Facebook to use PayPal

Facebook is adopting PayPal as its de facto payments system in a move that brings together the world's largest social network and the world's biggest online payments system.

Through a two-part roll-out, Facebook aims to make transactions on the website easier for both users and advertisers, while also positioning itself for a larger role in e-commerce.

"This is an evolutionary play," said Jeremiah Owyang, a web strategist with the Altimeter Group. "This is a testing ground to make Facebook an e-commerce platform."

Facebook's 400m users will now be able to use PayPal to purchase Facebook Credits, the virtual currency that can be used for various transactions around the website. Advertisers will also be able to use PayPal to buy the advertisements that made Facebook cash flow positive earlier than many expected.

The integration of PayPal signals a wider roll-out of Credits, which could allow Facebook to tap into new sources of revenue.

Hundreds of millions of dollars were spent last year on the social games that are played on Facebook's platform, analysts estimate. Companies such as Zynga and Playfish sell virtual goods to users who play games such as Mob Wars and Restaurant City.

But until now Facebook has not taken a cut of those transactions. The social game companies turned instead to PayPal and a handful of other payments providers to sell credits for individual games.

Now Facebook is testing the use of Credits within games and other applications on its platform. By allowing users to pay for in-game purchases with Credits, Facebook hopes to simplify the experience, allowing users to have a Facebook wallet of sorts, and likely taking a small commission on the payments.

Credits could also be used to make purchases in the retail storefronts that have begun appearing on the Facebook platform. Retailers including BestBuy, Sears and 1-800-Flowers are rolling out sophisticated e-commerce storefronts on Facebook's platform and are looking to cash in on the site's user engagement.

"Many brands are frustrated because while they may have a direct relationship with customers [on Facebook], it is not affecting their bottom line," said Mr Owyang.

In choosing PayPal to provide its payments infrastructure, Facebook puts an end to speculation that it was developing its own payments system.

PayPal, which is owned by Ebay, the online marketplace, also stands to benefit. With Facebook growing to be one of the largest sites on the web, it is attracting significant advertising dollars. PayPal, which takes a commission on each transaction, will now get a sliver of that revenue.

Published by: David Gelles

Published 18th February, 2010

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