Retail banks largely missed out on opportunities to develop online financial services during the e-commerce revolution of the ‘90s. They may be missing out again, this time within the realm of social media – except that now, the global online virtual dollar market can reach US$10 billion in 2010, with Asia accounting for US$7 billion, according to Engage Digital Media.
The size of financial transactions online is also increasing. In December 2009, a user of Entropia Universe's game bought a virtual Crystal Palace Space Station for US$330,000. This property currently holds the Guinness Record for the most expensive virtual world object.
Social network users and social gaming players are becoming more comfortable paying for virtual goods, and there is without a doubt, a need for convenient and secure micropayment transactions made in virtual or real currencies.
Just take a look at the variety of financial transactions conducted over social media and social games today:
• Purchase of virtual goods e.g. Entropia Universe, Second Life, World of Warcraft, Facebook, QQ
• Purchase of physical goods e.g. Facebook
• Social lending e.g. Kiva, Prosper, Lending Club, Virgin Money USA
• Donations e.g. Facebook, Twitter
• Online dating services e.g. Zoosk
Opportunities for banks
The need for flexible and secure payment infrastructures within social media environments gives banks the opportunity to offer solutions to social media players based on their technological knowledge, processes, reliability, regulatory compliance and reputations.
The opportunity is huge, given the growth of social media usage across the world. Social media users from US, UK, Australia, Brazil, Japan, Switzerland, Germany, France, Spain and Italy spent on average more than 5.5 hours per month on social networking sites in 2009, which is over 80% more than a year before. It is estimated that two-thirds of Americans now use Facebook, Twitter, MySpace, and other social media sites.
Here are just some ways retail banks can tap this growth:
• Setting up virtual banks
• Facilitating secure online money transfer services
• Management services for virtual currencies
• Risk and liquidity management solutions for peer-to-peer banking services
1. Setting up virtual banks
Players of online role-playing games with cash economies, such as Entropia Universe and Second Life, have the option to set up interest-bearing accounts, which they use to deposit their virtual salaries, pay virtual bills or lend virtual cash via the virtual banks.
MindArk, the creators of Entropia Universe, became the first company in the world to issue virtual banking licenses in 2007. These licenses were valid for two years and were sold for a total of US$404 000 to real world banks and entrepreneurs. In March 2009, Mind Bank AB, a wholly owned subsidiary of MindArk, was granted a real-world banking license, which allowed it to offer real bank services to consumers who are also inhabitants of their virtual universe.
There is a demand for strong reputable financial institutions within virtual environments. Second Life, created by Linden Labs, bans all unregistered and unregulated banks from their virtual world, after complaints about several virtual banks defaulting on their promises to pay high returns on customer deposits.
Such virtual banks could soon be introduced to social media networks such as Facebook, Friendster and Twitter, as they seek to allow their online communities to interact like they would in real life economies and to create more revenue-generating services.
2. Facilitating secure online money transfer services
Currently, the most popular payment options include credit cards, mobile phone payments and online payment systems such as PayPal. These cover payments for virtual currencies or goods and services but are limited as they are relatively expensive and not all payment options desired by the users are available on all social media platforms in all countries. Hence, current payment systems are not flexible enough for transactions such as multiple purchases of goods with lower monetary value or multi-country money transfers.
Advantages of current online money transfer systems
• Virtual currency systems simplify online payments and lower the transaction fees
• Most of the social media platforms accept at least the most common credit cards
• Systems such as PayPal make the transactions easier and faster as the financial details need to be entered only once, at the registration phase
• Mobile payments are a relatively easy payment option that is gaining popularity
Disadvantages of current systems
• Fees per transaction are still high
• Functionalities for multi-country users are limited
• The selection of payment options available on social media platforms is limited
• Security issues still create reluctance among some users
• Credit or debit cards payments are relatively time-consuming due to the need to enter financial information every time a purchase is made
This inhibits social media interaction and transactions on the Web. This in turn leads to lower revenues for social platform owners, social game developers and other stakeholders.
Social media developers are currently looking for better financial services solutions.
In April 2010, Facebook announced plans to add 100 to 200 local payment options worldwide that would allow Facebook members to buy Facebook Credits. They can use these virtual credits for games or to purchase virtual and real-world goods, participate in auctions as well as pay for advertising for example. The company is looking for partners who can range from mobile payment providers to bank payment system providers.
There are already solutions, such as Nokia Money, that allow consumers to manage their personal finances with a mobile phone. This business model, which allows individuals to transfer money without a bank account, has great potential in emerging economies where banking services are not so common. It also offers greater convenience and security to consumers in developed markets who do not wish to have to login into their online bank accounts in order to conduct mobile payments.
Perhaps it will be possible for consumers to use their Facebook and other social media accounts to transfer money, pay bills and deposit money in the future, either through their mobile phone on other mobile devices.
3. Management services for virtual currencies
Like any real-world economy, virtual currency supply controls and currency exchange systems are needed to keep virtual inflation low and virtual economies sustainable. Secure and flexible solutions in these two areas are crucial to the growth of virtual activities. Banks could offer their technology, know-how and regulatory compliance to social media players in the set up of transparent, reliable virtual currency mechanisms.
4. Risk and liquidity management solutions for peer-to-peer banking services
Online peer-to-peer lending platforms such as Kiva, Prosper, Lending Club and Virgin Money USA are gaining popularity as alternatives to the intermediated financial services industry. The average loan sizes vary from around US$400 on Kiva's network to US$4,500 on Prosper and US$8,700 on Lending Club.
Such loan solutions are more flexible when it comes to interest rates, sizes of loans, loan application requirements and lending periods. Some connect borrowers and lenders directly while others connect them via a third-party intermediary. On some peer-to-peer sites, lenders can set interest rates themselves and others pre-set rates based on historical performance and credit scores. Not surprisingly, peer-to-peer online banking services are usually more cost efficient than traditional banking services.
According to some estimates, peer-to-peer lending is expected to reach US$5.5 billion to US$6 billion this year alone.
Lenders to peer-to-peer banking services usually take on all the risk of potential credit defaults and their investment is less liquid than many other alternatives, as lenders are often required to keep their investment until loan maturity. Some peer-to-peer banking websites came up with solutions to tackle these two downsides of social lending. Lending Club, for instance, has created a secondary market for loans for those lenders that do not want to hold them to maturity. Prosper tries to lower the investment risk by offering loans only to borrowers with strong credit.
As peer-to-peer lending platforms are still looking for ways to lower the investment risk and improve the liquidity of loans, banks have the opportunity to offer risk management solutions, including loan insurance products, and liquidity management services such as loan securitization.
Conclusion
Retail banks that partner with social media and social gaming businesses have a great opportunity to capitalize on social media developments.
They can do this through a number of ways: by creating convenient and secure micropayment transactions for social media platforms, by setting up virtual banks, by providing technology and know-how for virtual currencies management and by selling risk and liquidity management solutions to peer-to-peer lending platforms banks.
Retail banks can increase and diversify their revenue sources and enable further growth of social media platforms as they seek to improve their financial infrastructures.
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