Social media giants have been infiltrating the payments market, with big players like Facebook offering users payment services outside of the platform. While this development might signal change in the payments field, Simas Simanauskas, Head of Payments at ConnectPay, says that social media platforms would have to overcome a lot of challenges, like meeting regulatory requirements, until they can establish a strong foothold in the market. 

October 4, 2021. Facebook has been upgrading its’ business ventures and now offers users payment services outside of the original platform via Facebook Pay. Although providing payment services is financially beneficial for social media giants and might give them the upper hand due to their accumulated user base, Simas Simanauskas, Head of Payments at ConnectPay, says that despite the potential they have to step in strong in the payments market, the shift has its challenges, such as establishing greater trust or adhering to ever-changing Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations.

Main advantage — user-base

First launched back in 2019, in August 2021 Facebook Pay officially announced it would make its payment services available on third-party websites. This step was a significant development for the platforms’ e-commerce strategy, as it could help establish more trust for the payment option. This could lead to more transactions inside the platform in the future, resulting in more revenue, considering that the number of active Facebook users in 2021 was recorded to be roughly around 2.89 billion.

Regarding the advantages Facebook has over traditional PSPs, Simanauskas notes that the first one is the large user base. This is something that no other players even come close to, and it might be the main factor that will define the possible success of Facebook Pay.

“Facebook’s second advantage is that users are familiar with its platform, already know how to navigate it, and use the app frequently,” Simanauskas explained. “For instance, people interact with PSPs only when they need to make a payment, whereas on social media they spend at least an hour or two a day.”

Native transactions or traditional PSPs?

According to the expert, one of the best ways social media platforms could attract more users’ attention to their financial products is by providing the ability to send and receive payments among friends. Facebook Pay introduced this feature to the US market back in 2015. That said, a successful global launch of the feature might pave the way for a universal payment experience from inside the social networking app, which might interest other social platforms as well.

“All platforms need to monetize their services as well as optimize and release new features to attract new users in order to grow. One approach is to do it directly and charge the users a subscription fee, like Netflix, and the second one is to enable other businesses to advertise and sell their goods and services on the platform and earn from them. Apparently, most social media players are gravitating towards the second option, as merchants are willing to pay increasing advertising fees, and the main question that remains is whether to do the transactions natively or utilize other service providers.”

Looking towards the future

According to Simanauskas, while social media players have certain advantages, there are some difficulties that might take them a while to overcome in order to get to the same level as PSPs, for instance, security.

“Big social media platforms are targets for scam and cyber-security threats. This can be observed from the big data leak Facebook had back in April of this year,” Simanauskas noted. “This might make users wary of trusting their funds with the platforms, especially since traditional banks have always been seen as fortresses with underground facilities to store people’s lifetime savings. While neo-banks are slowly changing this image, people are still likely to think twice before switching over to social media for payments.”

He believes that other platforms may be observing steps made by Facebook, however, they will not rush into payment services in the near future — as long as they can effectively collect payments from merchants using outside PSPs.

“Running a payment service operation requires social media platforms to meet the requirements of regulators, learn about Know-Your-Customer (KYC) and Anti-Money Laundering (AML) activities, as well as integrate them in the process. Not only are these programs expensive to run, but also over the past 5 years regulators all over the world have been exceedingly active in inspecting financial institutions as well as handing out colossal fines, so social media platforms should expect to be under a magnifying glass. Considering this, it is unlikely that other social platforms would jump into the PSP field in the near future, while they are still able to turn in substantial profits using other service providers.”