Facebook to enter payments arena

Banks have been put on notice. Their younger customers look to be dissatisfied with their financial services providers, making Facebook confident enough to take its first step into the payments space.

It is significant because companies like Facebook aren’t initiators of market demand, but followers. “It is only when they are confident the demand is there that they develop a product, hence take up happens very quickly,” said Phil Gomm, CapGemini director and banking industry practice leader.

Last week European press reported that Facebook is only weeks away from receiving approval from the Central Bank of Ireland to start a service that would allow users to store money on Facebook and use it to pay and exchange with others.

Gomm isn’t surprised that Facebook is set to become an e-money institution. 

According to CapGemini’s latest survey on World Retail Banking, due to be published shortly, for the first time in a few years there’s been a global decrease in its Customer Experience Index (CEI), driven by Generation Y (Gen Y). They’re increasingly dissatisfied with the service they’re getting from their financial services providers versus what other service providers offer in the social media space.

Banks are doing much to provide information on products and services through social media but they’re leaving transactions to mobile apps, which they consider to be more robust, said Gomm.

Younger people are shifting from doing pre-purchase research online to relying on recommendations of friends through social media platforms such as Facebook and Twitter. That’s where they’re spending all their time so that’s where they want to transact.

“In simplistic terms, it is all about transacting at the point most convenient to them.”

At the moment, making a spontaneous purchase, namely buying something that your Facebook friends are recommending, isn’t seamless, hence the disconnect between Gen Y’s expectations and what they can do, explained Gomm. 

“Facebook is recognising this is where its customers want to transact today.” 

Facebook has been experimenting with value exchange for some time through its FarmVille game, an updated version of Monopoly, where a participant can transfer small amounts of money to buy assets from another participant interested in that product or service.

“Experimentation with these low-value transactions has given Facebook confidence to take on bricks-and-mortar money transfer services with its sights set on the likes of Western Union.” Later this month, Walmart plans to launch a new store-to-store money transfer service to help its customers send cash to family and friends, again directly competing with Western Union.

It represents an early point of entry into the payments business which is very attractive, moving money between people in the same closed loop environment, he said.

The big challenge is to get take up. With Facebook this will happen organically as friends say they’ll send money to each other if they open Facebook money accounts. “The models are exponential in terms of growth.”

This makes it clear that banks must fully embrace social media as another channel that goes beyond just basic information and extends into payments and transactions. 

The fact that young people no longer rely on financial advisors and family members for advice but get information from an increasingly wide variety of sources brings risk. 

Therefore “financial services firms that can align their brand with customer expectations for the delivery of trusted services via social media are in a very strong position to capture this growth opportunity.”

If banks can follow Facebook in this way, they can then add more valuable financial products in an environment that is trusted by Gen Y.

“This adds more pressure on banks to extend their digital transformation agenda from providing information, and put an emphasis on establishing an informed social media policy and robust governance framework.”

Although regulators haven’t provided much clarity on their requirements around data protection and privacy in social media, Gomm said those “who are bold are finding that the perceived regulatory challenges are less than expected.”