook payments, which might be impossible to measure, is with advertising.
For example, Facebook generated $2.67 billion in its most recent quarter from advertisements. Advertisers on Facebook are buying placement in feeds, targeting users based on interests to achieve high engagement. However, for advertisers selling a product or service, the user must click on the advertisement, go to the retailer's website and then enter payment information.
Once the payments feature is implemented into mobile via text and desktop with the Buy button, consumers can skip the steps of clicking on the link to visit the third-party site and inputting their payment information. Theoretically, the product or service could be purchased from the advertisement itself in the Facebook feed. This level of integration coupled with Facebook's granular targeting capabilities could boost the already high value of ad space on the platform.
Other than the 30 million small business pages already on Facebook and its one million plus advertisers, Facebook's new features might also appeal to consumers. Perhaps a user wants to sell a TV for $200. Rather than putting it on eBay and paying fees for Marketplace, when and if it sells, a user can reach a targeted audience based on location, gender, age, etc, who may be interested in their used TV on Facebook.
All things considered, if Facebook can generate $2.67 billion in advertising revenue during its last quarter by selling likes and feed placements, then it seems probable that it can generate substantially higher revenues by allowing advertisers to sell products and services.
In retrospect, Facebook could very well create revenue from per-transaction fees and an increase in advertising dollars once these services launch. As for the latter, the ability to drive sales for advertisers could let Facebook close the gap with Google for ad dollars. Currently, Facebook earns $6.44 per user in North America. .
Google's advertising platform is driven by web traffic and product sales. Notably, Google's revenue per user in 2013 was $45 according to research firm KPCB, which well exceeds that of Facebook. While Facebook may never earn $45 per user, the company has a lot to gain by increasing conversions on its ads, which means that rising ad prices are unlikely to slow at any point in the near future.
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The article Facebook's Plan for Messenger, WhatsApp, and Payments Revealed originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google (C shares). The Motley Fool owns shares of Facebook and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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