Facebook will allow users to purchase its new online currency, Facebook Credits, with PayPal, the companies announced today.
Facebook sees a big future in its online payments platform — especially for social gaming and virtual goods — and the fact that its users can now put money into the Facebook system with PayPal is a big deal.
Many Facebook users — especially kids — don’t have access to a credit or debit account, but might have access to a PayPal account that is funded. This, then, potentially opens new sources of money for Facebook credits. (It also suggests that PayPal sees Facebook credits as more of a business opportunity than a threat.)
Advertisers will also now be able to use PayPal to purchase Facebook’s self-serve ads, but this isn’t as big of a deal.
Here’s JPMorgan analyst Imran Khan’s take from PayPal’s point of view:
Rapid growth makes for attractive opportunities. As we noted in our Nothing but Net report, more than half of US internet users now use Facebook, and globally the site represents ~5% of all time spent online. Additionally, we think social games generated more than $500M in revenue in F’09, and the sales of virtual goods and premium services are a key part of the revenue model for such games—one which we think has been constrained by the shortage of straightforward payment options.
C.A.R.D. Act creates college-age opening. The C.A.R.D. Act of 2009 makes it harder for those under 21 to get credit cards without a co-signer. With college students a key part of Facebook’s demographic, we think this partnership gives PayPal a useful entrance point into the 18-21 set.
“Adjacent” payments a part of long-term strategy. In the near term, we don’t think these kinds of payments are likely to contribute meaningfully to PayPal: we expect PayPal to see nearly $91B in TPV in F’10, with the off-eBay portion growing Y/Y at a 36% clip. However, over time, we think these initiatives present an incremental revenue stream.
Illustrates competitive advantage within Payments. We think PayPal’s continued success, contrasted with the limited traction demonstrated by online competitors (including Google and Amazon), illustrates the barriers to entry in the online payments business.