Universal Wallet: Facebook’s Very Bright Future

Never mind advertising, Facebook has the market penetration to revolutionize ecommerce, writes Steven I. Weiss.

Zef Nikolla, Nasdaq / AP Photo

Facebook shareholders should be shaking in their boots after Apple's presentation Monday of not only a photo-sharing system to rival that of the firm that Facebook just spent $1 billion acquiring but also the rollout of a new mobile-payments-and-ticketing program, Passbook, that could negate much of Facebook's expected potential in e-commerce. Facebook executives might be cheering the deeper integration of their social network that will come in iPhones and iPads, but none of those features bring new revenue to Facebook.The new threat from Apple comes after last month’s disastrous IPO, which called the core justifications for Facebook's value into question. Reports of downward revisions of revenue forecasts were at odds with expectations of advertising growth. Add to that the accompanying questions about transparency, and it would seem Facebook suffers both from a business model that's deflating and a company leadership that isn't eager to consult with shareholders on crucial issues of the company's future.

But one simple fix could change all of that, and make Facebook an economic stalwart that can count itself among the largest companies in the world [keeping this phrasing because they get to the top 10 if they surpass $200 billion; at $80 billion, they've still got a lot of competition], and one that transforms the way all of us live and do business.

The company’s real value lies in something no other major online business has accomplished, though almost all have tried: Facebook is the virtual ID we all use—and can use to spend money everywhere else. It’s uniquely positioned to become our universal wallet.

Facebook has the holy grail of the Web that everyone's been trying to find for nearly two decades: we've given the site our real names and headshots, and tied them into unique accounts that we use across desktop and mobile devices. They've got a majority of Americans—and nearly half the people in the world with regular Internet access—signed up for the service.

The plummeting stock value of Facebook so far is because many assume that advertising is where the company will find a way to convert users into profits. It's not an entirely out-of-place assumption, given that 82 percent of Facebook's revenues last year came from advertising, but it misses out on Facebook's real value.

As Michael Wolff has noted, and Doc Searls and Dan Kennedy have affirmed, that single pole of advertising on which Facebook has raised its tent is far more likely to collapse than it is to grow taller. Web advertising is decreasing in revenues on a per-impression basis and Facebook's ads in particular haven't proven very valuable, especially when compared with the return on investment firms get simply by being active members of the network (Just before the social network’s IPO, General Motors announced it would stop paying to advertise on Facebook but would continue to plow $30 million into marketing efforts on the network for which Facebook doesn't receive a cent).

The core misunderstanding inherent in discussions of Facebook is that it can count on the value we billion users represent and build billions from selling our eyeballs to advertisers for fractions of a penny at a time. As Wolff argues, "Absent an earth-shaking idea, Facebook will look forward to slowing or declining growth in a tapped-out market." But that earth-shaking idea is in sight.

As I discussed with Forbes managing editor Bruce Upbin, Facebook's virtual ID can easily be used as a credit card (which we'll call "FacebookCard")—a revolving-credit account, just like your Visa or MasterCard, that's usable anywhere. Facebook would have to spend some of the billions it now has in the bank to set up customer-service operations and credit facilities with banks to launch it, and invest in making Facebook logins more secure; the things every credit-card company has to do in order to operate.

You'd apply for credit with FacebookCard over the phone or online, just like you've done for the credit cards you have today. Once that account is established, you can use your FacebookCard to buy anything, anywhere.

Imagine the retail experience: when you enter a store with your smartphone, Facebook's servers check you in. You gather the few items you need and, instead of putting them down to take out a credit card, you walk over to an employee at a monitor, state your name, and he or she selects your face and name from a list of those logged in to the store. Your account gets charged just as with a regular credit card, except you don't have to carry that card around with you anymore, bother swiping or reswiping it, or worry about it getting lost.

It's an experience Slate's Farhad Manjoo called "magical," and it's something the firm Square actually makes available today in a smartphone app called CardCase. The problem Square has is that of every other Web firm that's tried to capitalize on the idea of a virtual ID: it doesn't have the critical mass of customers and stores paying attention to make it pervasive enough to be truly useful and convenient. Facebook, of course, has cracked that problem by making a social site first, and a uniquely popular one at that. For retailers, there's always value in making payments more convenient, and the ability FacebookCard offers to create better loyalty programs that reach you both when you're in the store and when you're online is of even greater value.

Of course, in-store checkout is at most a half-problem seeking a solution. It's not terribly inconvenient to pull out a credit card once you're gathering items and checking out, anyway.

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But a checkout experience that does genuinely need improvement is online checkout, and FacebookCard can make that a breeze. Millions of us are already using Facebook to log on to other sites to comment on articles, share information, or register a product. We do this because it's so much quicker and better than creating yet another account, adding an email address and generating a new password, and so on. At e-retailers, it's an even worse experience: we have to pull out our credit cards and manually type in the account numbers, and then type in our billing addresses and the ones we want our purchases shipped to. With FacebookCard added to our Facebook accounts, all we have to do is use that same login, and the transaction is done. Want to ship a gift to your mom? Just select her from your Facebook friends at checkout.

