How Facebook Could Make Credits for Websites Work: Optional, Then Mandatory

Last week Facebook announced the first test of “Facebook Credits for Websites”, its new program that could allow any site to sell virtual goods or digital media in exchange Facebook’s virtual currency. For businesses selling things online, a big hurdle to conversions is getting potential customers to enter their payment details, so this could be a big new way for them to make payments easier and monetize more users.

Facebook will need to make a choice regarding exclusivity and Credits for Websites. Requiring Credits to be the exclusive payment method for Facebook-logged in users would allow it to essentially charge websites for access to its identity platform. A rollout without exclusivity requirements could get more websites to adopt Credits.

Therefore, we believe that similar to how Credits were at first an option but then later required to be the sole payment method for Facebook.com games, Facebook may be best off initially allowing websites to use Credits alongside other options and later making them mandatory.

Credits Benefits and Costs

For background, Facebook launched Credits in the summer of 2010 to simultaneously make it easier for game developers to accept payment for virtual good and to give itself a 30% cut on virtual good transactions. Users buy Credits from Facebook with their credit card, PayPal account, mobile phone, gift cards, or offers. Rather than having to enter payment details in each different game or with each developer whose games they play, Facebook Credits allow them to enter payment details once with a single, theoretically more trusted vendor (Facebook) and then spend across different games and developers.

Initially game developers could provide the option to pay with Credits alongside their other payment methods. They would then redeem with the Credits spent by their users with Facebook for 70% of their value. In July 2011, Facebook began requiring all game developers to exclusively process payments through Credits, while utility app developers could (and still can) choose whether or not to use them. Then, Facebook began allowing mobile app developers to process payments with Credits earlier this month.

Offering Facebook Credits as a payment option is a trade-off for developers. Benefits include the ability to:

  • Instantly process payments from those with a balance of Credits
  • Monetize international users without having to accept their local currency
  • Monetize those without credit cards such as teens that can acquire Facebook Credits by completing offers, buying Facebook Credits gift cards with cash at local convenience and grocery stores, or by depositing loose change at Coinstar/Rixty kiosks
  • Avoid transaction and fraud costs
  • Let users pay through a big-name company they may trust more
  • Increase user spend because they’re paying indirectly through a virtual currency rather than directly with dollars they may be more careful with

Developers must also endure several drawbacks if they offering Credits as a payment option. Most importantly, they must pay Facebook a 30% tax. Additionally, developers lose flexibility in how they optimize virtual currency costs to maximize sales. Some people don’t trust Facebook and may be more likely to submit credit card information to a game developer than to the social network. Developers are also less likely to earn money off of breakage, where users buy their proprietary virtual currency but never end up spending it. Though there haven’t been many prolonged outages in the past, if the Facebook Credits system went down, those relying on it to process payments could miss out on sales until service was restored.

Finally, Facebook can impose its own exclusivity policies on how Credits can be used alongside other payment options. Facebook allowed the game developers to flourish using any payment method they wanted on the Facebook.com Platform before eventually requiring Credits to be their exclusive way of processing payments. In this way, the gaming industry invested in developing for the Facebook Platform rather than competitors such that it had little choice but to accept Facebook’s 30% tax when it became mandatory.

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