I’ve been thinking a lot lately about social payments, and have reached two conclusions. The first is that a payment facilitated by a social network is not a social payment—it’s just a normal customer-not-present payment. The second is that social payments are, by definition, social in nature and involve multiple parties. Hear me out on these two thoughts.

What if I used my Visa card to buy a cat flap being sold by a cat flap merchant on a social network? How is that really any different than buying a toaster from a merchant with a Yahoo store? It’s not. One merchant, one buyer, one transaction.

What if the merchant had a Facebook storefront and I was using my card on file in a Facebook wallet? I still say no difference. What if the merchant was enabled by Facebook to accept Facebook credits as a form of payment, and the merchant was subsequently funded by Facebook, minus normal Facebook payments acceptance fees? I’m still not biting. This would be intriguing in a Facebook-centric world, but still not a social payment in my mind. Still one merchant, one buyer, one transaction.

I’ve concluded that for something to be a social payment, it’s got to be social. It’s got to involve multiple parties paying at once. Or multiple parties being paid at once. Or one party buying and another party paying. On and on. The more I look at this, the more examples I find. Here’s a couple obvious ones:

• Group payments. This is multiple people all on the same team, in the same club, or part of the same informal group funding a single payment. Everybody kicks in $18.73, for example, to cover chips and sodas for the little league team party. CircleUp comes to mind as an enabler in this category –– who’s paid, who hasn’t paid, etc.
• Contingent payments. This is multiple people, maybe even strangers, all making partial payment towards funding an artist to create a community sculpture or a filmmaker to create a documentary. It’s all contingent, because if the overall funding goal isn’t met, all the transactions reverse and everybody gets their money back. KickStarter is a good example here.
• Networked payments. This is little Sally buying something and then passing the hat around between her grandparents until she has enough to finalize the purchase. More formally, a promise to pay passed through a network of friends until the obligation is settled. Kwedit comes to mind here, particularly the “Pass the Duck” feature on a Kwedit Promise.
• Dual-party payments. This is one person buying, another person paying. Happens all the time in business payments. But in the world of social payments this is Alice shopping online and having the bill sent to her mother. BillMyParents is the poster child here, but eBillme also comes to mind.
• Parallel payments. One person with a bunch of IOUs or items in their shopping cart from various merchants, settles everything—in parallel with each party—though a single transaction. A good example is here is TwitPay. Payvment, a new multi-merchant shopping cart, also facilitates parallel payments. Note that in both cases, it’s PayPal Adaptive Payments doing all the work in “parallel” payment mode.

I’m sure other examples will emerge, and maybe even other categories. I just saw a new company called WePay profiled on TechCrunch. It passes my social payments smell test and falls into group payments. A WePay account is a PayPal-like account owned by the members in a group. Multiple people can fund the account, and the WePay system facilitates group purchasing. The group can even attach a WePay Visa debit card to the shared account. Put that in the annual report!

I’m still thinking about old-fashioned P2P payments (I love that P2P is considered old-fashioned, by the way) and don’t know if they fit or not. On one hand its pretty social. Grandma sending Gretchen money for her birthday. On the other hand, it doesn’t feel multi-party enough. Grandma could have done the same thing with a check and I’m pretty sure that’s not a social payment!

One might argue that all these social payment examples are just “applications” that take advantage of core payment systems. But I believe there is more to it, particularly when you start thinking about a single payment trigger setting off multiple payments, transaction reversals in a multi-party context, buyer recourse, consumer protection, multi-party fee structures, etc. It feels like something important is happening.

Social payments are intriguing, but they’re just one part of the emerging Web 2.0 payments ecosystem. My partner Erin McCune and I will be addressing this topic in more detail at the NACHA Payments 2010 conference in Seattle in a session entitled “Web 2.0 and the Emergence of Social Payments.” In addition to social payments, we’re be talking about the other Web 2.0 payment building blocks — micropayments, virtual currencies, game currency cards, offer-based currencies, and bill-to-mobile — and will be trying to put it all together so that it makes sense.

