PayPal Integration Shows Facebook Wants to Play in Currency, Partner for Payments

A few minutes ago, Facebook and PayPal formally announced a partnership that brings PayPal in as a first-class payment option for both advertising and Facebook Credits – the core e-commerce services within the Facebook ecosystem today. It’s an important step for both companies, and is a symbolic step in the direction Facebook is taking its business as it relates to payments.

As we wrote in “2009: The Year Facebook’s Platform Monetization Efforts Kicked In“:

It’s somewhat hard to remember now, but during much of the last couple years the tech press was heavily focused Facebook’s plans to build a “PayPal killing” payments service. The idea was basically that Facebook would monetize its platform by owning both the payments layer and the identity layer, eventually spreading its tentacles further throughout the web via Facebook Connect, which would serve as the underlying infrastructure for both an ad network and payments service in the future…

Ultimately, however, Facebook has shown so far that it wants to rely on payments partners to manage deposits, and we think that will continue next year, instead focusing mostly on its currency experience. Why? Basically, currency is a much higher margin business. While we believe identity is vital to payments, and Facebook is in an interesting position to expand its role as a more generic payments platform in the future, we don’t believe Facebook is likely to build up the global operations necessary to build out such a service soon.

Today, by integrating PayPal as a payments option for ads and Credits, Facebook is showing that it’s fine relying on third party payment service providers to handle deposits. While this doesn’t mean Facebook will never build out its own “PayPal competitor,” this move does show that Facebook is prioritizing the growth of dollars flowing into its virtual currency and advertising platforms before building out more of the payments layer itself.

Ultimately, this should definitely lead to smoother payments for Facebook advertisers and Credits buyers, and nice incremental revenue for PayPal. It wouldn’t be surprising to see more partnerships with other third party payment providers over the course of the year.

Of course, more users shifting to Facebook Credits will present challenges to current Facebook Platform payment providers. As we detail in Inside Virtual Goods: The Future of Social Gaming 2010, between the rapid growth of the social gaming market and Facebook’s move to play a more direct role in monetization, it’s certainly going to be an interesting year for the monetization landscape on the Platform.

Note: We’ll be going in depth on the future of the payments ecosystem on the Facebook Platform at Inside Social Apps 2010 on April 20th in San Francisco. Renata Dionello, Chief of Staff to the CEO at eBay and former Director of Consumer Business Development at PayPal, will be speaking.