Where Social Networks, Payments and Banking
Intersect
by Terri Bradford, Payments System Research
Specialist
It may be old news that social networks are big, and getting
bigger by the day. But the expansion of commerce across the social network
landscape is a relatively new development—one that brings not only
opportunities for innovation but also a range of potential risks.
As a consumer market, the world of social networks is
vast. Facebook alone now has some one billion users. And it’s not just that
there are a lot of users. Those users are also spending a lot more time on
social sites. In 2011, users spent nearly a quarter of their total online time
on social networks, up from just 15.8 percent in 2009.1
Where there are large groups of people spending a
significant amount of time, commerce tends to follow. Nearly all of the top
internet retailers interact with consumers on at least one social networking
site. When that interaction includes the sale of goods or services, familiar
methods such as card payments, automated clearinghouse (ACH) transfers and even
PayPal support those transactions. In addition, alternative payment methods
have emerged. A significant number of financial institutions also engage their
customers using social networks and some are beginning to offer payment
services as well.
Unfortunately, where there is commerce and modes of payment
to support it, risks tend to emerge. By their nature, social sites allow users
to communicate not only directly with one another but also, sometimes
inadvertently, with an entire network of users. This may be a benefit for users
desiring to socialize, but when payments are involved along with the data
required to facilitate them, there are risks ranging from personal privacy
violations to fraud, or even potentially money laundering.
This article begins with a glimpse of the extent to which social
networks have been adopted. Next, it describes the diversity of commerce
arising among social networks and the payment methods that support it. The
article then describes ways in which financial institutions are using social networks
to provide banking services and how consumer attitudes may drive opportunities
to offer person-to-person (P2P) payments. Finally, the article concludes by
setting out some of the potential risks of these various interactions.
Social Networks and Their
Use
In existence since the mid-to-late 1990s, the use of social
networks has become mainstream. Facebook has one billion active monthly users,
more than 600 million of whom use Facebook mobile products. Twitter has more
than 140 million active users who are tweeting at a rate of nearly 350 million
tweets a day. And LinkedIn, reportedly the largest professional networking
site, has more than 185 million members in over 200 countries and territories.2
The demographics of these millions of active social network users
cover a wide range of ages. A 2011 study by the Pew Institute found that 83
percent of those who are 18 to 29 years of age, 70 percent of those 30 to 49,
51 percent of those 50 to 64, and 33 percent of those 65 and older are social
network users.
With such widespread adoption, it’s not surprising that
the use of social sites has become the dominant way that Americans spend their
online time or that the use of social networks on mobile devices is quite
prevalent as well.3 The sheer number of users has attracted commercial activity as
well.
Commerce and Payments on
Social Networks
The nature of commerce on social sites varies. Most of
it arises from the purchase of “virtual goods,” particularly in social games.4 However, commerce also arises from
the purchase real goods from “storefronts” on social network sites, and as
individuals use social media to make P2P payments and charitable contributions.
Virtual goods and
micropayments
A popular activity among users of social networking
sites is playing games. While the games are free to play, individuals can
customize their experiences within them through the purchase of virtual goods
such as hair for an avatar, rain for a virtual crop, or food for an imaginary
pet.5 Players purchase these goods to enhance their gaming experience
and/or to increase their chances of success in the game. A key feature of these
virtual goods is that each purchase is of small value, often less than a
dollar—a “micropayment.” In aggregate, however, these micropayments are growing
in significance. In 2012, U.S. revenue from virtual goods is projected to be
$2.4 billion, more than double the revenue from 2010 (Javelin Strategy and
Research 2011).
Because payments for virtual goods are micropayments,
payment methods differ from those used for online purchases of real goods and
services. Traditional payment methods such as card payments and ACH transfers
generally require sellers to pay a fixed processing cost for each transaction.
Having to cover this fixed cost for each purchase of low value would make the
sale of virtual goods prohibitively expensive. To get around this problem, many
social games allow players to pre-fund “virtual currency” accounts, like
Facebook Credits and Linden Dollars, using traditional payment methods.6 Players can then draw down their
virtual currency accounts as needed to purchase virtual goods. Under this
arrangement, the fixed processing cost per payment transaction need only be
incurred when a player adds funds to his or her account, rather than each time
a virtual good is purchased.
