About $600M of Facebook’s $4B in 2011 revenues is credits/payments. 40%, or $200M, are fees from Zynga’s virtual goods. Facebook is first, an advertising company, but second, and increasingly a payments company. As a fraction of total revenue, payments grew from 5% to 15% y/y.

Facebook has parallels to eBay/PayPal. eBay has a large community of users who transact with each other often. eBay keeps records on the volume, nature and success of transactions to estimate fraud rates for PayPal. With Facebook’s much larger graph, FB could build perhaps the best fraud detection system on the planet by using the data within its network: number of friends, history, purchase and browse activity on FB connected sites, even location across 400M+ mobile users.

I expect Facebook to launch a one-click checkout system across ecommerce merchants that would compete with PayPal, Google, Amazon and Apple in the next 12 months. They may first start with virtual goods where margins are much higher and FB can command the same 30% tax Zynga pays, in exchange for broad distribution. But eventually move into ecommerce and physical merchandise.

If successful, FB’s payment volumes and lower fraud risks would justify low transaction fees, in the 1 to 2% range. Though FB could pass this on to its customers as a savings, the company more likely will keep the margin as revenue and a fee for their massive distribution.

To date, Facebook has built the best identity management platform on the Internet. Payments seems to be the next big bet for the company.


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