OBSERVATIONS FROM THE FINTECH SNARK TANK According to BusinessWeek :
“Facebook unveiled a new group to pursue payments and commerce opportunities and put David Marcus, co-creator of its Libra cryptocurrency project, in charge of the initiative.Called F2 internally, short for Facebook Financial, the team will run all payments projects, including Facebook Pay, the company’s universal payments feature that it plans to build inside all of its apps.”
My take: Facebook faces some challenges to growing its payments business, including: 1) economics; 2) digital commerce; and 3) politics.
Facebook Financial’s Economic Challenges Today, payments are the tail wagging the Facebook dog.Payments and other fees comprise just 1.5% of total revenue—and there’s no telling how that percentage is split between the two categories.
S&P Global warns, based on its analysis of rival platform Tencent’s economics, that “payments may not contribute much to Facebook’s bottom line.”
That’s an understatement.
In contrast to PayPal’s roughly $18 fintech revenue per user, Tencent has less than a quarter of that at about $4 per user.In addition, margins on Tencent’s online advertising business is almost twice as much as the margin on its fintech business.
As a percentage of the total average revenue per user (ARPU), ARPU from payments and other fees’ revenue per user has accounted for about 2% of total ARPU in the US and Canada, and 1.5% of worldwide ARPU.
At 34%, Facebook’s operating margin isn’t as good as Tencent’s.
If—similar to Tencent—Facebook’s margin on payments is half its margin on advertising (17%), then payments and other fees added just $181 million—0.8% of income from operations—to Facebook’s bottom line in 2019.
How can Facebook grow its payments revenue to become a more significant contributor to the firm’s bottom line? Embedding payments in digital commerce.
Facebook’s Digital Commerce Challenges According to S&P Global:
“[Facebook] is building out a payments infrastructure around the world to position its four popular digital platforms as ways for people to send money to each other and to shop for goods and services.Keeping the user within its digital ecosystem through the entire shopping journey requires deep integrations with merchants and payment intermediaries.”
TechCrunch writes:
“Everyone wants to lend to small businesses, as the fintech boom continues to bring constituent players closer together in feature-terms.
Thinking broadly, the rising focus on small-business lending among B2B fintech and financial services companies feels similar to the rise of consumer-oriented fintech.”
Facebook is fighting for market share in the next big battle of the century: The fight for small businesses.
Facebook Shops launched in May 2020 to make it easy for small businesses to set up online stores for Facebook and Instagram users.Some analysts are bullish:
Deutsche Bank estimates Facebook Shops’ revenue opportunity at up to $30 billion as it “expands from the tagging and transactional elements of Instagram Checkout to offer merchants a more branded experience on the broader platform.” Raymond James wrote, “eCommerce penetration ranges of 0.5% to 5% would yield $11B to $105B of gross merchandise volume.
Applying a 5% take rate would yield $500 million to $5.3 billion in revenue.”
My take: Seems a bit optimistic to me.
At a 5% take rate, $30 billion in revenue means Facebook Shops is doing $600 billion in GMV.That would be 10% of projected global eCommerce sales for 2022.
To put that in context, Amazon’s global eCommerce market share was just shy of 14% in 2019.Does anyone really think Facebook Shops will catch up that quickly?
There’s also consumer data that dampens those rosy projections.Granted, it’s still early in the game for Facebook Shops, but one survey found:
1) 20% of US consumers have already shopped on Facebook Shops.This seems nearly impossible.First off, how many Shops are already up and running? When asked about Shops’ traction during the Q2 earnings call , COO Sheryl Sandberg simply said, “it’s very early.” Second, when you consider that there are 54 million Americans over the age of 65 of which only 40% are Facebook users, 20% of all US consumers seems unreasonably high.
2) 45% of Americans would not be interested in trying or continue shopping on Facebook Shops.
Of consumers that have actually shopped Shops, many aren’t interested in shopping again—and many who haven’t started shopping on it, won’t.To S&P Global’s point about “keeping users within its digital ecosystem,” just 12% said they would be interested in Shops because they “won’t have to browse multiple websites and apps.”
3) 69% of men are happy with their Facebook Shops experience versus 31% of women.Lower satisfaction among women is a bad sign for Facebook Shops considering women control a good deal of US households’ spending.
4) 32% believe Shops will be a threat to other platforms like Amazon.Four in 10 respondents said they think Shops will not be a threat to other platforms, about a third thinks it will, and 28% admitted they’re not sure (which is the right answer, because how could anybody really know at this point?).
My take 1: The digital commerce battle for small business has just begun.But commerce-oriented platforms like Amazon, Google, and Etsy have an advantage over a messaging-oriented platform like Facebook.
My take 2: A key to success will be how deeply the platforms integrate into small businesses’ payments and financial functions and provide a more holistic solution to small businesses beyond digital commerce.
Facebook’s Political Challenges The company’s 2019 annual report states:
“Payment transactions may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.”
As a result of the regulatory risks, Facebook’s annual lobbying spend grew four-fold between 2012 and 2019.
Regulations, however, might just be the least of Facebook’s political concerns.
Facebook has become a lightning rod for political controversy with its censoring—and not censoring—of certain posts.The result has been calls to boycott Facebook advertising.That will no doubt spread to Facebook Shops over time.
The political challenges are likely to stay with Facebook for the near future—and that lobbying spend will risk quickly.
Four more years of Donald Trump will keep the messaging side of Facebook steeped in controversy.
On the other hand, a Democrat-led administration (and, potentially, Congress) may increase pressure for a Facebook (and other Big Tech) break-up.
In any scenario, Facebook’s emerging payments business is in the cross hairs.
The Outlook For Facebook Financial Centralizing the numerous payments-related initiatives across Facebook may help make them more efficient and timely.
But the revenue and profitability outlook for the division appears to be limited.And that may be prove to be a big problem.
I don’t know David Marcus, but from what I’ve read about him, he doesn’t strike me as the kind of executive who’s content running an internal support group.
Look for internal squabbles over prioritization of initiatives and arguments regarding the attribution of revenue across lines of business.Those will be clues to how well F2 is really doing within Facebook.
Ron Shevlin
Ron Shevlin is the Managing Director of Fintech Research at Cornerstone Advisors.
Author of the book Smarter Bank and the Fintech Snark Tank on Forbes, Ron is ranked
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Ron Shevlin is the Managing Director of Fintech Research at Cornerstone Advisors.Author of the book Smarter Bank and the Fintech Snark Tank on Forbes, Ron is ranked among the top fintech influencers globally, and is a frequent keynote speaker at banking and fintech industry events..