Facebook's PayPal-Killer Will Be Bigger Than Facebook Ads, Some Execs Believe

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Inside Facebook’s Justin Smith broke news last night that some Facebook users can now buy virtual and physical gifts from third-party vendors using “Pay With Facebook” credits through the Facebook Gift Shop.

These gifts range in price from $1 to $50.  The participating vendors are app-makers American Greetings Interactive, GreetBeatz, Someecards, and Real Gifts.

It’s a significant development because it’s part of Facebook’s open-secret plans to compete with eBay’s PayPal and become a virtual wallet — the way its users pay for goods across the Internet. In June, the company hired Prashant Fuloria, the guy who used to run Google Checkout, to run “Pay With Facebook.”

Though CEO Mark Zuckerberg earlier this summer said that “Pay With Facebook” could eventually expand Web-wide, Facebook typically refuses to officially admit to such ambitions.

Following last night’s news, a company spokesperson told us, “I want to clarify that this is just an ‘alpha’ test in the Facebook Gift Shop available to a small number of users and with four developers.”

Still, one source close to Facebook tells us that there is a group of executives inside the company that believe “Pay With Facebook” could end up a bigger revenue source than Facebook’s advertising revenues. We’ve estimated Facebook’s advertising revenues will reach $475 million in 2009.

To get an idea what kind of challenges Facebook will have to overcome to get there, consider that during the second quarter, eBay subsidiary PayPal’s revenues were $669 million, up 11% y/y. 

It got there with:

  • 75 million active registered accounts
  • A total payment volume of $16 billion in the quarter
  • With accounts containing approximately $3 billion in stored value that is spent every 2 weeks
  • Supporting 19 currencies
  • With a .30% fraud rate

Facebook can’t approach any of those numbers yet, but it does possess one distinct advantage — nearly 300 million monthly active users.

What’s more, the rousing success that is Facebook Connect — the service that allows users to log in to participating third-party sites using their Facebook IDs with one click — hints that Facebook users might appreciate a similar “one-click” simplicity when paying for merchandise on the Internet.

Here’s how Inside Facebook broke the story last night:

Facebook is about to start testing a major new expansion to the Gift Shop that will integrate items from third party developers. The move will expand Facebook’s merchant platform beyond the “Pay with Facebook” tests that are running inside a few applications and, for the first time, integrate a variety of third party virtual gifts into the Facebook Gift Shop. In addition, for the first time, Facebook users will be able to purchase physical merchandise in the Gift Shop with Facebook Credits.

A Facebook spokesperson confirmed the news for us, writing in an email:

First, I want to clarify that this is just an “alpha” test in the Facebook Gift Shop available to a small number of users and with four developers – American Greetings Interactive, GreetBeatz, Somecards, and Real Gifts. All of these developers provide virtual goods except Real Gifts, which provides select physical gifts such as flowers or candy.  We are doing this test to explore possible new ways for users to share with their friends around birthdays and special occasions.

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