Be sure to look us up if you’re going to be at the conference. We’d love to hear your feedback on our model and learn more about what you’re thinking about the Web 2.0 payments space.

If you’re not going to be at NACHA Payments 2010, Glenbrook will also be exploring this topic in an upcoming webinar. Social Payments – Scenario Analysis will be held May 5th, 2010. Registration is open now.

Related articles:

1. Pay With A Tweet – A Social Payment System
2. On Online Tale (Social Payments in Action)
3. Glenbrook at NACHA Payments 2010 in Seattle, April 25-28

At Glenbrook we believe that social eCommerce and virtual currencies are the new frontier of payments. Person-to-person transfers, charity donations, and micropayments for virtual goods (e.g. games, music, e-books, etc.) are exploding within social networks and as the 800-pound-gorilla in the social networking space, all eyes are on Facebook. Estimates vary, but $300-500 million in transactions may happen within Facebook in 2009 (note 1), although thus far precious few of those transactions are funded by a native Facebook payment mechanism.

A couple days ago I decided to send my colleague Bryan a birthday gift on Facebook and was startled to discover that Facebook now as an option to buy Facebook Credits, Facebook’s fledgling virtual currency, via mobile phone using Zong (more from Payments Views on Zong here).  Developers on Facebook have accepted mobile payments for some time now, from Zong as well as other mobile payment providers, but the Facebook Gift Shop and Facebook Credits are Facebook services, not a developer product. And up until now (note 2) Facebook has only accepted credit card payments.

Being the payment geek that I am, I opted for the mobile phone payment option and took screen prints of the process flow. And then I wanted to compare the check out process via phone to the credit card check out process, so I bought Bryan a second gift (lucky Bryan) and took more screen prints. Continue reading to see a comparison of the check out process for the two payment methods.

But first, a little background…

The (Continuing) Evolution of Facebook Payments

• There has been a long standing Facebook Gift Shop where users can purchase virtual gifts for one another for $1 each. (Some sponsored gifts are free.) Users purchase “gifts” with a credit card: MasterCard, Visa, AmEx.
• December 2007:  Rumored that beta test of payments system for applications was imminent. Developers were instructed to sign up to participate (and had to sign an NDA).
• November 2008: Converted gift shop dollars to “credits.” Each $1 buys 100 credits, so gifts that used to cost $1 are now priced at 100 credits. Still pay for Facebook Credits with a credit card.
• March 2009: Facebook claims to be “looking at” a virtual currency system.
• April 2009: Facebook introduces a limited pilot program whereby users can give credit to one another. If one user “likes” content that one of their friends has posted, the user can give them a virtual tip, using Facebook Credits. The only thing you can do with the credits is buy Gifts or give them to your other friends.
• May 2009: Facebook announces “Pay With Facebook” a new feature that will enable users to make purchases from Facebook application developers. Funding is via Facebook Credits, which can be purchased only via credit card.
• June 2009: Facebook began testing payment for virtual goods within Facebook using Pay With Facebooka nd Facebook Credits, starting with the GroupCard, Birthday Calendar, and MouseHunt applications.
• August 2009: Facebook announces that the Gift Store is conducting an “alpha test” of non-Facebook gifts in the Facebook Gift Shop, including some physical goods (e.g. flowers, candy).
• August 2009: It is now possible to purchase Facebook Credits with your mobile phone, via Zong.

Purchasing Facebook Credits via Mobile Phone

(Note: click on individual images to see larger version)

When I clicked on Bryan’s Facebook profile I was reminded to wish him Happy Birthday, and optionally, buy him a “gift”

Up until now, Facebook has only accepted payment via Credit Card for Gift Credits. But now it is possible to pay with your mobile phone. Note that the “pay with mobile” option is listed first.

