The Facebook-PayPal Partnership: Who Benefits Most? Oct 26, 2016 Business Radio Podcasts North America facebook-paypal
A Facebook-PayPal partnership announced last week will allow Facebook Messenger users to link their PayPal accounts and send and receive money without leaving the site. But beyond that seemingly innocuous feature lies a cleverly crafted survival strategy at both companies, says Wharton marketing professor Z. John Zhang.
Much depends on whether both companies play it right in integrating the service and making it easy for users, says Jennifer Golbeck, director of the Social Intelligence Lab and professor of information studies at the University of Maryland. Facebook could “push people towards this idea that Facebook is a place where exchanging money is common.” Both experts also saw the partnership as an example of a “grand convergence” occurring in the digital world and potentially a precursor to other big acquisitions.
Clever Survival Strategy: Zhang says the deal bodes well for both Facebook and PayPal. “In today’s internet age, it is very difficult to survive,” he notes. “The fact that Twitter is shrinking is a good lesson for everybody to learn.” Twitter’s user base will grow only 2% this year instead of the 8% forecast earlier by eMarketer, a digital technology research services firm.
With PayPal in tow, Facebook makes itself “indispensable; it has a long-term survival possibility,” says Zhang. Also, PayPal’s position in the marketplace is a little bit more secure because of this deal, he adds. “At minimum, Facebook would not have the incentive to develop its own payment system at this point.”
Who Is the Bigger Winner? Immediately, PayPal is the biggest winner, although Facebook could also use the “extra attention” it would get from the deal, says Golbeck. The partnership is a “great move” for PayPal because it is “suddenly linked up with a billion more people who can use it,” she adds. She notes that PayPal’s Venmo digital wallet is already popular among millennials.
Facebook, too, will benefit as it will “keep more people engaged” with a new payment feature, says Golbeck. “If you and I are chatting on Facebook Messenger, I can send you money that comes through PayPal, through Messenger.” However, much depends on whether people stop using PayPal’s Venmo app and start using Facebook to route their payments, she adds.
PayPal could see a “huge explosion” in the number of users – it would be playing catch-up here, says Golbeck. “[PayPal wants] to be the way you send money, and they need a social partner for that,” she adds. With Facebook Messenger handling more than a billion messages a month, “the potential is tremendous,” says Zhang. “It is just a matter of converting people from the Messenger to the PayPal function – that is what PayPal needs to do.”
A ‘Grand Convergence’: “Every internet company is becoming like a Facebook, Google and Amazon,” says Zhang. “They are getting into each other’s business – there is a grand convergence.” The PayPal partnership will enable Facebook to “get into all kinds of different businesses,” he adds.
“The grand convergence is on the firm side and the consumer side,” says Zhang. “On the consumer side, everything is done on their smartphones. On the firm side, the challenge is to increase scale, leverage customer base and get into every different kind of business.” He notes that payment features on social media sites are common in China — Alibaba has Alipay, and Tencent also has a payment feature.
“Every internet company is becoming like a Facebook, Google and Amazon. They are getting into each other’s business – there is a grand convergence.”–Z. John Zhang
Strategic Fit for Facebook: For Facebook, the deal fits in well with its new Marketplace feature launched on October 3, where users can sell and shop for products, says Golbeck. Such a model is popular in China, where transactions occur within social media, she adds. “One of the things [Facebook] needs for that is a robust financial system that can deal with all the regulatory issues and [other issues] that Facebook probably doesn’t want to get into.”
As Golbeck sees it, “Facebook wants to be the only place that you have to go when you are online and do everything that you want to do.” She notes that Facebook has tested several features over the past few years “to see which one sticks.” They include a few different versions of its Marketplace feature, a few different ways to shop within Facebook, and some payment features as well.
“They’re not just going to introduce the whole thing at once; they’re going to try these little pieces [out] and use that to build this big model that merges all these things together,” Golbeck says of Facebook’s strategy. Soon, she expects Facebook to unveil a new ecommerce feature where it is easier for merchants to set up stores and for users to shop there.
Harbinger of Other Big Deals? Few companies other than an Apple or Facebook have the financial appetite for big-ticket deals, but Golbeck and Zhang speculate on some possibilities. Golbeck says she wouldn’t be surprised if Facebook buys PayPal at some point. “It is ultimately what Facebook wants – you don’t go to another app or another website to handle your payments,” she adds. (PayPal recently announced that it had 192 million active users as of the end of September. Facebook claimed 1.71 billion active monthly users as of end of June.)
In China, Alibaba is getting into banking, says Zhang, who is also director of the Penn Wharton China Center. Drawing from such moves, online retail giant “Amazon, too, must be thinking of [buying] a social networking company,” says Golbeck. AT&T, now busy with its Time Warner acquisition, will also eventually “come into the play” in the social media space, according to Zhang.
Amazon could also buy Twitter as a social partner, says Golbeck. Zhang agrees and notes that “a lot of investors must be thinking about [such a deal].”