Trust and Payments

Social commerce is a budding new industry that gives customers the ability to easily and cheaply transfer funds to other customers online with apps such as Facebook (META 1.54%) Messenger, Apple Pay, and Venmo. The industry is growing, but there are a few significant hurdles slowing things down and keeping the industry from mass adoption.

In this Industry Focus segment, our analysts talk about a few of those biggest hurdles -- privacy issues, security risks, funding issues, fierce competition, and more -- and how social commerce players might address some of them in the future.

A full transcript follows the video.

This podcast was recorded on March 13, 2017.

Dylan Lewis: One of the things that Kahina Van Dyke from Facebook said was, Facebook is not looking to make any money off the P2P side of money transfer. A direct quote here was, "We offer P2P for free, but it does cost money." What she really means there is, they're offering this, and the whole point is, "We're going to eat these costs because we think it's really great for engagement on our apps and on our platform. We're happy to do that if it keeps people in the system longer."

Gaby Lapera: Yeah. That makes a lot of sense. But, that's actually a really interesting point about collecting data. I don't know how many of our listeners are familiar with Venmo. They're owned by PayPal (PYPL -1.83%) now. They have this social feed that you can scroll through and see what all of your friends have been buying. So it could say, "Dylan Lewis paid Gaby Lapera for 50 pineapple upside-down cakes."

Lewis: A frequent purchase I make.

Lapera: Exactly. Dylan really likes pineapple. Actually, I don't know if you like pineapple, but I love pineapple, so maybe I would be paying you for pineapple upside-down cake. But there's this really interesting aspect that sometimes people don't say exactly what they're actually using it for. There's actually this really sketchy feed called Vicemo, where these people have a scraper that goes through the Venmo feed -- because you can see anyone's purchases on it -- and it takes out anything that has any references to drugs or ladies of the night or alcohol, any illicit or less-above-board activities, and it publishes them in a feed that you can just scroll through. But I don't think that many people are saying, "Yes, I am actually purchasing cocaine." They might do it as a joke, but I don't think it's real.

Lewis: Yeah, it's certainly entertaining. I think one of the things that highlights, and I am a Venmo user, and I do the same thing, I mess around with my friends, knowing that my payments are going to be public, and will often obscure whatever it is that I'm actually paying them for with a funny emoji instead. That kind of puts a ceiling on how helpful the data is that they're collecting on that messaging, and really understanding what people are using the platform to pay for.

Lapera: Yeah, definitely. I think the other thing that's really interesting about Venmo is that the adoption process, and other social commerce platforms, the adoption process has a hurdle in that a lot of people trust payment processors like Visa, or they trust their banks, but a lot of them have never heard of Venmo, or Facebook Messenger, as a way to transfer money. And they're like, "Is that really secure? That's not really your area of expertise? Your area of expertise is Facebook, it's not money." So, I feel like a lot of potential users might hesitate to hop on to the social commerce, fintech-type space.

Lewis: Yeah. For as much as I enjoy messing around in the social space, and hanging out on digital media, I will not be giving Facebook my payment information. On my end, I'm happy to have one less point of access to my financial accounts.

Lapera: Yeah, definitely. That's something to keep in mind. And one of the really interesting things about Visa is that it's one of the most recognized brands in the world, and also one of the most trusted brands. And while Facebook might be one of the most recognized brands as well, I don't know that it's one of the most trusted, too.

Lewis: Yeah. There was a great quote from the panel. One of the people on it said, "People may not like their banks, but they trust them." I think when you're talking about financial services, that's really what it comes down to. You want your money to still be there a week later. You don't want to have to worry about someone logging in and liquidating your accounts because you're constantly signed in to Messenger on your phone, or something like that. The authentication that it takes for me to get into my online bank account, there's a lot more hurdles there than it takes for me to log in to Facebook on my iPhone.

Lapera: Yeah, which is one more argument for these tech companies using other parties that are already established to help them set up these networks. The other thing that's really interesting is that a lot of these things have not been monetized yet.

Lewis: Yeah. And they are backed by big tech money. Facebook saying, "We're offering P2P for free," and it is, in some ways, a loss leader, or, it's a way to keep people playing on the platform, that echoes what Sheryl Sandberg has said in the past, one of their executives, basically saying that it's a way for them to enforce the activities that they want to see on Facebook and Instagram. It's not a means to an end in terms of profitability for them.

Lapera: They just want to see more people using their products.

Lewis: Exactly. And that's great for consumers. It's awesome for me to be able to send you money for free and not have to worry about it. But I think it does make the space a little bit tougher for your small players, maybe some of your upstarts.

Lapera: Yeah, definitely. I think Venmo is also free for P2P transfer. That's actually how I pay my rent. Fun fact -- I told my landlords about it and they were 100% on board. They used to use PayPal, but they charged a processing fee. Venmo is free, as long as you're not paying via credit card. If you pay via credit card, there's a 3% surcharge. But as far as I know, that's the only way they're making money right now, and they're still not in the black.

Lewis: And they are, of course, part of PayPal, which is a large payment facilitation company. They're able to get away with fueling growth, fueling growth with the Venmo platform because they have this underlying business that is really firing on all cylinders. Ditto for Facebook. They have this huge ad business that just prints money, so they don't care what goes on with the payments on Messenger, because it's such an inconsequential amount of money for them. When you have that kind of backing, and you can have these loss leader services, it makes it a lot tougher for those new entrants, like I talked about. What you need to do and what you need to be able to offer is going to be eating into your bottom line for a long time just so that you can acquire customers.