During Facebook's (NASDAQ:FB) second-quarter earnings call last summer, CEO Mark Zuckerberg told analysts, "Messenger will have, over time, there will be some overlap between that and payments." The comment followed a question about the hiring of David Marcus -- the former president of eBay (NASDAQ:EBAY) subsidiary PayPal -- as head of messaging products.
The day has finally arrived: Facebook Messenger users will be able to send digital payments to each other within the app by connecting a debit card or bank account. Facebook holds the money for just seconds before transferring the funds to the other user's account.
The new service differs from Snapchat's similar service in that Facebook has built the infrastructure itself instead of relying on a partner like Square or Stripe. (Snapchat rolled out its payment partnership with Square in late 2014.) That means Facebook stores the debit card and bank account information (of both the sender and receiver) on its servers, reducing costs and opening the door for future opportunities.
A huge audience
As of Facebook's last update, Messenger had more than 500 million users. What's more, the payments feature will be available on the desktop version of Messenger, which is tied to Facebook and its 867 million desktop users.
eBay-owned Venmo, the leading peer-to-peer digital payments app, can only dream of such scale. Venmo processed $2.4 billion in payments last year, but eBay doesn't provide details on its total number of users. Still, the rapidly growing platform is becoming an increasingly large part of PayPal's mobile payments volume.
Facebook's entry into the market is bad news for Venmo. Facebook Messenger is more convenient for new users, since it's likely already installed on a person's phone. For existing users, Venmo's utility is limited by its network, where Facebook excels. And the announcement couldn't have come at a worse time for Venmo, which is under scrutiny for security shortcomings.
A long-term game
Like seemingly everything Facebook does, the payments service appears to be part of a long-term strategy. Facebook won't generate any revenue from the service, as holding cash for a second doesn't allow it to make any returns on the float. Instead, Facebook seems content with collecting and storing a user's payment information for future uses.
One such use could include a "buy" button, for which the company has partnered with Stripe in its early experiments. With payments information on hand, the buy button becomes much more seamless. That increases the value of Facebook's retail advertisements by reducing the friction between click and purchase.
Another utility would be to enable users to interact directly with businesses through Messenger. Zuckerberg hinted at such capabilities in the second-quarter earnings call last year. Users could purchase concert tickets or a cup of coffee for a friend through the app, and Facebook could charge businesses a service fee of some sort. Facebook already has strong relationships with millions of small businesses that it could leverage for such a product.
What does it mean for investors?
The entry into payments won't generate any revenue for Facebook in the near term. But it's a signal that Facebook isn't going to wait for its services to reach 1 billion users before it moves to monetize them, as Zuckerberg hinted at in the company's third-quarter earnings call.
That's a strong message to investors considering that Facebook has several products with relatively large user bases that are barely monetized, including WhatsApp and Instagram. Moving forward with monetization efforts on those properties will supplement the steady growth of ad revenue on Facebook's flagship platform.