Another payment method that economizes on the transaction costs of
micropayments enables consumers to use their mobile phone accounts to pay for
virtual goods. The cost of each purchase of virtual goods is charged to the
consumer’s mobile account and settled only once at the end of the month, when
the consumer pays his or her phone bill. Billing to mobile phone accounts has
long been used to pay for low-value digital goods such as ring tones and
wallpaper. More recently, mobile payment providers like Boku, mopay and Zong
have partnered with mobile carriers to facilitate payments for virtual goods
used in games as well. In a typical transaction, the consumer selects the
amount of a virtual currency to purchase and enters his or her mobile phone
number. The mobile payment provider then sends the consumer a text message
that contains a PIN, which must be used in the game to confirm the purchase.
After the purchase is confirmed, the payment provider notifies the mobile
carrier, which posts the charge to the consumer’s phone bill. The mobile
payment provider is subsequently paid by the carrier and will periodically
settle with the game provider by transferring funds through the ACH to the game
provider’s bank account. A recent mopay study reveals that mobile gaming
accounts for more than half of all mobile transactions, with growth in social
gaming, in particular, drastically increasing.7 Mopay data showed that average
spending ranged from below $2 for various mobile-related services to $10 and
above for social networking or entertainment offerings.
Consumers can also pay for virtual goods with rewards earned by
participating in online promotions. Companies like Super Rewards and Tapjoy
serve as intermediaries between advertisers trying to interest consumers in
promotions and game providers seeking to monetize their games. Typically, when
a consumer agrees to participate in a promotion, the intermediary asks the game
provider to add the agreed-upon amount of virtual currency to the consumer’s
account. Periodically, the intermediary collects the funds due from the
advertiser and passes them on to the game provider via the ACH, wire, PayPal or
check to cover the virtual currency reward. These transfers are made only
periodically, rather than each time a consumer participates in a promotion. As
a result, transaction costs are kept to a minimum, just as in the case of
mobile carrier billing and pre-funding of virtual currency accounts. Tapjoy
reports that its network has reached more than 500 million devices and is
actively used by 110 million customers on a monthly basis.8
Purchase of real goods from
social storefronts
Ninety-seven percent of the top 250 internet retailers
have a presence on at least one social networking site.9 Social networks enable merchants to
meet their customers where they are, and can provide information about
potential customers, such as whether they are male or female, their age range,
where they are located and even what language they speak. This type of insight
can prove useful to retailers in improving products and services, refining
marketing efforts, or simply making consumers’ experience more enjoyable.
Using a social network like Facebook, a retailer can set
up a page to promote products or services and encourage users to become
“fans.” Once a Facebook user opts to become a fan, the retailer’s posts and
special promotions appear on the user’s Facebook page. In most cases Facebook
users wanting to interact with a retailer will have to follow a link to the
retailer’s website, taking them off the Facebook platform.10 However, some
retailers operate storefronts that enable Facebook users to make purchases
without leaving the Facebook platform.11 In those instances, payment is almost always made
through a payment intermediary like PayPal. As in traditional e-commerce, the
payment intermediary either processes payments on the consumer’s credit or
debit card or uses the ACH to deduct funds from the consumer’s bank account.
Twitter is another social network that retailers use to
interact with consumers. Retailers can encourage consumers to “follow” them on
Twitter by sending tweets with special offers. As in the case of Facebook,
consumers responding to these offers generally must leave the social networking
platform and navigate to the retailer’s website or physical location to make
the purchase. However, new payment services like Chirpify are attempting to
streamline the payment process by linking consumers’ Twitter accounts with
their PayPal accounts.12 Chirpify enables a Twitter user to buy goods and services without
leaving the Twitter platform, simply by replying to tweets. PayPal, acting as
the intermediary, processes the payment on the consumer’s credit or debit card
or through the ACH. Among the users of Chirpify are a growing number of
musicians who sell music and merchandise via Twitter.
P2P payments and charitable
contributions
P2P payments have been introduced on social networks by providers
such as Pay Me and Twitpay but haven’t yet achieved widespread adoption. Pay Me
was launched on Facebook in 2007 and Twitpay was launched on Twitter in 2008.
