Facebook to Test Its Own PayPal Competitor in Bid to Simplify Mobile Purchases

Facebook plans to test a new payments product that would allow online shoppers to make purchases on mobile apps using their Facebook login information, according to sources familiar with the company’s plans.

The product, sources said, would allow any shopper who has previously provided Facebook with their credit card details to make purchases on partnering e-commerce mobile apps without entering billing information.

Facebook confirmed the test, which is expected to launch in the next month or so, to AllThingsD.

Thrillist-owned JackThreads, a flash-sale shopping site for young men, is the pilot partner. The company has a strong relationship with Facebook, sees a good chunk of revenue come through mobile phone purchases and may also have a decent demographic overlap with one particular segment of Facebook users — gamers — who would have provided the social network with credit card information. It will be interesting to see if Fab, another close partner of Facebook’s that does well on mobile devices, will follow suit.

The new product, if launched widely beyond its current small testing phase, would undoubtedly pit Facebook against digital payments giant PayPal on mobile devices. It would also compete with offerings from Google, Amazon and a host of startups such as Braintree, Stripe and Klarna, all up-and-coming outfits that are working, in one way or another, to make it easier to make purchases on mobile phones. All of these companies, including Facebook, recognize that it can be challenging to easily enter your payment details on small devices.

If eventually expanded to more partners, the product would also potentially give Facebook keen insight into the shopping habits and preferences of the company’s users, a lucrative set of data for the world’s largest social network to gather.

At the same time, Facebook’s test is, for now, focused solely on creating a better mobile checkout experience, rather than getting involved in payment processing. That setup allows partnering commerce companies to still work with payment processors of their choice. Yet, part of the pitch to merchants from companies like PayPal is the simplification of the checkout experience, which Facebook is now going after.

“It sounds like a dead-on competitor of PayPal,” said Sucharita Mulpuru, a retail analyst at Forrester Research, after AllThingsD apprised her of Facebook’s plans.

“We have a great relationship with Facebook and expect that to continue. Our customers love using PayPal on Facebook,” a PayPal spokesperson said in a statement. “We’ve been investing in mobile payments since 2006, and last year 10 percent of our total payment volume — $14 billion — was from mobile devices. However, we always welcome competition and are looking forward to seeing what Facebook will announce.”

(Update 12:15 pm ET: Facebook sent the following statement to AllThingsD after publication on Thursday: “We continue to have a great relationship with PayPal, and this product is simply to test how we can help our app partners provide a simpler commerce experience. This test does not involve moving the payment processing away from an app’s current provider.”)

The checkout product could also potentially provide Facebook and its advertisers with valuable insight into what type of products its users are buying off of Facebook.

What is unclear, however, is just how many credit cards Facebook actually has on file.

The social giant has also used its Gifts product to bolster the company’s cache of credit card numbers. Launched nearly a year ago, Facebook Gifts allows users to send one another real physical goods via the Facebook platform. In order to purchase items, users need to enter their credit card or PayPal info, which Facebook then stores in perpetuity.

The same goes for the millions of gamers who spend money buying in-game virtual goods while playing on top of the Facebook platform.

While Facebook users can use PayPal to make purchases on the social network, they will need to give Facebook actual credit card information to make purchases using their Facebook login off of Facebook.

Forrester’s Mulpuru said she’d be surprised if the social network has more than 10 million credit card numbers on file in the U.S.

“Nobody trusts social networks with their financial information, and they are certainly not going to trust Facebook,” Mulpuru said. “Maybe they have a few million people that have bought something on things like FarmVille, but that does not a network make.”

It would make more sense, Mulpuru said, for Facebook to allocate resources toward creating a platform for Facebook-centric small businesses that now mainly conduct business through inefficient mediums such as email.

“PayPal is well-suited because they have more than 100 million accounts with real people who have trusted them with their information. To be a latecomer to the game in something as complex as payments, they would be better off buying Square,” she said.

As it stands, Facebook’s revenue from payments and other fees totaled $214 million in the second quarter, a mere fraction of the company’s billion-dollar ad business.

This isn’t the first time Facebook has tried to position itself inside the e-commerce arena. The company launched its Credits initiative in mid-2009, essentially an attempt to create another form of virtual currency for users to purchase items via the Facebook platform. But the experiment was scrapped in the summer of last year, chalked up to overcomplicating what should be a friction-free, painless process.