I could select whether to purchase 15 ($2.99), 25 ($6.99), or 50 ($9.99) Facebook Credits and then prompted to enter my mobile phone number.

Meanwhile, I received a SMS text message from Zong providing a PIN number, confirming a payment of $2.99 to Facebook, and instructions on how to stop the payment or get help:

I entered the PIN number provided, waited a few moments, and then got a confirmation screen.

Finally, I received two confirmation SMS text messages from Zong (not from Facebook):

Purchasing Facebook Credits with a Credit Card

For Bryan’s second gift (a virtual beer, I am sure he would have preferred a real one!) I opted to pay with a credit card. Note the difference in price per Facebook Credit (more on that in a minute).

Next I entered my card details and was immediately presented with a confirmation screen. The process is definitely quicker (and cheaper) if you purchase via credit card.

Finally, when I purchased via credit card I received a confirmation email directly from Facebook (whereas with the mobile phone payment I received the confirmation via SMS text from Zong, rather than Facebook).

Pricing Varies by Payment Method

When I paid with my mobile phone the price per Facebook Credit was twenty cents. I only paid ten cents per Facebook Credit when I made my purchase with a credit card. Zong charges the merchant (in this case Facebook) a higher processing fee than the credit card companies do. This is not uncommon. Payments via mobile phone are typically for virtual goods (ring tones, avatar super powers, games, etc.) with relatively low cost of goods, thus merchants are less price sensitive. Once they’ve done the coding, every incremental sale above and beyond development costs is profit. Mobile payments for virtual goods cost between 20-50% of the transaction amount, with most of the fee being passed on to mobile phone carriers. Given this pricing structure, it is not surprising that Facebook charges more per Facebook Credit when you buy with your mobile phone. It is unclear how much of the net fee application developers receive and how much Facebook retains, and if the split varies depending on payment method.

Other Forms of Payment Within Facebook

Keep in mind that Facebook Credits are just one way of purchasing goods within Facebook. Today, Facebook application developers monetize their games and other applications by accepting payment directly using PayPal, Google, Amazon FPS, or SocialGold. Or developers may opt to receive direct payment via mobile phone via Zong, Boku, or another mobile payment provider. Virtual currencies that can be used across a variety of social networks and game sites include Spare Change and SocialGold. It is also possible to earn virtual currency credit by taking surveys and participating in trials offered via Super Rewards, OfferPal Media, Peanut Labs and many others. And finally, game developers in particular, often accept payment via a prepaid card sold in retail establishments, such as the Ultimate Game Card. The social and gaming web is exploding with virtual currency offerings, yet thus far no one model or payment brand dominates.

We’ll continue to monitor Facebook’s payment evolution and track the development of social eCommerce here at Payments Views. In the meantime, you might enjoy these related Payments Views posts:

• Digital Content & Mobile Phones – a Look at Zong by Carol Coye Benson (July 15, 2009)
• Payments Views Archive: Mobile Banking & Payments
• Payments Views Archive: Facebook

Notes

1. Facebook transaction value estimates here.
2. Caveat: I am not quite sure when Facebook started accepting Zong – sometime after June, as that was when I last checked in. I suspect, but haven’t confirmed, that the change was made in conjunction with last week’s announcement that the Gift Store is conducting an “alpha test” of non-Facebook gifts in the Facebook Gift Shop, including some physical goods (e.g. flowers, candy). If anyone out there knows for sure, please let us know in the comments.

Related articles:

1. Zong’s Office in Palo Alto – Mobile Payments “In the Wild!”
2. Digital Content & Mobile Phones – a Look at Zong
3. Glenbrook’s Model for Social Payments (A Work in Progress)

Editors Note: Glenbrook, along with the rest of the payments industry, has been watching developments in mobile payments closely.  A few weeks ago, our partner Carol Coye Benson profiled Boku and CashEdge products.  Today, she takes a look at Canada’s Zoompass, Zong (below), Billing Revolution, and Blaze Mobile. [UPDATE Aug 6th: Be sure to check out Carol’s latest installment on Obopay, one of the original mobile payment pioneers.]

