Why Facebook Is Folding On Credits And Doubling Down On Payments

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Editor’s note: Peter Vogel is co-founder of Plink, an online-to-offline loyalty program that rewards members for dining and shopping at their favorite national restaurants and offline stores. Reach him via email at peter@plink.com or follow him on Twitter @pvogel.

In a surprising move this week, with just a short post on their Developer Blog, Facebook has ended their three-year experiment with the virtual currency of Facebook Credits.

Credits will be phased out by the end of the year and users will simply have a Facebook account with a balance measured in Dollars in the U.S., or whatever currency is native to a country. Facebook’s new member accounts will function similarly to an iTunes account: a user adds a credit card to their account, digital goods can be purchased and immediately charged to the card on file, or can be drawn from stored value in that account.  If you are given a Facebook gift card, in card or digital form, you would add that reward code to your account and that value would be stored until you use it – just like an iTunes gift card is added to your account and stored until spent.

But does this change imply that Facebook is less committed to becoming a dominant force in the Payments space? Facebook did generate 15 percent of their 2011 revenue from Payments, primarily from Facebook Credits used in social games.

Absolutely not!

I predicted that Facebook’s revenue from Payments will double every year for the next five years and still stand by that prediction – Credits or no Credits. This is not a significant change in Facebook’s strategy, just a different name for the currency being exchanged; instead of ‘Credits’ which Facebook invented, users will make purchases in their native currency – for example, Dollars in the U.S.

We still expect media providers like Netflix, Spotify and The Washington Post to offer digital goods for sale on Facebook – paid apps are coming to Facebook’s App Center very soon.

We still expect Facebook to be become a dominant player in the Payments space, similar to a PayPal. Last year, 15 million people bought Facebook Credits, according to their S-1 filing, so it’s assumed Facebook has close to 15 million credit cards on file. By the end of this year, once paid apps are added to Facebook’s App Center, it wouldn’t be surprising if 50 million people, or about five percent of Facebook’s users are purchasing apps and other digital good, like movies, music and TV episodes, which means Facebook would have a pool of 50 million people who have entrusted it with their credit card information

At that point it’s a very short distance to a “Pay with Facebook” blue box showing up every time you make an online purchase (on web sites everywhere, not just on Facebook). Why re-enter your credit card number when you already trust Facebook to handle the transaction and bill your card? For users this could be seen as more convenient and safer than entering their credit card number on multiple sites. Facebook is PayPal on steroids, with the strength of a billion members.

And then, what’s to stop Facebook from introducing a Facebook Credit Card?  Facebook could be bigger than PayPal and become Visa or MasterCard as well. Facebook has the potential to become a universal wallet for both online and offline purchases.

In a recent article at The Daily Beast, Steven Weiss makes an extremely compelling argument why this is the next logical step for Facebook:

“Millions of us are already using Facebook to log on to other sites to comment on articles, share information, or register a product. 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.”

Ironically, it’s the enormous potential of Payments as a revenue source that is causing Facebook to phase out the Credits currency. Payments as a revenue source is too important to Facebook’s future to take the risk of promoting an untested and unproven currency. To establish Facebook Credits, Facebook would have had to spend significant resources educating the public and building the brand of Credits. It’s a much easier solution to simply transact in an already established currency that users understand and utilize.

In addition, it’s also speculated that with the growth and establishment of a new currency, Facebook would have faced increasing legal and regulatory scrutiny.

Switching to an existing currency allows Facebook to focus on what they’re best at, providing a platform and allowing others to innovate and create value for members.

What Facebook is aiming to become best at next is providing a platform where consumers are comfortable buying the products/applications they find valuable and developers/innovators can generate significant revenue by selling the products they are building. Once paid apps are introduced to the App Center, this massive wave of commerce will start building.

And it’s the companies who can successfully surf the ups and downs of this wave that will profit most heavily.