Both P2P services required their respective users to link their social network
account with a PayPal account to settle payments.13 With either P2P service, a user
could initiate a payment to another user of the same social network by replying
to or sending a message. Pay Me or Twitpay noted the payment on the accounts of
the sender and recipient and kept a record of the payment until it settled
through PayPal. Failing to achieve significant adoption within their respective
social network, Pay Me shuttered its service by 2010, and Twitpay shifted its
focus to its RT2Give service, which enables registered non-profit organizations
to solicit contributions via Twitter.14
Twitter users interested in making charitable contributions can
also register with RT2Give by providing personal and payment information and
linking their Twitter accounts. Once the registration process is complete,
Twitter users can respond to tweets from registered causes without leaving the
Twitter platform. Payments are completed by traditional methods such as the use
of credit or debit cards or through the ACH. Examples of charities that use
RT2Give include the Literacy Freedom Project, the American Lung Association,
and the Children’s Miracle Network.
Social networks also facilitate charitable contributions through
the purchase of virtual goods in social games. For example, in response to the
Haiti earthquake in January 2010, social game developer Zynga created limited
edition virtual goods for games played on Facebook and donated the proceeds to
Haitian relief efforts. Purchases of virtual goods like Haitian white corn in
FarmVille and Haitian fish in FishVille generated over $1.5 million in
charitable contributions for Haitian earthquake survivors.15
Banking Services on Social Networks
Merchants are not alone in their use of social networks
to engage customers. A study by The Financial Brand found that nearly 75
percent of financial institutions use Facebook, 54 percent use Twitter, and 48
percent use LinkedIn.16 They use these sites to share information about their community
service and philanthropic activities, market products and services, provide
customer service, foster engagement and, to a more modest extent, provide
access to banking services.
Vantage Credit Union was an early adopter of social
networking. It used Twitter to launch its TweetMyMoney service in 2009.
TweetMyMoney allows Vantage customers who are also Twitter users to view
account balances, transfer funds between their Vantage accounts, and view their
last five transactions. While Vantage remains a relative trail blazer in
offering banking services through a social network, Citigroup recently
solicited interest in banking on Facebook, and a number of international financial
institutions have recently begun offering banking services as well.17
Earlier this year, India’s ICICI Bank launched a
Facebook banking application that enables its customers to perform account
inquiries, check account balances, and get account statements. South Africa’s
FNB Bank has also given its customers the ability to bank on Facebook by
linking their mobile banking profile to their Facebook profile. The FNB Bank
service is currently limited to purchasing prepaid airtime, text messages and
smartphone data bundles, and viewing balances and lottery results. FNB
customers can also buy vouchers that can be sent as gifts to friends on
Facebook and later redeemed for prepaid airtime or converted to cash. In
addition, FNB plans to allow payments in the future. Meanwhile, Commonwealth
Bank of Australia is building an application that will allow its customers to
make payments to third parties and friends through Facebook. Finally, New
Zealand’s ASB Bank, which is owned by Commonwealth Bank of Australia, has a
mobile application that allows its customers to make P2P payments directly to
Facebook friends.
One of the main hurdles faced by electronic P2P payment
services is the inability to achieve universal adoption among consumers,
whether as payers or as payees (Bradford and Keeton). Given consumers’
demonstrated willingness to engage on social networks, it may be that social
networks could provide a channel through which P2P payments can overcome this
hurdle. There are now 5 billion mobile devices in the world and 1 billion
Facebook active users—600 million whom already access Facebook from their
mobile device.18 Though banking on social networks is still in the developmental
stage, the financial institutions that are pioneering payment services are able
to leverage some aspect of their mobile banking platform to allow customers to
send payments to Facebook friends.
Implications for Payments
Risk
Growth of commerce and payments on social networks has
implications for risks related to money laundering, fraudulent activities, and
privacy violations. With respect to money laundering, in the physical world,
providers of financial services are mandated under the Bank Secrecy Act and
the USA Patriot Act to “Know Your Customer” (KYC). KYC requires financial institutions
to collect and analyze basic identity information as well as monitor financial
transactions against expected behavior. In a virtual world, money laundering
is an emerging vulnerability that could potentially occur as social gamers
interact internationally, buying and selling virtual property, goods, and
services. An individual can establish a virtual currency account using
falsified information. The individual can fund the account using a prepaid
product, for example one purchased with proceeds from criminal activities. The
individual can then begin to transact with a partner or a network of partners
who then convert the virtual currency to real currency and withdraw the funds
(AUSTRAC 2012).
