[ Update April 2014 – According to INC (quoting FT), Facebook is now waiting for Irish regulators to grant it a banking licence. ]
When the market capitalization of Facebook dipped to USD $55 billion, down about 40% from its opening day high, it caused many to wonder if Facebook has been a victim of its own hype. Some analysts claim that Facebook will be gone in just a few years, following in the footsteps of the social media companies it overwhelmed, like Friendster and MySpace. Money invested today, it’s commonly agreed, is money wasted, thrown down a hole full of excitement but lacking all substance.
One does not expect vision from business analysts or technology pundits, but this is ridiculous, even for them. The short-sighted nature of these observations tells us that no one, anywhere, has grasped the true value of social networks and social graphs. Social graphs detail human relations: the bonds of blood, friendship, school, profession, and shared interest. Beneath the specifics of every connection in any graph we will always find a deeper and more meaningful bond: trust. Our social graph details who we trust, and who trusts us.
Trust is the foundation for all commerce. We will not trade with an individual or organization considered untrustworthy, and will preferentially trade with those businesses where we have the deepest relationships – the strongest bonds of trust. Trust between strangers is not instantaneous. It is earned and remembered. Once established, that trust becomes the foundation for a range of activities, everything from romance to finance.
Facebook has a network of nine hundred million social graphs; with an average of thirty-five connections in each graph, there are over thirty billion trust relationships within their service. These trust relationships are continually reinforced by sharing: pokes, posts, timelines, photos and videos. Within the context of these trust relationships, it should be just as easy to share money as to share anything else.
This is the cornerstone insight, the subtle but profound shift in how Facebook operates (and thinks of itself) which will see it transformed from an underperforming advertising business into a behemoth of financial services. This is the transition that turns Facebook into a trillion dollar company.
This is, admittedly, a very big claim: can Facebook grow to 20x its current valuation? Inevitably, either Facebook will fill the role outlined in the next paragraphs, or some competitor will. There are too many opportunities open to Facebook, as it becomes a global force in the 21st century economy.
Facebook will take a billion dollars from offering and buy a medium-sized bank. Why? Because the purchase of a bank instantly gives Facebook all of the licenses needed to operate in financial markets. Facebook will give each of its members an account, so this ‘Facebank’ will immediately have over nine hundred million members, making it the largest retail bank on Earth.
The possibilities for ‘social banking’ remain mostly unexplored. Although finance is most often thought of as intensely private (no one except your partner knows how much money you have in your accounts), finance has always been highly social and participatory. A social bank allows people to pool financial resources to achieve specific goals.
For example, families could gather resources to save to send a newlywed couple on their honeymoon, help them with the downpayment on a house, or send their child to university. All of these activities are technically possible today, but each are so friction-filled that in a practical sense they rarely ever happen. At the most recent LAUNCH conference, startup TrustEgg pitched a three-step web form which allowed a parent to set up a trust fund for their children, a process that normally takes a fair bit of work (and the expense of a lawyer) reduced to a frictionless and accessible operation.
That’s the kind of service that a Facebank will be able to offer to its billion members, plus an almost unfathomable range of other sorts financial services: families making loans to one another, or submitting remittances internationally; friends offering loans to friends, and even more sophisticated ‘microfinance’ transactions, where a large group of connected individuals each provide a small amount to help someone in need; groups pooling funds to go on a holiday, make a big purchase, etc. None of this happens now – or happens only informally, outside the financial system – because there is no structure in place which brings trust relationships and financial tools into the same environment. Facebank does this uniquely well.
Facebank will have the additional side effect of acting as a strong driver for Facebook membership, because Facebook members will enjoy an access to capital and financial flows that will be inaccessible – or prohibitively friction-filled – to anyone not using the service. Family members already belong to Facebook to effortlessly share pictures and stories; when people can share money just as easily, Facebook becomes impossibly alluring.
Does this get Facebook to a trillion dollars? On its own, perhaps not. The largest bank in the world with the broadest range of services – many of them created by members for members, in a huge upswing in financial innovation, as creating new financial services becomes no more complicated than creating a Facebook app – will be worth perhaps three hundred billion on its own. Facebook/Facebank will grow to encompass at least two billion members (three billion if India joins in). Valuing each of these member clients at a hundred dollars seems almost too low, an understating of the potential for social banking.
