The Rise of Social Commerce

Social commerce is what happens when the payments industry and social media collide. Companies likeFacebook (NASDAQ: FB)are leading the way in these efforts.

In this clip from Industry Focus: Financials, Gaby Lapera talks with Dylan Lewis about a presentation he watched at this year's SXSW conference about social commerce, and where the budding industry fits into the big picture of the payments space.

A full transcript follows the video.

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This podcast was recorded on March 13, 2017.

Gaby Lapera: Today's topic is about disruption in the payments space. You attended a session called "Payments Gone Viral: The Rise Of Social Commerce." Can you tell us a little bit about the general premise, and tell us about who was there?

Dylan Lewis: Yeah. The two folks that I was really interested in on the panel were Hans Morris, who is someone who is a long-term member of the payments space, he's currently a VC, he's at Nyca Partners, he has extensive experience working in payments at Visaand [Citigroup]. And also, Kahina Van Dyke, who is at Facebook, she works in the consumer financials services and payments and commerce side of their business, which I think a lot of people don't even realize exists. It was definitely really interesting to hear the two of them weigh in on what is going on with social platforms and payments, and how that relates to some of the industry stalwarts like the payment processors, the credit card companies, and the banks.

Lapera: Yeah. What is social commerce?

Lewis: It's basically layering on a lot of the financial services or money exchanging that we're used to doing with banks, on platforms that we tend to think of more for social. So, Messenger allows for peer-to-peer --

Lapera: That's Facebook Messenger, folks, just in case you weren't sure which one. AOL instant messenger, etc. [laughs]

Lewis: Sorry, I realize I need to be a little bit less insider tech. That's great clarification, sorry about that. But, Facebook Messenger allows for peer-to-peer processing of payments. They're not doing the processing, though the optics for a user might be. They're really just enabling people to transfer money back and forth, and leaning on the legacy systems. That was really what a lot of this talk was about. I think one of the things really early on that set the tone for me was Hans said, "If you're thinking about getting into the payments space, whether you are a big tech company or a new fresh starter looking to disrupt the space, don't compete with other forms of electronic payments. Compete with cash or with transactions that just don't happen." And his thought here is, there's so much going on, there's so much money that's been invested in the infrastructure to support payment processing. You're not going to unseat those people. What you are going to do is collect a decent amount of the market, and a meaningful market share, if you're able to replace cash and take what would be offline transactions digital. Or, if you're able to enable transactions that wouldn't happen. So, making it easier when people might not have money, or making a more streamlined, a little bit less friction type process that eliminates some of the barriers for transactions that don't happen now.

Lapera: Yeah, definitely. That's really interesting, you said it's brutally tough to compete with the legacy payment processors. Of course, he's talking about companies like Visa or Mastercardor even American Express.These companies have giant moats. They have these crazy international systems. The thing about Visa and Mastercard is the more users they have, the more merchants they're going to have, because the merchants have an interest in providing a service that lets people give them money easier. Of course, that creates a self-fulfilling cycle, where the more merchants who have Visa, the more customers who have Visa.

Lewis: In tech, to bring it back around and use a tech term, we call that the network effect. It's no different than the idea that Facebook as a platform is more valuable because there are more users on Facebook. So, with every incremental user -- if you only have four friends on Facebook, then how valuable is it for you to be on there? If you have 1,000 friends on Facebook, and it's the way you connect with people, and that's how you plan, then it becomes a much more valuable and compelling value proposition for potential users. So, the same mechanics at play.

Lapera: Definitely. And one thing I want listeners to think about is, when was the last time you went into a merchant and you were like, "Oh no, they don't take whatever card I have in my wallet?" I bet you can't remember a time, unless they just didn't accept cards at all.

Dylan Lewis owns shares of Facebook. Gaby Lapera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook, MA, and V. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.