In contrast with the physical world, the KYC responsibilities of
operators of virtual worlds are less certain. In July 2011, under a requirement
of the Credit Card Accountability, Responsibility and Disclosure Act of 2009,
the Financial Crimes Enforcement Network (FinCEN) issued its final rule
amending the Bank Secrecy Act implementing regulations regarding Money
Services Businesses (MSBs). Though money laundering in the context of social
networks is not explicitly addressed, the rule clarifies which entities qualify
as MSBs and are therefore subject to the anti-money laundering regulations of
the Bank Secrecy Act.19 Given this clarification, it could be interpreted that providers
of virtual currencies are indeed MSBs and should be treated accordingly.
Other fraudulent activity is also a risk on social networks.
For example, users who participate in online surveys or sign up for new
services to earn rewards may be misled by confusing or spurious offers. Some
users have experienced billing of unwanted services to their mobile phone or
card accounts.20 Fraud also can result from criminals’ using stolen payment card
information to buy digital goods which they sell and then convert the virtual
proceeds into real dollars. Consumers have recourse when transactions are made
with payment cards, but it is less clear what recourse is available when mobile
account billing is the method of payment. Merchants selling goods in social
networking environments may also be more vulnerable to fraud. Their
vulnerability arises because methods of fraud detection may not be rigorous and
because delivery of goods is instantaneous. CyberSource Corporation has
estimated that merchants that sell digital goods lost 1.9 percent of revenue to
fraud in 2009, compared with a 1.1-percent fraud rate for companies that sell
physical goods online (Worthen).
In addition to fraud risks, users of social networks can
expose themselves to identity theft through social engineering, hacking or
inadvertent exposure of data. Research has shown that even individuals with
privacy concerns who join social networks nevertheless reveal vast amounts of
personal information—about themselves, their families, and even their
employers. Some users believe they can control access to their personal information,
while others have a general misconception about the actual size and
composition of the online community and therefore the visibility of their
profiles (Acquisti and Gross). In recent testimony before the House Judiciary
Subcommittee on Crime, Terrorism, and Homeland Security, the assistant director
of the FBI stated that social networking sites, especially, are breeding
grounds for cyber-criminals who trick unsuspecting victims into revealing bank
account information and other personal details. To combat such activities, the
FBI has forged partnerships with federal, state, local and international
law-enforcement agencies, and with the private sector and academia.
Social network users’ data also can be inadvertently exposed. For
example, Facebook recently announced it has begun allowing marketers to target
ads at its users.21 Facebook is enabling the advertisements based on the email
addresses and phone numbers that users list on their profiles, or based on
their surfing habits on other sites. Facebook maintains that it is not selling
user data to advertisers. However, its actions have raised concerns and calls
for special scrutiny because in many cases Facebook has more information about
its customers’ identities than other internet companies.
Conclusion
Commerce—and payments—will tend to arise wherever people
congregate in significant numbers. Although commerce on social networks is
still in its early stages, it offers interesting possibilities for payments.
New payments are emerging alongside more familiar options such as card payments,
ACH transfers and PayPal. Now, Twitter can be used to complete a transaction
using just 140 characters or less. Virtual currencies like Facebook Credits and
Linden Dollars can be used to purchase virtual goods. In turn, those purchases
of virtual goods can be used to make charitable donations. And, with just the
name of a Facebook friend, funds can be transferred from one person to another.
However, just as social networks create opportunities for
commerce, they may also unintentionally introduce risks such as breaches of
privacy, fraud and even money laundering. If new regulations become necessary,
that may have a dampening effect on the potential for social networks to offer
new retail payment opportunities. If the social channel is to reach its full
potential, providers, users and policymakers will need to remain vigilant and
guard against the attendant risks.
Endnotes
1State of the Media: The Social Media Report, Nielsen Q3 2011, and
“What Americans Do Online: Social Media and Games Dominate Activity,” Nielsen
Wire, Nielsen, Aug. 2, 2010.
2The statistics in this paragraph were accessed on Dec. 4, 2012, at
the following sites:
Facebook Statistics:
http://newsroom.fb.com/content/default.
aspx?NewsAreaId=22
Twitter Statistics:
https://business.twitter.com/basics/what-is-twitter/
LinkedIn Facts:
http://press.linkedin.com/About
3State of the Media: The Social Media Report 2012, Nielsen.
