Surprising news yesterday from Facebook: the social network officially signed a strategic agreement with PayPal to become one of the alternative methods to pay for Facebook ads and Facebook credits. Neither the length of the contract nor the sharing ratio is specified but it's a 180° shift in strategy on Facebook's part. The announcement was not expected as Facebook had its own payment system in beta for years (see here and here) which will still exist for virtual goods.  One simple fact can explain this decision: already 70% of Facebook users live outside the US, as do the advertisers.

Facebook had three alternatives: either building its own system (they tried but didn't succeed), signing national/regional agreements (nightmare but why not?) or making an agreement with an established e-payment leader. Enter PayPal, which claims 81 million active accounts in 190 markets and 24 currencies around the world.

This decision is disappointing for those who contemplated Facebook's long-term opportunity as a global payment system competing with PayPal, but in the short term it will be a very good enabler for Facebook to obtain more cash. Indeed, with this kind of payment alternative, Facebook bets it would be simpler for anyone, either individuals or SMEs, to pay for ads or virtual goods in a few clicks with PayPal. Also, as a lot of people just think about Facebook's advantage, it's a very good opportunity for PayPal to extend their existing customer base with this exposure to 400 million users and a host of SMEs.

This is very good news for both companies, and maybe we will see other payment alternatives emerge on Facebook platform (Zong was already tested by Facebook six months ago). The famous monetization of Facebook is no longer a problem and with Facebook Connect combined with PayPal, it maybe the first step in the creation of a universal identity for payments.

Strategic Analyst