Facebook’s (hypothetical) crypto strategyby@mondesai
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Facebook’s (hypothetical) crypto strategy

by Monica DesaiMay 7th, 2018
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<strong>Facebook’s recent restructuring represents the first strategic declaration of intent in crypto from a FANG incumbent. </strong>One must wonder how far behind Google, Apple and Amazon might be.

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Facebook’s newly forged blockchain group represents a massive strategic decision for Facebook, with top executives like David Marcus (previously Head of Messenger and Paypal President) and Kevin Weil (previously VP Product, Instagram and Twitter) placed at the helm. This piece explores the 4-part laddering up strategy Facebook could take to (1) go from P2P payments (2) to B2C within FB (3) to B2C across the web/mobile (4) to finally integrating with offline retail — all with dramatically lower processing fees to motivate merchant adoption.

Facebook’s recent restructuring represents the first strategic declaration of intent in crypto from a FANG incumbent. One must wonder how far behind Google, Apple and Amazon might be.

You know what’s cool? A billion+ users to stabilize a new cryptocurrency.

Despite the explosion of ICOs the the past few years, almost every cryptocurrency is sub-scale to serve as a truly stable medium of exchange. They’re all missing two core ingredients:

  1. A massive, engaged end-user base
  2. High frequency use cases

That’s where Facebook’s 2bn+ active users and B2C/P2P payment use cases — in Messenger/WhatsApp, as well as commerce (ads) — come in. Google, Amazon, and Apple have their own analogous positioning, too.

This comes at a time that’s been particularly choppy for Facebook — amidst the Cambridge Analytica scandal around user data privacy and #fakenews election fallout, Zuckerberg has been on a world tour of contrition.

But advertising revenue relies on that data, and Facebook has struggled to shift their monetization model elsewhere. They’ve poured resources into Messenger over the past years, trying everything from customer service bots, shopping and partnerships like Uber, but nothing has gained traction at scale.

Back in January, Zuckerberg first hinted at blockchain as a part of their long-term strategy:

“Many people now believe technology only centralizes power rather than decentralizes it. There are important counter-trends to this — like encryption and cryptocurrency — that take power from centralized systems and put it back into people’s hands. But they come with the risk of being harder to control. I’m interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services.”

Now, between of its decentralized nature and efficient payment model, could building a “ZuckCoin” on the blockchain help Facebook counter data privacy headwinds and develop a new monetization model?

Facebook’s “Ladder-Up” strategy for Crypto

“This is how a company accomplishes what, at the beginning, may seem impossible: a series of steps from here to there that build on each other. Moreover, it is not only an impressive accomplishment, it is also a powerful moat; whoever wishes to compete has to follow the same time-consuming process.” — Stratechery

Facebook has a clear path to integrating crypto across its product offerings, each step building on the last with two-sided network effects between end-users and merchants in the process:

  1. Give 2bn+ people a reason to use crypto
  2. Lower processing fees to motivate merchant adoption
  3. Move from “Sign in with FB” to “Pay with FB”
  4. Enable offline, low-fee payments, following WeChat’s playbook

Rung 1: Give 2bn+ people a reason to use crypto

Facebook has 2.2bn+ users across FB, Messenger, WhatsApp, Instagram — coincidentally, these form the recently restructured “Family of Apps” group under Chris Cox. That compares to tens of millions of crypto user globally. Facebook’s daily reach is 20x+ higher than crypto’s.

First, ZuckCoin becomes a new way to send P2P payments to any connection. Versus traditional payments, ZuckCoin processes with effectively no fees and faster clearing times. Suddenly, users begin to see their network as functional connections — they can remit money home on Messenger and pay friends for dinner on WhatsApp.

For the 1bn+ DAUs that live outside the US and Europe — over 67% of FB’s users — storing money in a ZuckCoin wallet could also be a more stable store of value than their local, more volatile currencies.

