Facebook brings in payment system

Facebook has begun tapping a new revenue stream with the introduction of an internal payments system, a move that might help the fast-growing social networking website achieve profitability while being less reliant on advertising.

The long-rumoured payments system, which is in its early stages, will allow users to purchase Facebook "credits", then use those credits to buy virtual goods from the third-party applications that run on the site, or from Facebook itself.

Facebook hopes that by offering a site-wide currency it will encourage more commerce on the website. By serving as the payment provider, it will capture a percentage of every transaction.

"Over time, this will be very significant," said Ray Valdes, an analyst with Gartner Research. "Social networking sites have suffered with monetising (their services), but this leverages [the fact that] users are there on Facebook."

Mr Valdes said revenue from its payments system could soon represent one-third of Facebook's income.

Users are increasingly spending real money buying virtual goods and credits on the applications that run on Facebook's platform. Zynga, the largest applications developer on Facebook, with 42m users of its games, is reported to be nearing annual sales of $100m. Together, developers working on Facebook's platform are expected to make more than $500m this year - perhaps more than Facebook itself.

"Control equals revenue," said Bruce Cundiff, director of payments research and consulting at Javelin Strategy and Research. "They have that (captive) user base, and they're going to make it as easy as possible to buy Facebook credits and use them."

Facebook has more than 300m registered users and continues to grow rapidly. Last week, it accepted a $200m investment from Digital Sky Technologies, a private Russian internet investment group, which valued the company's preferred stock at $10bn.

Though the payments system is being tested on just three applications at the moment, it is expected to be rolled out more widely in the coming weeks.

The payments platform could position Facebook to become a significant e-commerce player. "Potentially you're looking at Facebook as a shopping portal and a source for music downloads," said Mr Cundiff.

The question of how Facebook will monetise its significant traffic has dogged the company of late. But last week Mark Zuckerberg, Facebook chief executive, said his company had been profitable before interest, tax, depreciation and amortisation for five quarters and was expecting revenue growth of 70 per cent this year. He said Facebook would be cash flow profitable sometime next year. Outside estimates put 2009 income at about $500m.

Developers have had to cobble together payments solutions to enable commerce on their applications. Using Facebook's payments system could make it easier for developers to monetise their applications.

Copyright The Financial Times Limited 2009