The Green Sheet Online Edition
February 27, 2012 • Issue 12:02:02
Facebook becoming a payment business
Facebook Inc. made $557 million from its payment business in 2011, up from $106 million in 2010, the company disclosed Feb. 1, 2012, in a much anticipated initial public offering (IPO) filing in advance of the social networking site becoming a publicly traded company. The Securities and Exchange Commission document gave potential investors insight into Facebook's payment revenues and its plans for building its payment business.
Facebook said most of its revenues are generated from advertising and social gaming, with total payments reaching $188 million in the fourth quarter 2011. The company said its payment business accelerated in fourth quarter 2010 when platform developers began to adopt Facebook Payments in significant numbers. "Facebook Payments became mandatory for all games developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011," the IPO document noted. "In 2010, we generated approximately 62 percent of our revenue from advertisers and platform developers based in the United States, compared to 67 percent in 2009."
Facebook said social network game developer Zynga Inc. accounted for 12 percent of its total revenue in 2011 (up from less than 10 percent in 2009 and 2010). The revenue came from processing fees connected to sales of Zynga's virtual goods and from direct advertising purchased by Zynga.
Facebook said Zynga is committed to using Facebook Payments as its primary means of payment on Facebook through 2015. "Under this addendum, we retain a fee of up to 30 percent of the face value of user purchases in Zynga's games on the Facebook Platform," the company said. The Menlo Park, Calif.-based social network added that platform developers received more than $1.4 billion through Facebook transactions in 2011. The company expects to do more payment processing as it increases payment volume and adds new payment methods to its platform.
Facebook's platform accepts debit and credit card, PayPal Inc., mobile phone, gift card and other types of payments. When Facebook users transact on the social networking site, they primarily buy virtual currency to purchase virtual items in social games; Facebook takes a percentage of transactions for processing costs, the company said. Facebook uses the CyberSource Payment Management Platform to accept credit and debit card payments.
In regard to the selling of virtual or digital goods, Facebook does not consider itself to be a principal, as opposed to an agent, in the sales process. "The indicators used to determine whether an entity is a principal or an agent to a transaction are subject to judgment," the company said. "We consider ourselves the agent when we apply the indicators to our facts.
"We do not believe we are a financial institution subject to [U.S. laws and regulations]. However, it is possible that payments on the Facebook Platform could be considered a financial product and that we could be deemed a financial institution subject to applicable U.S., state or foreign regulation under certain interpretations of laws governing businesses such as money transmitters, check cashers, and sellers or issuers of stored-value."
Facebook said it is applying for "certain money transmitter licenses in the United States," which will force the company to comply with U.S. laws concerning money transmission; gift cards and other prepaid access instruments; electronic funds transfers; anti-money laundering regulations; counter-terrorist financing initiatives; gambling; banking and lending; and import and export restrictions.
Looking to the future, Facebook said it is "focused on enabling the development of apps in categories beyond games." As new social apps, such as customized music, news, movies and television, become available on the Facebook platform, developers will have more opportunities to create transactions, the company stated.
One such opportunity is in rent payments. In January 2012, Campus Apartments LLC said its online student rent payment portal, SmartClick, added Facebook Connect. The partnership allows students and parents to pay rent for student housing via Facebook. "We plan to invest in enhancing our payments offerings and in making the payments experience on Facebook as seamless and convenient as possible for users and platform developers," the company said, adding that most apps have advertisements, and usually developers can add Facebook Payments if desired.
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