Online checkout is unpleasant and difficult for consumers, which has thus made it a major strain on business for e-retailers. And every half-solution proposed for a shared login—Paypal, Google Checkout, and many even-less-successful efforts—has failed to make a serious dent precisely because it can't get everyone into one system. But everyone's already logging on to Facebook. And where almost every other online payment system has represented competition to other retailers because of parent company associations, none of Amazon, eBay, Apple's iTunes, and the like face any threat in letting FacebookCard be one of several credit card options at checkout.

Less-prominent e-retailers from which we make occasional purchases—Newegg, Zappos, and the like—would actually see great benefit in both new and return business as the larger e-retailers no longer maintain a competitive advantage of already having an account. Removing both the barrier to entry of signing up at a site for the first time and the barrier to reentry of needing to remember what email address and password you used makes the little guys quite a lot more able to compete with the big boys in the online retail space.

And the part of FacebookCard that really takes it over the top is the ability to combine the two shopping experiences—in-store and online—into one account that makes purchasing a seamless opportunity for the consumer, where all they do is just manage that one ID, that one account. For retailers, the opportunity to work with consumers across the virtual and real-world space represents immeasurable potential return: as just one example, the opportunity to have a virtual shopping cart filled up with options at a brick-and-mortar location, with the ability to review your options and make a final purchasing decision later online, means that stores can invest in giving consumers a quality shopping experience without worrying that they'll spend their money elsewhere online if they exit the front door with paying for something.

So how much is FacebookCard worth? Visa, MasterCard, American Express, and Discover have a combined market capitalization of $210 billion, annual revenues of $52 billion and profits of $13 billion. All FacebookCard has to do is take away 10 percent of that market share, and it will double its 2011 profits. Paypal alone generates more than $5 billion a year in revenue, and there'd be no reason at all for it to exist after FacebookCard launches.

There's every reason to think, however, that FacebookCard would do more than just make a minor dent in the revolving-credit business. For consumers, there's very little difference among today's credit cards: the average card holder has 3.5 different credit cards and treats them largely as commodities. For retailers, the only difference among the cards is the fraction of a percentage difference in the 2-3 percent that the card companies charge per transaction. FacebookCard represents a substantially more convenient way of shopping in all the ways that we do it, and an opportunity to make all those various ways part of one basic account. If FacebookCard were to become a reality, the major credit-card companies would have to begin wondering what unique value at all they provide in a U.S. market in which $327 billion in retail will exist online, and more than half of Americans already have smartphones and Facebook accounts.

And then there's what FacebookCard can do for that most virtual of virtual-shopping experiences: digital media. It's a business with profit margins more than 10 times as large as that of the credit-card business, and one that continues to stumble with other vendors due to several major problems that FacebookCard can fix. The first major problem is making payment easy, and of course we've seen how Facebook can handle that. The second major problem is getting a paywall on, for example, a New York Times subscription to work across all devices, and of course FacebookCard solves that problem, too. The last one is something especially challenging to online media: how to make access easy and reliable for subscribers while not giving away the store. People are pretty free about sharing login information for the unique subscription logins they have for sites like MLB.com, Salon, or the New York Times, and that has meant imposing various user-unfriendly measures to keep sharing across multiple devices down. But no one's going to risk sharing a FacebookCard login with a friend, so content providers can rest easy. How big could that business be? Well, iTunes alone generates $8 billion a year, more than twice Facebook's entire 2011 revenues. And if Facebook over time can generate just 25 percent of that as the online media business continues to grow rapidly, it'll add more than 50 percent to its 2011 bottom line.

Meanwhile, all of these initiatives make the Facebook experience better, while most ideas for advertising-based revenue growth would likely aggravate loyal users. Instead of steadily losing users over time like almost all other social networks have, Facebook can turn those users into profit centers while it's still peaking and in doing so make the service far more valuable and necessary to everyone.

Add all of this up, and there's several billion dollars in profits just waiting for Facebook to flip a switch. And since advertising won't go away entirely, it's pretty easy to see how Facebook gets to $5 billion in annual profits by adding FacebookCard; at a typical tech-company multiple of 20, that's $100 billion in value, justifying a premium on the IPO price. Of course, with hard work and innovation in these areas, there's not much reason it can't hit $10 billion in profits and $200 billion in value, which would make it one of the 10 largest companies in the world, holding a stock price above $70.

I took this idea to some leading lights of social media and Wall Street to get their take, and they've all expressed the hope that Facebook will implement something like FacebookCard. Laura Martin of Needham is one of the dozen or so analysts who've placed a "buy" rating on the stock, and while she's still quite bullish on advertising prospects at Facebook, she said she was " most optimistic about payments."

Even Ben Rose of Battleground Research, now rather famous for his early "sell" rating on Facebook, said "I think you're onto something with this," and said if he were a holder of Facebook "these are the kinds of things I would expect them to be working on behind the scenes," so long as they can address security and privacy concerns while doing so.

Facebook's already done the hard work of getting a billion people to use the site as a virtual ID; the road from there to becoming the universal wallet is a relative breeze. All it takes is realizing that Facebook's value as a business isn't in how it can get its users to want whatever advertisers are selling during their time on the site, but how it can get them to use the virtual ID they've created to buy things everywhere else.