Reports indicate Facebook (NASDAQ:FB) is looking to double down on its mobile payment platform by letting FB Messenger users buy things in-store. This puts Facebook in direct competition with Apple (NASDAQ:AAPL) Pay and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android Pay. Other features include "secret conversation," which may allow users to hide threads within Messenger, however the payment functionality deserves extra attention. For anyone who has followed the evolution of WeChat, they can easily see where Facebook is going with the Messenger app.
As I argued in my outlook piece (see - Facebook: 2016 Outlook - Messenger And Virtual Reality The Key Catalysts), enhancing Messenger to be competitive against Asian messenger apps such as WeChat, LINE and Kakao will be a priority, and the payment function will be a critical component of that strategy. To create a mobile messenger ecosystem with services such as travel booking, restaurant booking, mobile commerce, taxi booking, on-demand services, movie ticketing and so forth, Facebook needs a robust payment infrastructure that supports all these services and facilitates user convenience. Facebook's network effect certainly works in the company's favor in that offline merchants have an incentive to collaborate with Facebook due to 1) the company's global platform and mobile user base, 2) much of these merchants' services are conducted via mobile and 3) incremental traffic referral onto their site. I see endless opportunities for Facebook as it gradually integrates mobile services onto the platform. Should Facebook achieve success in this area, it will be the largest mobile messenger ecosystem globally.
Facebook has been slow to enhance its mobile messenger ecosystem relative to the Asian peers, but for good reasons. Notably, the core advertising business remains robust and video advertising is taking off. However, recent upgrades to Messenger clearly highlight Facebook's ambition to become a global messenger platform that encompasses commerce, payment, services and social. Facebook's early entry into mobile payments was the creation of P2P money transfer over Messenger. This essentially sets the foundation for its broader ambition of connecting payment to other third-party merchants.
Facebook's creation of a searchable directory on local service providers is an attempt to break into the local advertising market that could potentially expand to online-to-offline services. Under Facebook's new "Services" URL, there is a directory where users can look up local service providers such as auto repair, vets, spas and restaurants, and see reviews left by Facebook users similar to that of Yelp (NYSE:YELP) and Angie's (NASDAQ:ANGI) List. It is unclear how Facebook will monetize this initiative, but since this project is targeted to local service providers, Facebook is clearly targeting the local ad market, specifically classified advertising dollars that many print media companies depend on. In the long-term, Facebook could leverage local services and Messenger to roll out O2O initiatives that will ultimately drive its payment penetration higher, similar to how Alibaba (NYSE:BABA) and Tencent (TCEH) are driving their own respective payment services in China. (see - Alibaba: Setting An Example In Mobile Payments).
Additionally, Facebook announced a partnership with Uber (Private:UBER) that allows Messenger users to hail Uber rides directly via the Messenger app. This is exactly what Tencent's WeChat users have been doing for the past two years and it appears Facebook is finally warming up to this idea. These two features ultimately strengthen Facebook's ecosystem, allowing the company to leverage its sticky user base and massive network effect to disrupt conventional industries such as transportation, wireless communication (i.e., VoIP), O2O and payments.
All these services require a strong payment platform to knit them together and it appears Facebook is leveraging Messenger to achieve this goal. I remain bullish on Facebook given that much of Messenger economics have yet to be factored into the analyst models. Facebook's entry into financial services, such as fintech or digital banking similar to BABA's Ant Financial, which is valued at $50bn+, could add further upside to Facebook estimates in this decade.
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