March 18, 2015
In October last year, LTP wrote a breaking news story about a Stanford computer science student who had revealed that Facebook Messenger payments was on its way. He had used an iOS app exploration developer tool called Cycript. Also last year, Amit Goel (LTP co-founder and chief curator) wrote about Facebook’s strengths and weaknesses in becoming a payments player, and related What-if scenarios. After David Marcus joined the Facebook Messaging team, it was evident that something was imminent and then Mark Zuckerberg announced that Facebook and Payments will eventually overlap. So here we are...
Facebook: The Social Graph Of Payments
Today, on March 17th, 2015 Facebook has entered into payments in a very big way . This is perhaps the biggest news in this sector since its inception. Much like WeChat, a sort of Facebook of China, along with Alipay with their hundreds of millions of users, to send money via instant messages.
To become a person to person payment system in the US, the company must apply for and be granted a money transmitter license in every state. Facebook has been approved money transmitter licenses in every US state and territory along with many European and Asian countries. My good friend Faisal Khan has been researching this for a number of years.
In the US there has not yet been a person to person payment system centered around a communication platform. One could argue that Google’s system was a communication platform centered around gmail but it was not fully linked to the chat system.
It turns out a vast majority of Facebook’s 500 million monthly users are logged on to Facebook Messenger with about 80 million payment cards on file. With Facebook Payments, the entire system is currently built around the Messenger platform. Fundamentally, person to person payments are a form of deep communication and Facebook Messenger is a logical jumping off point. A vast majority of person to person payments begin with a conversation, perhaps already within Messenger. Thus, with the press of the new $ icon and the entry of an amount, you can send money that will arrive on the recipient’s listed debit card within seconds.
How Does Facebook Payments Work?
To use the system, the sender associates a US based debit card with a Visa or MasterCard logo to her Facebook account. If the user already has a debit card on file with Facebook from gaming, advertising or donations, this can be the default card. The system will allow for the user to image the card via a camera or to manually enter the card into the setup form. Users will be prompted to set a passcode or use Apple TouchID on compatible iOS devices to confirm transfers, although one can opt out of this authentication in the settings panel. Once an account is confirmed, it's ready for use.
To send money, press the $ button in the Messenger message composer - you have an option to send a photo or sticker along with a text message and the money - enter in an amount that is currently less then $250 and tap the Pay button.
The money is instantly removed from the sender’s debit account and delivered to the recipient’s Facebook associated debit card. Facebook uses the debit card network which can take about 24 hours to become usable. Both sender and recipient will see a confirmation message detailing the transfer status and time.
If the recipient has not associated a debit card, they will be prompted to register, going through the same process and choices as the sender. If for some reason the money is not claimed by the recipient in 30 days, it will revert back to the sender. Along the way, Facebook will send the recipient notices to claim the money.
As an added security feature, Facebook may ask users some extra security questions before a transfer can be authorized. This may take the form of Did you ever own a red car? or In what city did you live in during the period of 1984 - 1986?, etc.
Facebook is currently using only a debit card based system, using a similar system that Square adopted for Square Cash , but there are a number of changes and optimizations made by Facebook to make the system more fault tolerant and redundant. Facebook is also using better recognized APIs that have the ability in the future to allow payments from credit cards. The system will also be able to easily scale to countries outside the US and localize from a both a technical and a regulatory stand point.
Thus, we can be certain that we will see this platform on Instagram and WhatsApp soon. First Instagram, and then WhatsApp will grow their international business.
I am certain we will see merchant payments using this platform by the next Facebook developer conference.
Now The Person To Person Payments Party Is Ready To Begin
Facebook is entering into a market that has many existing solutions, including:
It is inevitable that a shakeout will commence that will define competing products and remove some from the market. There is little doubt that the landscape will be far changed one year from now.
Square Cash seemed to be in a very vulnerable position before Facebook Payments  and I tried to present the case days after the product was announced that this will prove to be a huge waste of time, talent and money that will result in abstractions and distractions for Square. While Square is the current payment platform for SnapCash and currently this element of Square Cash is growing, it's simply not at the level that had been expected. The question is: how will this part play out in the future and will SnapCash use cases be enough to sustain SquareCash as a product?
PayPal + Venmo
There is no doubt that PayPal and Venmo will see a challenge from Facebook Payments. The IPO and the new DNA at the company may help drive the fleet-footed innovation and marketing needed to respond to Facebook. There are many ways that PayPal and Venmo can stay vital and relevant because of the scale they have already achieved. But the next year is critical.
Banks have been doing person to person payments via inter-accounts and intra-accounts for over two decades. They have finally begun to catch up to payment startups with useful and intuitive apps. There is also good reason to believe that banks are currently working on a system that is outside the ACH system and will allow for instant person to person payments in the next 12 months. However, as it stands today, Banks that have whole families and friends on the same platform in the US may very well continue to hold their own for some time to come, even if they fail to continue to innovate because they have a home field advantage.
Google has been sending person to person money via Gmail for over two years and although it is not breaking any records, it continues to grow and become a platform for many users. The simplicity of attaching payments like a document or a picture is quite genius. Google will need to lower costs and to continue to innovate.
The other person to person payment products that are not centered around out of country remittances will face huge adoption issues and attrition. Some may be able to survive by redesigning and specializing. Many will not.
Apple Will Enter Soon
Finally Apple will become a huge part of person to person payments and will choose partners and a system that will surprise even Facebook. The plans have been in process for quite some time, and unlike Facebook, PayPal, Google and Square, Apple will not handle any payments themselves.
The Payment Disruption Era Is Now Officially Over
In less then 12 months, the entire payments landscape has forever changed. Back in March 2012, I wrote Brian Roemmele’s Answer to Who Will Enter the Retail Payments Market Next? and listed Apple, Facebook and retailers themselves. Today Apple Pay, Facebook Payments and MCX/CurrentC are here.
It was fun times as my thesis and postulations were controversial and constrained. This was the height of the payments disruption mania and frankly few wanted to hear about the practical and pragmatic impacts and concerns of merchants and consumers. Today we are just beginning to see the sweeping changes in payments, I am guaranteeing far more changes.
As always, you and I along the way, will vote with our wallets.
And, by the way, we are also making decent progress on our 2015 predictions that we shared with you last Christmas!
____  Send Money to Friends in Messenger | Facebook Newsroom  Brian Roemmele’s answer to How does Square Cash work technically?  How Is Square Cash Doing?