In this video, we’ll talk about the third type of digital wallets. Those derived from or embedded in social networks. Social relationships represent a unique opportunity to grow a paycheck ecosystem because of the strong network effect and the word of mouth effect. If all your friends are using a particular digital payment platform to pay each other and for other transactions, then you’ll be more inclined to use it as well. We’ll talk about two examples representing two different approaches to fuse payment platforms with social networks. In the first example, Venmo, we start with a payment platform then add a layer of social meaning to these transactions.
In the second example, WeChat, we start with a social network and grow a payment platform from within it. Note that the tech itself is identical to a standard digital wallet, which is essentially a user interface wrapper around the existing payment rails. The key innovation here are on the business site, and that’s the focus of this discussion. Let’s first talk about Venmo, which is now part of PayPal. The revenue model is almost identical as well, free to use foremost, charging merchants for transactions and charging for credit card usage. The key innovation is that they have combined the social element and the financial element of a single financial transaction.
They started off with the millennial and younger population with the problem of say, splitting a bar tab. It’s usually a somewhat awkward situation. But what Venmo did is turning this into a social network status update.
They can broadcast this financial transaction to all their friends into the world, and maybe adding in a clever joke, some emojis and maybe a selfie. This not only takes the awkwardness out of the transaction, it also adds a financial overlay to a user’s typical social media interactions. The result of this is that the value of the user’s social network data is significantly increased. Venmo hasn’t systematically started monetizing this yet. But by mining these financial transactions data in the social network, we can have a much more granular insight on a user’s financial profile that we wouldn’t be able to get from other data sources.
This opens the door for a series of customized financial products based on this insight, particularly in short-term lending and insurance. Note that data privacy will be an important issue, and any monetization effort will have to take into account any future regulatory changes. Now, let’s look at this from the other direction using the example of WeChat. WeChat is a China-based social networking platform similar to a combination of Facebook and WhatsApp. After they’re built a large user base, the company started to think about more creative ways to monetize the network interaction. And one of the ways is to build a payment platform for the network users. Users identifiers will be their network handles, and as usual, money will flow on traditional rails.
But how do you get people to use it, especially if many of them are already with competitors like Alipay? WeChat’s key innovation is really to focus on the social part with the so-called Lucky Money campaign. In many Asian countries during important holidays like the Lunar New Year, is customary to hand out gifts of small amounts of quote-unquote lucky money wrapped in red envelopes to one another. And it’s customary for one to both receive and give out these red envelopes. So when one receive an envelope, they usually takes the money out, put it in their own envelope and give it to somebody else. Do you see a similarity between this system and the digital wallets?
There’s a lot of small money simply changing hands without entering or leaving the Red Envelope system. And this type of interaction is ideal for the virtual balance-based digital wallet. So WeChat seized this opportunity and launch the Red Envelope app during the Lunar New Year of 2014. Users simply send and receive these virtual balances instantly to one another without much transferring to or from the bank. The company even gamified this a bit by allowing users to send one envelope to multiple people so they’re racing to be the first one to open it. This became viral overnight, and as a result, they gained a large number of users at least temporarily.
The next step then is to keep them. Lunar New Year’s only happened once a year, a new services are needed to keep the users for more drawing in the meantime. So WeChat open up a marketplace that’s similar to the Facebook marketplace. This allows users to conduct both Venmo-like transactions with friends, as well as e-commerce with members of their social network. All powered by their WeChat wallet. This led to a large number of WeChat-based merchants who otherwise wouldn’t be able to build an online capability. And now can sell their merchandise through their public WeChat profiles. This significantly expanded its reach to the merchant side.
And finally, once they have build up the user base, kept them engaged with the marketplace and attracted enough margin participants, they went outside at the social circle and became a full-fledged payment platform to compete directly with Alipay, both online and offline. This three-step innovation process is informative about growing a paytech ecosystem from within a social network, which is an important monetization strategy that other social networks like Facebook are also pursuing.