Inside Facebook's Plan to Boost Ad Revenue by Turning Users Into Buyers

Revamp of Payments Strategy Is Major Change of Course for Company

Published on .

Reprints Reprints

You're talking to your sister on Facebook's Messenger, when she asks if you've bought mom roses for her birthday. Without leaving the chat, you place an order through 1-800-Flowers.com via a bot with artificial intelligence that's embedded in the instant-messaging service.

Without realizing it, you might have just tried the next big thing in internet retailing.

Called contextual commerce, such capabilities make it easier for marketers to sell goods and services without interrupting users' conversations or interactions with content. The features may allow Facebook to charge advertisers higher rates for better interaction with customers, according to Chief Executive Officer Mark Zuckerberg. That would be a big boost for the world's biggest social network, which generated $17 billion in advertising revenue last year but faces a decline in the average amount it charges marketers per click.

To get there, Facebook is revamping its payments strategy. It's a major change of course for the company, which once had high hopes for taking cuts of fees paid to companies whose games it hosted, like Zynga's FarmVille. Instead, the network may be copying the strategy of Chinese rival Tencent Holdings, whose WeChat messaging app allows users to buy everything from gifts to taxi rides.

"We want to connect people with products that they love and make it easy for them to buy," Deb Liu, vice president of platform at Facebook, said in an interview.

Facebook is one of a host of tech companies, from Samsung Electronics to Alphabet, that are delving into the world of financial transactions, both online, on mobile phones and in the physical world. On Monday, Apple may announce new features for its Apple Pay service.

Facebook has been introducing its payment features in stages, and the strategy is only now becoming clear as advertisers and partners put them to use. The company rolled out peer-to-peer payments and the ability to order Uber rides through the Messenger app last year. In April, it launched chat bots -- or automated personal shopping assistants -- for Messenger, which has more than 900 million users. The move is already producing results for some participating advertisers, particularly by attracting younger consumers.

Ad unit

"What we are seeing is a clear uptake of activity," said Chris McCann, president of 1-800-Flowers.com. "The majority of interactions with the bot are placing an order. The vast majority are new customers for our brand. We are reaching the early-adopter audience that the general advertising doesn't hit. We are reaching the younger demographics."

But in order for Facebook's plan to fully work, it has to make it easy for people to pay for goods and services without pulling out their credit cards or wallets, as they can on Amazon.com. And many payment features, offered directly or through partners like PayPal, must be free.

Facebook's commerce strategy has taken many turns over the years. A few years ago, it had retailers like Gap create virtual stores, but the effort fizzled around 2012, although it's being revived. Last year, the social network introduced "Shop" sections to its business pages so users could buy products.

Facebook's payments strategy has evolved as well. In 2010, it began offering Facebook Credits, which was a way to buy virtual goods in games, and created a subsidiary to handle those payments. But in 2012, Facebook announced that it would give Credits the boot, and allowed the use of third-party services like PayPal.

Now the site processes payments that are made directly to it, such as from companies buying ads, and through person-to-person money transfers. But when someone buy goods via a Messenger chat, a "buy" button or "shop" sections, those payments are processed by third parties.

Facebook's revenue from "payments and other fees" has declined from a high of almost 16% of total revenue in 2013 to 4.7% last year, according to data compiled by Bloomberg. In the first quarter of 2016, the amount of revenue Facebook booked in the category hit the lowest in any quarter since 2012, and was down 20% year over year. And it's expected to drop even further this year compared with 2015, Chief Financial Officer David Wehner said in April.

The decline is partly a matter of changing tastes. Many consumers have moved away from playing Facebook games -- and paying for virtual goods -- on their desktops to heavily using mobile devices, where many free games compete for users' attention.

"It's worth thinking about several eras of payments at Facebook," said Jan Dawson, analyst at tech researcher Jackdaw Research. "Payments was a big deal for a while there when FarmVille took off. Era Two is the decline that followed that. Era Three would be getting back into payments in a more meaningful way. It seems likely, longer term, the payments business will be about supporting commerce. We are at the very beginning of Era Three."

In 2014, Facebook hired David Marcus, a former PayPal executive, to lead its messaging efforts. By beefing up payment services, Facebook is taking a page out of Tencent's playbook.

"You can literally do everything within WeChat," Aunkur Arya, general manager for mobile at Braintree, a unit of PayPal, said in an interview. "A lot of companies in the West are looking at that and trying to recreate that experience."

To get there, Facebook needs to collect more of its users' payment credentials, though, the way Amazon.com already does.

"I don't even know if Facebook has my home address," said Michael Pachter, an analyst at Wedbush Securities. "Whereas Amazon not only has my home address, but everybody I ever sent gifts to. Is this a big opportunity for Facebook? Yes, definitely. Giant."

-- Bloomberg News

Most Popular