Rung 2: Lower processing fees to motivate merchant adoption

Messaging can be a more transactional medium than feed. So I think what you’re going to start to see are people interacting with pages, maybe follow a page on Facebook or Instagram. You see content from that page. You can click through or tap through to a message thread, and then you can either get customer support or complete a transaction or do a follow-on transaction.” — Zuckerberg

Next, those same users start to possess more ZuckCoin. They have the opportunity to liquidate those tokens into fiat, leveraging Facebook’s existing global payment network. This network, bolstered by their ads and marketplace businesses, can accept payment in over 50 currencies, and partners with Transferwise to facilitate global pay out rails. But with enough native FB use cases, there’s less reason to transfer into fiat.

With Facebook’s 80m+ businesses across the world, it’s easy to imagine organic transaction opportunities across ad units, customer service touch points, and brand pages. For example, a user could click through a targeted ad directly to purchase and pay with one easy button —immediately delivering a superior user experience and clearer merchant attribution.

Why would the merchants want that? Well, for starters, e-commerce businesses already operate on incredibly lean margins. For companies that are striving to hit single-digit profit margins, 2–4% payment processing fees are material. A blockchain-based coin could lower fees via Facebook to basis points, giving the merchants full percentage points of profit back.

Those retailers are suddenly incentivized to promote ZuckCoin as their preferred payment method — they can offer bigger discounts and loyalty rewards to that audience. With a clear margin motivation, merchants actually become ZuckCoin’s biggest advocates.

Rung 3: Move from “Sign in with FB” to “Pay with FB”

Today, “Sign in with FB” is by far the most common account sign-up and log-in flow. Tomorrow, “Pay with FB” could become the most common payment flow, piggy-backing on top of the existing FB authentication widgets across the web/mobile.

Online merchants care deeply about 3 problems:

  1. Basket abandonment rate
  2. Payment processing fees
  3. Fraudulent charge rates

They want to minimize all three. Paying with FB should, in theory, address that:

  1. Since sign-in with FB is already 1-click and 1.5bn+ users would potentially have stored ZuckCoin credentials, it would be much faster to complete a purchase than manually entering shipping and CC info.
  2. As mentioned in the previous section, processing fees could drop by an order of magnitude.
  3. Because Facebook has logged-in users with rich identities and social graphs, it should have the data to decrease fraudulent charges.

Consumers crave lower friction payments, merchants want higher margins and less fraud, and FB can provide both across the web and mobile apps — making for a massive potential payment opportunity.

Rung 4: Enable offline, low-fee payments, following WeChat’s playbook

Lower fees are equally appealing to merchants offline, which still account for 90%+ of retail spend.

Similar to WeChat’s approach in China, Facebook could build POS-integrations for “Pay with Facebook” in the ROW. For the 2bn+ people with a FB-owned app on their phone, they could simply open that to get their profile (QR)code to pay at checkout.

Imagine how transformative this could be — massive retail industries like groceries, which have a 1.6% net margin, could more than double their net revenue, getting 200bps of processing fees back.

Beyond Merchant Payments

These rungs simply describe the natural extension of a blockchain-based Facebook payment token to P2P and B2C transactions.

ZuckCoin could also enable a whole new economy of micropayments that would never make sense in today’s world of high fixed cost processing fees. These micropayments would naturally support Facebook’s existing news and video content as a monetization model alternative to advertising. They could also be used to curate content and foster a thriving Facebook-native media marketplace.

Finally, Facebook could decouple parts of identity, allowing users to own their digital data more directly. In that scenario, FB personal data generated would be encrypted, and users would hold their personal data decryption key. They would have control over sharing their data, with advertisers, 3rd party apps, etc and revoke access at will. While this in some ways would undermine Facebook’s own data moat, it may be better for Zuckerberg to regulate his own company through technology rather than let Washington do it through policy.

“It’s inevitable that there will need to be some regulation, [but] you have to be careful about what regulations you put in place.” —Mark Zuckerberg, Apr 2018, Congressional Testimony