RYAN HOLMES: As trends go, this one is hard to miss. In the space of a recent week, both Twitter and Apple made major announcements about payments — i.e. how we buy things online and in real life. Twitter has just rolled out a “buy” button, which appears alongside certain tweets and allows users to make purchases directly through Twitter with just a click or two. Apple, meanwhile, unveiled Apple Pay at its iPhone 6 event. The new mobile wallet app will allow users to “tap and pay” with their iPhones at more than 200,000 brick-and-mortar stores in the U.S., as well as execute online purchases.
At the same time, Facebook has been beta-testing its own “buy” button, which shows up next to posts and ads, allowing users to complete a purchase without ever leaving the network. And Google, of course, has been trying to get its tap-and-go Google Wallet app to catch on for years. (Adoption has been stymied by the fact that Apple won’t allow its hundreds of millions of iPhone users to access the app, among other reasons.)
So what’s behind this race to payments and why do social networks now want in?
On one level, in-stream purchasing on Twitter and Facebook represents the next logical step in making it easier for you and your money to part ways. The advent of credit cards freed consumers from the obligation of actually having cash on hand and heralded a new era of impulse shopping. Amazon’s famous “1-click” checkout took this a step further: Once your credit card was on file, just about anything under the sun could be bought and shipped with the press of a mouse. But you still had to go actually go to the Amazon website… and there lies the friction.
It’s also important to note that Facebook and especially Twitter are real-time media, perfect for short-term promotions and special deals tied in with fleeting trends. With time-sensitive offers literally streaming by, consumers may well be inclined to act quickly and seal the deal, forgoing the obsessive comparison shopping that characterizes lots of Internet transactions.
Selling directly on social media has another key benefit: Retailers and advertisers get instant confirmation of the impact of their social media marketing efforts. A recent Wall Street Journal report noted that while social media marketing budgets are expected to more than double in the next five years, only 15% of marketing executives can show the quantitative impact of spending. Connecting individual Tweets and Facebook posts with actual purchases has thus far proven to be a huge analytical challenge. But with the advent of buy buttons and in-stream purchasing, concrete revenue and conversion figures can be attached to social media efforts in a way that hasn’t been possible until now.
But what’s in it for the social networks themselves and — more broadly — for Apple and other makers of mobile wallet apps? For now, Facebook and Twitter are testing their buy buttons with a select group of merchants, in many cases free of charge. It’s foreseeable, however, that they’ll start charging a fee for sellers using the feature or even set up a revenue sharing system (akin to Apple’s iTunes model). The buttons — with their promise of rich data on buying patterns — may also prove useful in luring more advertisers to the networks and boosting overall revenue from ad sales.
It’s also critical to note that, to facilitate repeat transactions, both Facebook and Twitter will store users’ credit card information. Twitter, for instance, is partnering with payments processor Stripe to handle transactions. Facebook’s new Autofill feature (a kind of Facebook Connect for credit cards) allows users who enter their credit card info to check out not only on the network but with 450,000 e-commerce merchants across the web. Apple meanwhile already has an astonishing 800 million credit cards associated with iTunes accounts. The new Apple Pay app encourages users to link additional American Express, Mastercard and Visa cards to their accounts. And here’s where things really get interesting.
Right now, Apple, Twitter and Facebook are all content to act as middlemen more or less, connecting consumers with other parties who process payment — from credit card companies to online services like Stripe and PayPal. These processors, of course, skim a healthy chunk off the top of all transactions — around 2% for most credit cards; 2.9% for Stripe. In the U.S. alone, credit card interchange fees — generally borne solely by merchants and vendors — represent a $40-billion-a-year industry.
But who says Apple, Twitter and Facebook have to remain on the sidelines while all this money changes hands on their sites and services? Indeed, it’s already been revealed that Apple will get a per-transaction fee from card-issuing banks each time iPhone users pay with the Apple Pay app. This fee will come directly from the banks, rather than from merchants or consumers. (Banks seem content to part with this extra fee because of the additional business Apple Pay will bring their way.)
But why stop there? Should Apple Pay or in-stream purchasing in Twitter and Facebook truly catch on, it’s foreseeable that these companies will themselves start to act on some level as payment processors. By elbowing out credit card companies and their online equivalents, and possibly offering merchants more attractive fees and terms, Apple and these networks could theoretically have a much bigger chunk of the extraordinarily lucrative payments pot.
This may sound a bit far-fetched, especially considering that Apple Pay’s launch is predicated on partnerships with Visa, MasterCard and American Express. Without these credit card companies on board – willing to let cardholders access their cards through the app — Apple Pay would be a nonstarter. But Apple has embraced more than few strategic partners throughout its recent history only to let them loose once their purpose had been served. Think back to how restricted the Skype calling app was when the original iPhone was unveiled in 2007, in all likelihood due to Apple’s initial partnership with exclusive carrier AT&T. By contrast, the new iOS 8 operating system allows Wi-Fi calling, enabling users to make standard voice calls over a Wi-Fi network and bypass the carrier entirely. The game has changed. I predict that this same playbook is going to be used with payment partners. Expect to see an Apple finance arm in the future.
Nor does the payments arms race have to end there. Google and Microsoft may well dive further into the payments space in the years ahead. Might they perhaps acquire Square, or even Twitter, as a way to connect mobile, social and payments? The service fees charged to merchants are only one potential revenue stream here. The rich pool of data on consumers’ buying habits collected from these transactions may prove equally as valuable, with advertisers and retailers willing to pay top dollar for insight on how to better target buyers.
