Here’s How A Payments Feature Could Impact Facebook’s Business

Facebook (NASDAQ:FB) recently unveiled a payments feature on its Messenger app, after much speculation about this move since last year, when Facebook hired a former PayPal executive to lead its Messenger business. Built in-house, this feature will allow Facebook users to send money to their friends (not others), after adding debit card information to their accounts. And it will initially be launched in the U.S. on both desktop computers as well as mobile platforms (including Android and iOS), and will not bear any charges. There are also reports that third-party apps could soon be integrated on the Messenger app. ^[1]

We believe the revenue impact from transaction fees on payments could be limited in the long-term. This is because payments are generally free on apps including Venmo, with a small fee attached to transactions through credit cards and non-major debit cards. Nonetheless, the feature could help strengthen engagement and advertising business on the platform, in our view. Holding payment details for millions of users, could potentially lead to conclusion of sales on Facebook’s platform itself, and this could propel ad pricing on the platform. Presently, upon clicking ads, users are generally directed towards third-party sites, where they complete their transaction process.

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Transaction Fees (On Payments) Will Most Likely Have Marginal Impact On Overall Top-Line

Buoyed by rising ubiquity of smartphones and safer payment mechanisms, the mobile payments market is forecast to triple over the coming years.  The global mobile payment transaction value is estimated to grow from $235.4 billion in 2013 to $721 billion in 2017, according to Gartner. ^[2]Peer-to-peer (P2P) payments comprise for a small proportion of this market — according to Forrester, the share of P2P payments in overall mobile payments in the U.S. could reach 12% by 2019. ^[3]

Though Facebook is strongly positioned to gain in this rapidly expanding market, due to over 500 million users on Messenger app and 1.19 billion mobile monthly active users on Facebook, the potential revenue stream through payments seems marginal. Venmo, an app by PayPal, which totaled $2.4 billion in payment volume during 2014, is free to use when linked to bank accounts and major debit cards. However, a 3% fee is charged on each payment through credit cards and certain non-major debit cards.

To arrive at potential revenue through this service, let’s assume Facebook follows a similar fee structure as other players  and its total payments volume expands to $10 billion in the long-run owing to its large network. Further, we can safely assume that credit card transactions will comprise  a small proportion (let’s say 20%)  of these transactions. Under these assumptions Facebook would generate only $60 million in additional revenue, which is a marginal amount compared to the overall monetization on Facebook.

Payments Could Increase Engagement And Overall Buying On Facebook

Though its revenue impact could be limited, the payments feature could bolster Facebook’s business in other ways including:

• It could help drive engagement (or average time spent by existing users) on the platform. This could also boost Facebook’s popularity among younger users, who seem to be gravitating towards other social networks. The Venmo app is especially popular among the younger demographic (aged 18 to 24) who commonly use it to share expenses after travelling or eating out. ^[4]
• Holding credit card and payment details for millions of users will help Facebook in concluding transactions on the platform itself. This could also be achieved through the ‘buy’ button on ads (which is presently being tested). The completion of the entire transaction process on Facebook by users at scale will make ads more valuable and measurable. This will lead to higher ad pricing and monetization.
• Owing to the rapidly evolving mobile landscape, newer players keep entering the market, vying for the time spent by users on mobile devices. Facebook’s ability to successfully roll out such newer features will be instrumental in warding off threat from these upcoming apps in the future.

Our $87.5 price estimate for FB’s stock, represents around 5% upside to the current market price.

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1. Facebook plans to add third-party apps to Messenger, Mashable, March 2015 [↩]
2. Gartner Says Worldwide Mobile Payment Transaction Value to Surpass $235 Billion in 2013, Gartner, June 2013 [↩]
3. Facebook’s foray into payments: Should PayPal be worried?, Fortune, March 2015 [↩]
4. Mobile Payment App Venmo Makes Paying For Group Dinners Easy, Business Insider, Jan 2014 [↩]