Facebook (NASDAQ:FB) could soon turn Messenger into a retail point of sale (POS) service, according to code within the app spotted by The Information. The new feature would allow customers to pay "directly in Messenger" upon buying an item at retail stores, with Facebook authorizing each credit card transaction.
During a conference call in January, Facebook CEO Mark Zuckerberg suggested that Apple (NASDAQ:AAPL) Pay could be integrated into Messenger alongside other payment services. But if those mobile payment players decide against partnering with Facebook, the company might launch Messenger as a competing platform instead.
Let's check out why Facebook wants to enter the mobile POS market, and what its entrance could mean for other players.
What mobile payments mean for Facebook
Nearly two years ago, Facebook forced all its mobile users to download Messenger as a separate app. It subsequently expanded Messenger as a platform by adding stickers, apps, games, and peer-to-peer payments. That strategy is similar to the "monolithic" approach of Asian messaging apps like LINE and WeChat, which both launched a wide variety of apps and services to enhance their messaging services. By doing so, Messenger becomes a new way for Facebook to monetize its core users beyond the News Feed.
Facebook finished 2015 with 800 million Messenger users, making the app the second-most-popular messaging app in the world after WhatsApp, which it also owns. So tethering the app to the mobile payments market -- which Future Markets Insights projects to grow from $392 billion to $2.85 trillion in transactions between 2014 and 2020 -- seems like a smart move.
Transactions don't equal revenues
The problem with the mobile payments market is that service providers only retain a tiny cut of the transaction. Apple, which is widely believed to have secured the most generous deal, receives 0.15% of each U.S. credit card transaction on Apple Pay. But even with that cut, Piper Jaffray estimates that the service will only generate $310 million in revenues this year -- a drop in the pond for Apple. Meanwhile, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google doesn't retain a percentage of credit card transactions with Android Pay, since card companies subsequently blocked third-party payment processors from charging card providers fees.
Apple's ability to charge card providers lets it process payments without directly charging merchants -- which is how most mobile payment companies generate revenue. Square (NYSE:SQ) currently charges merchants 2.75% per card swipe or paid invoice, or 3.5% plus $0.15 per manually entered transaction. Rival PayPal (NASDAQ:PYPL) charges 2.9%, plus $0.30 for retail and peer-to-peer payments. Google Wallet, which is a separate service from Android Pay, charges a flat 2.9% fee for debit and credit card transactions. Whether or not Apple has a price advantage depends on the card being used, since Apple Pay merchants still pay a 1% to 3% interchange fee for each credit card transaction.
Facebook doesn't charge a fee for its P2P payments service -- which lets you send money to friends using your debit card -- indicating that its POS platform could also be launched as a free service. If that happens, merchants could dump Paypal, Square, and Google for Apple and Facebook's cheaper services.
Facebook's social networking edge
Facebook's greatest asset is its massive user base. Convincing a large portion of its Messenger users to use the app for P2P and retail payments would basically create the largest "social payments" network in the world.
Square previously tried to address that threat twice, first by adding pay-by-message features to its Cash app in 2014, and then integrating its payment features into Snapchat that same year. PayPal's Venmo attempts to address the same issue with message payments and a "news feed" of friends' activities. But neither of those efforts can really compare to Facebook's simply adding P2P and retail payment buttons to its app.
Expand first, monetize later
A glaring flaw in Facebook's payments strategy is that it's not designed to generate any revenue. Facebook might get a cut of Apple's payments revenue if the latter agrees to integrate Apple Pay into Messenger, but it won't likely amount to much.
Therefore, Facebook's purported plans for P2P and retail payments are likely similar to its plans for Instagram, WhatsApp, and Oculus -- to expand their user bases first before testing monetization strategies. Facebook has already made considerable progress in monetizing Instagram, so it could only be a matter of time before it does the same for Messenger. For now, investors should view Facebook's expansion into payments as an ecosystem play, which won't generate much revenue but might cause big headaches for other players in the mobile payments market.