But we’ve only just gotten started.
Trust is the bedrock of commerce; the strength of eBay springs from its ability to translate the ratings from its tens of millions of users (both buyers and sellers) into trust metrics (zero to five stars) which allow individuals who do not know one another to transact business with a reasonable expectation that they will not be defrauded. It took eBay some time to build that trust network – and they have done surprisingly little with it, even though it is their most valuable asset.
Facebook starts off with a bigger trust network already in place; this means there is no barrier to offering eBay like services, a ‘Facebay’ that turns Facebook into a global swap meet. Every Facebook profile could easily have within it list of things that a member wants to sell (or even just offload, gratis). This would be searchable by anyone on Facebook, creating a connected marketplace of buyers and sellers, supported by the trust provided by the social graph. Friends will trade with friends, family members with family members, interest groups with interest groups. All of that trading will feel safe and secure from the launch of Facebay, and the commerce framework provided by Facebank means that transactions can all be completed within the service.
Again, the network effect of Facebook’s huge size comes into play here. With a billion people or more trading everything, everywhere, Facebay becomes a legitimate alternative not just to eBay (which will be consigned to specialty markets beyond the reach of Facebay) but to nearly all online stores of any description. Every business that wants to reach a billion customers will present themselves through Facebay. Facebay quickly becomes the leading retail outlet globally, outpacing Amazon (which lacks a social framework), WalMart, Tesco, and everyone else.
With two or three billion individuals, each with their own storefronts within their profiles, the commercial potential of Facebay is difficult to overstate. Once again, at least several hundred billion dollars, and perhaps as much as a trillion, as the full dimensions of a truly global retail enterprise reveal themselves. It is possible (with just a dystopian squint) that Facebook could become both banker and retailer to the majority of the people on the planet. That would make Facebook a multi-trillion dollar business.
Finally, Facebook has the potential to become the investing platform of the 21st century. With the emergence of ‘crowdfunding’ platforms such as Kickstarter, and the recent passage of the USA’s JOBS act – making it possible for large numbers of individuals to pool resources to fund startup ventures – it has never been easier to find the capitalization required to start a business.
There has been an expectation that the startups to be crowdfunded will be primarily in the technology sector, but it seems more likely 80% of the businesses will instead be small, local, and non-technical – pizza parlors, not smartphone apps. Since the connections within an individual’s social graph tend to have a local flavor, every resident of a community already has the connections within that community necessary to secure funding for their business. While that connection has always existed, it has never been explicit, nor contained in a framework that allows for a frictionless connection between business and investor. These connections are becoming increasingly easy to create – witness the success of The Angel’s List in lowering the barrier to startup funding – and, with ‘Facestarter’ crowdfunding business investment via Facebook will become almost effortless.
Although Facestarter may be the least profitable of the new enterprises to be explored by Facebook, it is undoubtedly the most important, because Facestarter is where Facebook will be able to have the greatest positive impact on the lives of its members and their communities. Most businesses are small businesses, and most people are employed in small businesses. The easier it becomes to form a small business – because capital is available on demand, from the Facebook community and its connections – the more rapidly communities suffering through The Great Recession will be able to recover. Facestarter could be the ingredient that ignites the boom that will follow the present economic difficulties.
As these businesses form, they will naturally turn to Facebank for all of their banking needs, and in this way Facebank moves seamlessly from retail banking into commercial banking, capturing all but the biggest accounts and the biggest businesses. Facebook becomes a commercial infrastructure, connected to every part of the global economy, at every point. This is why Facebook is worth a trillion dollars, or even more, and why today’s valuation will seem, in retrospect, a laughable misunderstanding of the true value of the social graph.
It must be admitted that all of this is provisional. Facebook has not purchased a bank, and they might choose to remain an advertising-driven business, trying to hang on as CPMs plummet. But they now have the time and the capital to engage in a long, deep think about what business they’re really in. That business is trust, and all else flows from that. If Facebook doesn’t see this, and act upon it, a competitor will.
DISCLAIMER: I own no shares in any company, do not trade in any share markets, do not give financial advice, and don’t even have a Facebook account.