4Social games are a subset of online games, which are played on
multiple platforms (PCs, consoles, and social networks with Facebook being the
largest platform).
5In gaming, an avatar is a visual representation of the player of the
game.
6Facebook Credits are used to purchase goods in a wide variety of
games that are played on the social networking site. Once purchased, they
cannot be converted back to cash. Credits are scheduled to be phased out by
year end; user account balances then will be measured in U.S. dollars, or
whatever currency is native to a country. http://developers.facebook.com/blog/
post/2012/06/19/introducing-subscriptions-and-local-currency-pricing/, accessed
Oct. 5, 2012.
Linden Dollars
are the virtual currency used in the virtual world Second Life. Linden Dollars
can be traded for real world currencies (USD, EUR, GBP, JPY) on the Lindex, the
official Second Life trading site, and on other third-party exchanges.
7Mopay Study Reveals Consumers’ Spending Behavior Via Direct Carrier
Billing, http://www.mopay.com/upload/20120904_PM_ mopay_Numbers_US.pdf,
accessed Dec. 4, 2012.
8Tapjoy Surpasses Half A Billion Mobile Devices, http://info.tapjoy.
com/about-tapjoy/company-news/press-releases/tapjoy-surpasses-half-a-billion-mobile-devices/,
accessed Dec. 4, 2012.
9TOP 250
Internet Retailers On Social Media, https://www.
campalyst.com/top-250-internet-retailers-on-social-media-infographic, accessed
Oct. 3, 2012.
10“Gamestop to
J.C. Penney Shut Facebook Stores,” Bloomberg, Feb. 22, 2012.
11“Small
Retailers Open Up Storefronts on Facebook Pages,” New York Times, July 25,
2012.
12Chirpify has
also integrated with Instagram, a photo sharing social network. See References.
13Twitpay originally
used Amazon Payments to settle its transactions, but was later relaunched with
a link to PayPal.
14RT2Give means
“retweet to give.” In January 2012 Twitpay also began allowing registered
clients to post messages and solicitations on their Facebook walls. http://blog.twitpay.
com/?p=404, accessed on Oct. 5, 2012
15“In five days,
Zynga raises $1.5M for Haiti via Facebook games,” January 19, 2010, http://venturebeat.com/2010/01/19/in-five-days-zynga-raises-1-5m-for-haiti-via-facebook-games/
16State of Bank
& Credit Union Marketing in 2012, Jan. 17, 2012, http://thefinancialbrand.com/21384/2012-bank-credit-union-marketing-study-results/
Participants included over 300 FIs; 101 banks, 143 credit unions, 33
community banks and 26 other types of financial organizations.
17“Facebook
Banking Shows Signs of Life,” American Banker, Aug. 2, 2012.
18Fowler,
Geoffrey A., “Facebook: One Billion and Counting,” Wall Street Journal, Oct. 4,
2012.
19http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18309.pdf, accessed Oct. 5, 2012.
20“Zynga’s
Request to Dismiss Lawsuit Denied By Judge,” Industry Gamers, Nov. 16, 2010.
21“Facebook Sells
More Access to Members,” Wall Street Journal, Oct. 1, 2012.
References
Acquisti,
Alessandro, Ralph Gross, “Imagined Communities: Awareness, Information Sharing,
and Privacy on the Facebook,” Privacy Enhancing Technologies Workshop 2006.
Australian
Transaction Reports and Analysis Centre, AUSTRAC typologies and case studies
report 2012, pp 16-19.
Bradford, Terri,
William P. Keeton, “New P2P Payment Methods: Have Checks Met Their Match?” Economic
Review, September 2012.
Javelin
Strategy and Research, Virtual Currency and Social Network Payments—The
New Gold Rush, June 2011.
Lunden, Ingrid, “InstaSale: Chirpify Takes Its
In-Stream Commerce Service To Instagram As Its Twitter Servicer Continues to
Fly,” October 23, 2012.
Madden, Mary, Kathryn Zickuhr, 65% of Online
Adults Use Social Networking Sites, August 26, 2011.
The Nielson Wire, “What Americans Do Online:
Social Media and Games Dominate Activity,” August 2, 2010.
Worthen, Ben, “Fraudsters Like Virtual Goods,” Wall
Street Journal, July 21, 2010.
