Saturday, March 10, 2012

The fastest growing bank in the US is Facebook

The first thing to realize is that Facebook is in fact a bank. It doesn't have a charter and its not regulated*, but it accepts deposits from consumers, and provides means for payment using those deposits. In my book, thats pretty darn close to being a bank.

Facebook Credits are really deposits
This becomes clear when you realize that you have to give Facebook money in exchange for those virtual Credits it gives you. You can use Credits for payments of course. But till you actually do that, Facebook is in effect holding that money for you. In other words your money is deposited at Facebook, and you trust Facebook to hold that money for you safely till you decide to spend it.

Facebook has to account for this money as a liability, which is what bank deposits are for banks. They even acknowledges this in their S-1 -
"Upon the initial sale of our virtual currency, we record the value purchased by a user as deferred revenue and deposits."

Deposits at Facebook are growing rapidly
And what's happening with these "deferred revenue and deposits"? They're growing rapidly by over 114% between 2010 and 2011




Of course, this is still minuscule compared to the trillion dollar deposit bases of behemoths like JPMorganChase and Bank of America. And its always easy to grow rapidly from a small base. But with Facebook set to grow its Credits volume globally, and working hard on increasing distribution, they could stay on this growth trajectory for many more years to come.

Final thoughts
By issuing its own currency, Facebook is closer to a central bank than a traditional retail bank, but that actually means it pays even less to raise deposits. And not being a regulated entity means that it doesn't have to hold reserves with the Fed or comply with any of the Federal regulations like Reg E, Reg P, etc.

It does need to comply with state money transmitter laws if it wants to enable p-2-p payments, but its already working on doing that. Given the trillion dollar size of the banking industry, even limited success could make Facebook's $100 bn IPO could end up looking cheap.


*except under the state MSB laws.

12 comments:

  1. You are using the definition of a "bank" too liberally. As Blade McCool points out, there is no FDIC insurance on funds deposited with Facebook. Also, Facebook does not facilitate payments outside its own platform. Can someone pay their rent with Facebook credits? Buy groceries? Manage payroll? Get a loan?

    Facebook would be be described as a "proprietary, internal payments platform." It's more like buying credits at a video arcade than it is something akin to banking.

    ReplyDelete
    Replies
    1. Exactly. An arcade isn't a bank because you can buy tokens there.

      Facebook is the biggest seller of little kids' games and digital roses for grandmas to give their grandkids (the new Myspace!).

      It is basically the worst place on the internet at this point! :)

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