How Facebook Could Make Credits for Websites Work: Optional, Then Mandatory

Last week Facebook announced the first test of “Facebook Credits for Websites”, its new program that could allow any site to sell virtual goods or digital media in exchange Facebook’s virtual currency. For businesses selling things online, a big hurdle to conversions is getting potential customers to enter their payment details, so this could be a big new way for them to make payments easier and monetize more users.

Facebook will need to make a choice regarding exclusivity and Credits for Websites. Requiring Credits to be the exclusive payment method for Facebook-logged in users would allow it to essentially charge websites for access to its identity platform. A rollout without exclusivity requirements could get more websites to adopt Credits.

Therefore, we believe that similar to how Credits were at first an option but then later required to be the sole payment method for Facebook.com games, Facebook may be best off initially allowing websites to use Credits alongside other options and later making them mandatory.

Credits Benefits and Costs

For background, Facebook launched Credits in the summer of 2010 to simultaneously make it easier for game developers to accept payment for virtual good and to give itself a 30% cut on virtual good transactions. Users buy Credits from Facebook with their credit card, PayPal account, mobile phone, gift cards, or offers. Rather than having to enter payment details in each different game or with each developer whose games they play, Facebook Credits allow them to enter payment details once with a single, theoretically more trusted vendor (Facebook) and then spend across different games and developers.

Initially game developers could provide the option to pay with Credits alongside their other payment methods. They would then redeem with the Credits spent by their users with Facebook for 70% of their value. In July 2011, Facebook began requiring all game developers to exclusively process payments through Credits, while utility app developers could (and still can) choose whether or not to use them. Then, Facebook began allowing mobile app developers to process payments with Credits earlier this month.

Offering Facebook Credits as a payment option is a trade-off for developers. Benefits include the ability to:

  • Instantly process payments from those with a balance of Credits
  • Monetize international users without having to accept their local currency
  • Monetize those without credit cards such as teens that can acquire Facebook Credits by completing offers, buying Facebook Credits gift cards with cash at local convenience and grocery stores, or by depositing loose change at Coinstar/Rixty kiosks
  • Avoid transaction and fraud costs
  • Let users pay through a big-name company they may trust more
  • Increase user spend because they’re paying indirectly through a virtual currency rather than directly with dollars they may be more careful with

Developers must also endure several drawbacks if they offering Credits as a payment option. Most importantly, they must pay Facebook a 30% tax. Additionally, developers lose flexibility in how they optimize virtual currency costs to maximize sales. Some people don’t trust Facebook and may be more likely to submit credit card information to a game developer than to the social network. Developers are also less likely to earn money off of breakage, where users buy their proprietary virtual currency but never end up spending it. Though there haven’t been many prolonged outages in the past, if the Facebook Credits system went down, those relying on it to process payments could miss out on sales until service was restored.

Finally, Facebook can impose its own exclusivity policies on how Credits can be used alongside other payment options. Facebook allowed the game developers to flourish using any payment method they wanted on the Facebook.com Platform before eventually requiring Credits to be their exclusive way of processing payments. In this way, the gaming industry invested in developing for the Facebook Platform rather than competitors such that it had little choice but to accept Facebook’s 30% tax when it became mandatory.

In many cases, developers would prefer Facebook not implement exclusivity policies, though they begrudgingly accepts them and the 30% as the cost of being able to do business on the Facebook Platform.

Facebook Credits for Websites and Exclusivity

In the first round of testing for the new Facebook Credits for Websites program, the social network is working with online gaming portal GameHouse. In two specific games, if users are logged in to GameHouse via their Facebook Credentials they’ll be prompted to pay for virtual goods with Credits and won’t see the credit card and PayPal options. In this way, Credits are the “exclusive payment method for users logging in through Facebook”.

If the tests go well, Facebook could roll out Credits for Websites to more beta partners and eventually to all websites. Here are some of the exclusivity structures it could use, how they would impact developers, and the likelihood that Facebook would choose each potential structure:

Exclusive for all users - Websites can only use Facebook Credits as a payment method if it’s the only option they give to users, even those without Facebook accounts. This would prevent developers from monetizing significant portions of their users who don’t have a Facebook account or don’t log in with it. Therefore it wouldn’t be worth it for developers to switch to Credits exclusively. It’s very unlikely that Facebook would choose this structure. It only works on Facebook.com because every user there must be logged in through Facebook.

No Exclusivity - Websites can offer Credits as a payment option as well as other options such as credit cards and PayPal. Though it would clutter their payment flows, developers could offer Credits as an additional option to lower the payment barrier for those who maintain a balance of the virtual currency. It would help with monetization of international and teen users without forcing developers to pay a 30% cut on all of their transactions.

At first, Facebook may choose to roll out Credits for Websites without exclusivity. This would lower the risk and cost for developers such that Facebook could to get the maximum number of developers to add Credits as a payment option. Getting a wide base at first would also help Facebook push more users to start carrying a balance of Credits because they’ll see them as more widely applicable.

Though it would complicate enforcement, Facebook could require Credits to be listed equally or at least alongside credit card and PayPal options so developers wouldn’t bury Credits behind additional clicks to dissuade users from paying through a taxed method.

Exclusive for Logged in Facebook Users – Websites that want to utilize Facebook as an identity provider to power their registration and login systems would have to exclusively use Credits as their payment method for Facebook-logged in users. This creates a value exchange where developers can’t piggyback on Facebook identity without paying for it. If developers want to monetize their users but not use Facebook Credits, Faceboo could deny them access to its identity platform.

Functionally, it works because only logged in Facebook users would see the option to pay with Credits, and those with an existing balance of Credits would be able to pay instantly. People using a third-party website without signing in through Facebook would only see more traditional payment options, or could also be given the option to log in through Facebook to pay through Credits.

If the test is any indication, Facebook may eventually want this to be the way Credits for Websites works. Third-party sites would be taxed for access its its identity platform the same way Facebook taxes developers on Facebook.com. At first it might allow Credits for Websites to be used without exclusivity, but eventually it might give sites warning that it would become the mandatory payment method for Facebook-logged in users.

Facebook has already carried out this strategy of luring developers with an untaxed Platform, then giving them the option and incentives to use its taxed universal currency, and then finally making Credits the exclusive payment method with games on Facebook.com, and canvas utility apps might be next. A similar long-term strategy for Facebook Credits for Websites could be the best path to monetizing transactions for games, media, subscriptions services, and more across the web.

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