by Timothy D. Welsh, CFP®
Imagine if you will, in the not so distant future, that Facebook, flush with billions of new IPO dollars, launches a financial services company. Seems like a stretch? Don't they have better things to do? How could they do that, and ultimately, what would it mean for the wealth management industry if they did?
These are all very important strategic questions that should be answered for your firm sooner rather than later as the giant social network continues to expand and looks for new ways to diversify revenue from its huge user base -more than 800 million users worldwide. This becomes particularly important as the traditionally staid wealth management industry struggles to assimilate the latest disruptive technologies created by the rise of social media.
According to many industry analysts and observers, the ultimate question is not if Facebook launches a financial services company but when.
In fact, it may have already begun. Facebook has a vast reach, and now goods and services are transacted on a very large scale on its platform. Knowing this, the accidental billionaires who created this Internet-eating phenomenon are moving rapidly in this direction. These folks are the smartest guys in the room and have learned from the best in the business how to leverage online content, community and commerce to disrupt traditional business models that exist in the real world.
First a Currency, Then a Bank?
As an example, Facebook Credits are the new currency people can use to buy things on Facebook. Similar to PayPal and other online payment schemes, Facebook knows the power of its brand in creating confidence and comfort among users to entice them to use their real-world credit and debit cards to purchase virtual currency to acquire virtual goods and services.
All the while, Facebook takes a healthy cut and spread that would embarrass the most egregious foreign exchange operators to facilitate commerce among gaming companies, entertainment platforms and other related entities.
To understand the scope and scale of this first foray into financial services by Facebook, check out some recent numbers. Revenues from Facebook Credits are expected to reach $470 million in 2011 up from $140 million in 2010, according to estimates by eMarketer. This revenue stream is growing faster than Facebook's traditional source of revenue from advertising, and you can bet Zuckerberg is paying attention.
And similarly to how other retail industries have expanded into financial services to lever up the return on their brand and inventory, such as Nordstrom (Nordstrom Bank), GE (Genworth Financial Services), and GM (Ally Bank), Facebook is sure to follow as it mines for new ways to monetize the huge user base.
The one difference here is that Facebook is starting from first position as a humongous media company, its own currency, a massive user base and a powerful transactional platform. It is quite an easy path to offer branded credit cards and other financial services similar to what the airlines have done to facilitate loyalty programs, and Facebook is probably salivating at this opportunity alone.
However, once you have your own currency, how far behind can establishing your own bank be? And from there why not create your own online broker-dealer, investment adviser, insurance company, mortgage company or all of the above? While I'm sure regulatory and legal issues will arise along the way, these can surely be solved with the right amount of creativity, lobbying and political persuasion that arises from being a $100 billion plus organization.
Thus, while the Facebook Death Star is slowly being constructed and its monopoly power grows and grows, the stakes go up for traditional players such as financial advisers, asset custodians, mutual fund companies, separate account managers, alternative asset providers, insurance companies, banks and the like. Why? Ultimately, the financial services industry has been and always will be dependent upon distribution. And when you can digitally tap into the largest network ever constructed, you gain unprecedented economies of scale, reach and marketing access.
Social media outlets are beginning to play a larger role in how consumers learn about and purchase financial services. Consider the proliferation of user-generated sites that discuss investment products, offer guidance on financial topics and highlight qualifications of advisers- many of which are facilitated by Facebook communications. In fact, many people are using the search tools and content on social media sites to learn about financial advisers and companies that offer various financial products and services.
Now Is the Time to Embrace Social Media
Ultimately what this all means is that it should be incumbent upon all players in the wealth management industry to have in place a social media strategy now, so that you can benefit from, and participate in, the inevitable technology evolution that sites such as Facebook are driving.
So, while many compliance officers, aging executives and regulators are struggling with social media technology, now is the time to embrace it and find ways to begin incorporating usage into your business model, product strategy, distribution approach, marketing plans, employee training and customer service.
Otherwise, just like the many traditional businesses that were not forward-looking and did not embrace the Internet, such as retailers (Amazon), classified ads (Craig's List), video stores (Netflix) and many other recent examples, you have the very real possibility of being innovated out of existence.
If the history of technology innovation is any guide, then the question again for the wealth management industry remains: it's not a matter of if; it is a matter of when.
Timothy D. Welsh, CFP®, is president and founder of Nexus Strategy LLC, a leading consulting firm to the wealth management industry. Contact him at tim@nexus-strategy.com or on Twitter @NexusStrategy.
