Social Media & Financial Services and the Rise of the SuperApp - Fintech Breakdown Issue 10

In the past few weeks, rumours have been swirling of negotiations between Paypal and Pinterest for the former to acquire the latter. Paypal is a fintech giant – no, with a $273 Billion market capitalization; larger than most global banks, it’s a financial services giant, period. Pinterest, while not being one of the foremost social media platforms, still has 478 million global monthly active users as of March 2021. Although both companies have downplayed the rumours, it’s still worth questioning why a fintech company would want to acquire a social media platform. Those are two entirely separate things, aren’t they?

Enter social commerce.

There are a lot of perspectives about what social commerce is, but at its core, it refers to the integration of the social media experience with shopping capabilities. The goal is to minimize the time between spotting an item in your feed and placing an order for it. In other words, to make commerce more social… or to make social more commercial? 

In the past, if you saw an advert for a nice watch while scrolling through your feed, you’d click the button and the embedded link would open a browser window on the seller’s website, where you would then proceed to register, enter your card details and then checkout. That process was long, complicated and prone to cart abandonment. Also, the social media platforms did not make any money from the sales – just the ads. 

Social commerce now (as implemented on platforms like Instagram and Facebook) allows you to click on the watch, select whether you want it in gold or silver, and click “order”. Your payment will go through instantly because you’ve already entered your bank details and shipping address on the app the first time you placed an order. Seamless, convenient, and fast. 

If you’re a cynic, you might even say it’s too fast for you to realize you don’t really need another watch. 

Prospects

So why are social media platforms taking this path? 

Transaction Fees – First, there’s the prospect of charging for processing payments and facilitating product deliveries. For instance, Facebook's (now "Meta") fees for its Checkout feature is 5% per shipment or a flat fee of $0.40 for shipments of $8.00 or less, according to to their Business Help Center. When combined with the fees they earn from ads, it’s clear that social commerce could shape up to be another significant source of revenue. 

For Paypal, with its broad customer base and established payments infrastructure, it could have even higher margins since a large number of payments would likely be from one Paypal account to another. That would remove the need to pay operators like Visa and Mastercard for card processing. Presumably, that’s one of the goals Facebook has with its Diem currency (which we covered in Issue 4). You’d be able to use that currency to pay for goods and services on Facebook (and in the Metaverse), without Facebook needing to pay any third-party fees. 

Non bank financial institutions are quickly and steadily eating into banks' dominant position.

Data – As trite as “data is the new oil” has become, it’s still valid. Social media platforms currently have access to humongous troves of information about us – what we’re interested in, where we go every day, what we do there, who we do it with, etc. With access to what we’re buying as well, those companies would be able to send even more targeted ads our way, thus increasing the chances of us buying more stuff (and them earning more fees).

Super Apps, Super Diversification – Multiple reports have revealed that Paypal has ambitions to become a super app in the mould of Alibaba’s Alipay and Tencent’s WeChat, both of which allow users to use a wide range (wide as in up to 120,000 ones) of services directly or through linked third-parties, such that people are able to do everything from send messages, make payments, shop online, and book holidays or medical procedures, and even invest in stocks and cryptocurrencies, all from within a single app. With all payments processed in-app, the opportunity to earn transaction fees is essentially limitless.

Paypal had announced its intention to create a similar app, with rolling updates to introduce new features planned over the near future. During its recent Q2 earnings call, PayPal CEO Dan Schulman told investors that the initial version of its new consumer digital wallet app is ready to be rolled out. The redesigned app will offer a mixture of financial tools, including direct deposit, bill pay, peer-to-peer (P2P) payments, shopping services, and cryptocurrency support. Schulman also announced that messaging would be added to the app, allowing users to message family, friends, and retailers without leaving the app.

Although Facebook hasn’t described itself as such officially, it’s clear that it has similar plans, with similar features already present and new ones constantly being introduced, including a focus on the metaverse, where presumably, people would interact, shop, buy services and trade using Facebook and its currency. 

Customer/Regulatory Considerations

Concentration of Services – The expansion of social media companies into payment services, and vice versa, comes at a time when there’s a popular agitation for social media platforms to be more closely regulated. Some have even suggested that they be mandatorily broken up, to prevent a select few companies from having undue control over our online lives. This trend is likely to increase those agitations, and there’s likely to be even more political pushback. 

As everything goes the tech way, the question is going to be asked continuously – “How big should a company get?”

Data Protection – By acquiring Pinterest, Paypal would gain access to the data of Pinterest users. As with all super-apps, the data from various services would be used to optimize the features in others. That could pose some significant problems in terms of the ability of users to track what data is collected from them, what it’s being used for and what rights they have over that data. As more services are introduced, the data will invariably get transferred around and could potentially be used to make decisions about customers. Those decisions could range from what ads to see to whether they can access credit facilities or certain health services, and there's no assurance regarding how accurately or fairly those decisions will be made.

Conclusion

Social media, e-commerce and digital financial services are three of the most important pillars that modern society rests on, especially now that the emphasis is on doing everything remotely. The combination of products across those sectors holds a lot of potential for convenience, but by its very nature, that also cedes great power to the companies that would control those super-apps. 

While the approach regulators will take remains to be seen, it’s clear that customers must become more aware of who provides them the services they rely on daily, and what their rights are in respect of those services, especially as it relates to their personal data. 

What do you think about SuperApps, and the concentration of social media and financial services in the same companies? Would you prefer to use those services separately or in the same app? Please share your thoughts in the comments and remember to share the newsletter with people who'd find it interesting.

Sources/Further reading

PayPal is building a ‘super app.’ Should banks be worried? - American Banker

PayPal Is Exploring a Purchase of Pinterest - Bloomberg

Super-app is the future – and not just for social media companies - Verdict UK

Super app or super disruption? - KPMG

PS. On Saturday we'll be reviewing what fintech looks like in the new metaverse? How will financial services work in virtual reality? Be sure to keep an eye on your inbox on Saturday to learn all you need to know.