Why could Facebook's digital payments project succeed where others have failed?

Facebook (FB) clearly has an excellent understanding of the power of network effects – how the total value of a platform increases as more and more participants add – in the world of media applications social and messaging. And from the point of view of things, the company also understands the essential role played by network effects in setting up a new payment platform.

Six weeks after announcing that Facebook was seeking a total investment of $ 1 billion for its high-profile project, the Wall Street Journal reports that Facebook has convinced more than a dozen companies, including Visa (V), Mastercard (MA), PayPal (PYPL). and Uber Technologies (UBER), to invest about $ 10 million each in cryptocurrency financing. The online travel giant Booking.com (BKNG), the Latin American leader in e-commerce, MercadoLibre (MELI), and the private group Stripe, whose platform is used by many leading technology and commerce companies electronic to process payments, have "signed on the project."

Markets like what they see: Facebook's share is up 2.2% near the close on Friday, despite a 0.4% dip for the Nasdaq.

According to previous reports, the WSJ said that Facebook's piece would be "attached to a basket of currencies issued by the government in order to avoid the wild fluctuations that have ensnared other crypto-currencies". He also said that neither Facebook nor any other member of the consortium formed to govern the play – which will be known as the Libra Association – will have direct control over the currency.

Last month, the BBC announced that Facebook wanted to launch its coin in 12 countries by the first quarter of 2020 and discussed this effort with US and UK regulators. At the same time, the Financial Times announced that Facebook had discussed with major financial trading companies and crypto-currency exchanges about the support of his play.

We still do not know much about how the play works – we should learn more next week, when Facebook should share a white paper on the play. But many things have already been reported about the types of use cases envisioned by Facebook.

In addition to managing the types of digital payments that are often processed nowadays via credit cards or PayPal accounts – possibly with minimal or no transaction fees – Facebook apparently wanted to allow international money transfers to go smoothly. market. The company would also be interested in supporting microtransactions of digital content that are too small to be funded through credit cards in a cost-effective manner and by the idea of ​​"paying fractional room to users when they view advertisements, interact with other content ". or shop on his platform. "

By ensuring that companies like Uber, Booking, MercadoLibre and Stripe are supporting the piece from the start, and also supporting it on its own platforms, Facebook could possibly avoid the kind of dilemma of the egg and the chicken that has so derailed other payment initiatives over the years. If you support microtransactions and inexpensive cross-border payments, the piece could quickly interest a subset of Facebook users.

And even if the company does not charge transaction fees on the use of the room, Facebook could benefit as it increases the time spent on its main applications, generates more advertising activity on these applications and / or provides him with transaction data. that his advertising business can exploit.

However, there are still some big questions. Among them: what will be the interest of consumers who receive cash back and / or other benefits, through their credit card loyalty program, to use the coin for standard digital transactions? For these consumers, a 2% or 3% discount due to the lack of payment processing fees might not be a sufficient incentive to use it.

It should also be questioned, given the obvious risk that could represent the piece of Facebook for their existing businesses, to what extent companies such as Visa, Mastercard and PayPal will support it. For such businesses, being involved in the Facebook project at such an early stage may simply involve keeping your close friends and your enemies closer, so you do not get caught off guard if the Facebook piece takes off. Certainly, the $ 10 million they would have invested in the project would bring them change.

Nevertheless, given Facebook sponsors and what has been reported about its potential use cases, it makes sense that investors become a little more enthusiastic about the commercial potential of the project.