Zong is a mobile payments product from Echovox which enables digital content purchases on mobile phones.  A few weeks ago, I profiled competitor Boku, and commented on some of the benefits they offer digital goods merchants.  Last week, I spoke with Zong’s CEO David Marcus.  Like Boku, Zong offers consumer ease of use (leading to higher purchase completion rates – a key problem solver for merchants), simplicity of merchant implementation, broad global carrier coverage, and a strong four-letter consumer brand.

From a payments system standpoint, Zong shares with Boku and others in this category the defining characteristic of using the carrier’s bill to the consumer as the means of payment.  Zong gets paid, and pays the merchant, only once the consumer has paid their mobile bill: there are different patterns depending on whether the underlying consumer phone account is prepaid or postpaid.  The carrier is an economic participant in the value chain, driving the total cost to the merchant, including Zong’s “slice”, to 30% to 50% of the gross purchase price.

David discussed some of the additional aspects of Zong’s service that he believes give Zong a competitive advantage.  In the key area of consumer convenience, Zong’s “pin code based flow” is, he believes, superior to a “reply to text message” based flow, and drives a claimed 15% higher payment conversion rate.

But the critical differentiating element of their product, they believe, is the nature of Echovox’s  relationship with global carriers.  Echovox has been working with carriers for over nine years.  Rather than using an aggregator model (aggregators, who evolved to enable the ring tone market, are intermediaries standing between digital content or service providers and the carriers), Zong is directly connected to the carriers.  There are a number of important advantages to this, according to David.

One advantage is that the payment from the carrier to Zong happens more quickly with these direct connections than with the aggregator model.  This enables Zong to pay the end merchant more quickly.  Secondly, simply having one fewer layer in the value chain means fewer parties to compensate, enabling Zong to charge lower rates to the merchant. Finally, digital content merchants working with aggregators are exposed to a number of financial and operational risks – aggregator failure is one.  Payments to merchants may also be delayed for sometimes staggering periods of times (many months).

Finally – and this is pretty intriguing – David believes that by avoiding the aggregator model, Zong may be on track to establish a different type of economic model with the carriers in the future.  Today, no carrier is going to tinker with the highly profitable ring tone model that the aggregators enable.  But some carriers, David says, are open to establishing a new business model to enable payments transactions – as long as it doesn’t threaten that ring tone model.  The long term payoff?  A separate transaction type, with much lower carrier “cuts”, could enable this model to greatly extend the market for mobile payment platforms.  Think of it this way.  Today, The New York Times (which has played with any number of digital content models) is not going to try a model where a subscription – or an article purchased – nets a carrier (or a payments service working with carriers) half of the consumer revenue.  But – who knows? – maybe they would if that cut were, for example, 10%.  More than a merchant discount rate, less than a digital content rate.

David summarized his comments on the aggregator model by saying that “it simply doesn’t scale” to match the market potential.  Aggregators, in his view, are a bottleneck limiting the growth of the market.

I asked David about the likelihood of Zong expanding into non-digital goods purchases, P2P payments, or funding sources other than carrier bills.  He thinks Zong has a “sweet spot in social networking and gaming”, but says “we do have broader ambitions”.

In my view, although it is interesting to look at the competition between Zong and its closest peers, such as Boku, the far larger question is how these types of services will compete with other types of payments, including cards and ACH type bank network payments.  Three years from now, will most mobile, low-value, digital content purchases be made through carrier billing arrangements, or through mobile-enabled card and bank account payments?  I’m not sure I know which side of that bet I’d take!

Related articles:

1. Zong’s Office in Palo Alto – Mobile Payments “In the Wild!”
2. Purchasing Facebook Credits with Zong Mobile Payments
3. Wallets and Stickers and Phones, Oh My! – a Look at Blaze Mobile

Boku announced a new mobile payments product yesterday, along with a set of acquisitions, new funding, and a new management team. The offering is ambitious, and dead-set against the emerging global market for spontaneous purchases related to online gaming.

Niche, you say? I’m not so sure. There’s a lot to be interested in here. Of course, I may be biased – as a Francophile (at times openly, at times secretly), I like the wordplay. And strong, four letter payments brands seem to work…

Here’s what caught my eye:

Boku is drop-dead easy for the consumer. The online demo is stunning in its simplicity. Never, ever, underestimate the importance of ease of use for a consumer. Especially for spontaneous purchases. In my opinion, this is right up there with 1-Click.

It enables “new money”. While many new payments offerings are structured to provide consumers with alternative ways of paying for things they are buying now, Boku is primarily about enabling the sale of stuff that hasn’t been sold before – all those “extras” (costumes, awards, points, etc.) that the new class of on-line “free” games will allow users to buy.

Those of us with long histories in the payments industry may well say “hmmm, sounds like micropayments to me”. Now, the term may cause you to twitch – there is a long and painful history of micropayments failures. But the lure of micropayments – what has brought investors and developers back to the concept time and again – was this very notion of enabling a class of commerce that previously didn’t exist. The failure of most micropayments schemes to date can most simply be attributed to the basic “information wants to be free” concept, which proved to be the case with computer-centric consumers of information.

But this isn’t about computers, and it’s not about information – right now, at least. It’s about phones, and entertainment. If “information just wants to be free”, remember that “kids just want to have fun”. The model here is ring tones – a market that is very much still alive (as evidenced in my life by a trip to the mall yesterday with three thirteen year olds – all playing their ring tones to each other in my much-too-small car).

What else has Boku got right? Matching the drop-dead easy pitch to consumers is a pitch to sellers (“publishers”) that makes it simple to access a global market of consumers. The mind-boggling complexity of cross border commerce and payments has already provided lucrative opportunities for companies and networks willing to step in front of the complexity and offer simple products. That is what the global card networks did so successfully for tourists, and what PayPal has done so successfully for online eCommerce. In an interview with VP of Product & Marketing Ron Hirson, he referred to this as “iceberg-ing”. A publisher will be shown exactly the fees for a given country and carrier, and (equally key) be given easy-to-use tools to set pricing and therefore control their available revenue. Boku will handle all the complicated details behind that. Transparency plus simplicity – nice!

So, you say – it still sounds like a niche? How big can online gaming be, after all? Even if I agreed with that, here’s why I’ll be watching Boku as it moves forward:

It’s defining itself as a payment platform. Today, the platform has limited funding options (the purchase is billed to your phone bill) and a risk management approach that is obviously optimized for digital goods. There are inherent limits to these models. Larger dollar purchases will run into well-known problems with carriers extending and managing credit; non-digital goods have entirely different fraud management and logistics requirements.

But platforms, once established, can support growth both horizontally and vertically. A Boku “wallet” of the future could easily offer consumers choices of funding, and make its way into other classes of goods. Perhaps not the purchase of plasma televisions (at least not right away), but certainly other forms of digital content – music, video and ebooks.

This will take them straight into the Apple orchard – so it will be fascinating to see how Boku evolves and works (or doesn’t work) with the iPhone App store and its emerging competitors. As an avid ebook/Kindle user (making way too many spontaneous purchases of digital content!) I’m keeping my eye on Amazon in this market as well.

Finally, there is the confusing, but intriguing, world of social networking, with hundreds of unanswered questions about how payments will be made and received among participants in a network. Boku has some of the pieces necessary to play. Let’s stay tuned!

Related articles:

1. Digital Content & Mobile Phones – a Look at Zong
2. It’s Not Just Games Anymore – A Look at Payfone
3. Decoupled Mobile? A Look at mPayy