Will massive outage set back Facebook's payments plans?

Facebook's recent systems crash left retailers around the world unable to engage with consumers and process transactions, creating an operational risk at the same time the company is battling its latest controversy over data usage and privacy.

"It's about trust. We have over the decades learned to trust banks, Mastercard, Visa and other payment providers we have used for a long time," said Ginger Schmeltzer, a strategic advisor for Aite-Novarica's retail banking and payments practice. "Newer tech entrants don't have that track record of trust."

The Facebook outage on Oct. 4, the largest in the company's history, affected as many as 2.9 billion people, covering Facebook's core social network and Facebook-owned properties WhatsApp and Instagram. The outage lasted only six hours, but the reputational impact could hurt the social network's financial services ambitions.

Johannes Berg/Bloomberg

In addition to being relatively new to financial services, Facebook is also facing public scrutiny from a whistleblower who says the company "sows division, harms children and undermines democracy."

An unexpected shutdown adds to the reputational risk, according to Schmeltzer. "There's already trust issues with Facebook and that is extending to bank information," she said.

The recent Facebook outage affected business in places from Pittsburgh, where a bridal shop that used Facebook's services couldn't make appointments or execute transactions, to Turkey, where stores were unable to collect payments. In Colombia, a nonprofit organization that aids abuse victims was cut off from its users.

"Merchants that sell through Facebook or WhatsApp were dead in the water," Schmeltzer said. "That highlights the need for regulatory oversight — for regulators to pay closer attention to these tech providers that offer financial services, to make sure they have backups in case systems go down."

Traditional banks and payment companies also suffer outages. Bank of America, for example, had one earlier this month. An outage in February at the Federal Reserve affected banks and other institutions that execute electronic credit and debit transfers. An August outage at the payments processor TSYS affected businesses ranging from e-commerce sites to sports stadiums.

And Visa in 2018 reported outages in Europe that left travelers stranded and stores racing to adjust payment systems on the fly to allow non-Visa payments.

But with banks and established financial companies, regulatory oversight often helps assure customers that their data and deposits are safe, even in the face of the occasional outage, according to Schmeltzer.

"The [Facebook] outage is a public relations nightmare and a huge inconvenience for consumers and businesses worldwide," said Eric Grover, a principal at Intrepid Ventures, noting Facebook's user base creates scale that still puts it in position to promote payment products.

Facebook did not return a request for comment for this story. In an earlier interview, David Marcus, the head of F2, Facebook's financial services division, argued existing payment rails are antiquated and don't support faster payments and financial inclusion in underserved markets. Marcus also said Diem and Novi (a wallet app that Facebook is developing) will use blockchain technology to form a new digital payments standard that will serve more than 1.2 billion underbanked consumers globally.

In addition to pending projects, Facebook also has a massive existing payments business that relies on its ability to enroll billions of users quickly, then store those credentials for future use, either to pay via Facebook or to access other retail apps via the social network. In a recent analyst event, Facebook CEO Mark Zuckerberg said Facebook Pay will be the most convenient way for users to move between Facebook and other e-commerce sites, since the users are already logged into Facebook before shopping.

Facebook in late 2020 created an accounts center that centralizes several of its services, allowing consumers to post content across Facebook, Instagram and Messenger — and save payment information for use across the different platforms.

The company's Facebook Pay buy button went live on e-commerce sites in August, with access for merchants on Shopify's ecommerce platform alongside Apple Pay, Google Pay and other digital wallets. About 1.8 million merchants use Shopify, according to BackLinko.

WhatsApp is the world's most popular messaging app with 2 billion active monthly users, according to Statista, adding Facebook's own Messenger app has 1.3 billion and WeChat has 1.2 billion. WhatsApp has 400 million users in India alone, where it is a major cog in Facebook's payments strategy, acting as a means to connect users to Jio Platforms, an Indian digital retail company that counts Facebook as a minority owner.

Instagram, which has 1.4 billion users according to BusinessofApps.com, includes a buy button that allows people to buy items after tapping on Instagram tags on shopping posts. Instagram's services also include a checkout option that uses stored payment information. Instagram recently introduced technology that allows users to shop and order through its video services.

The outage at Facebook will additionally create pressure from consumers on Facebook and other large technology companies to improve redundancies for embedded finance, according to Tim Sloane, vice president of payments innovation at Mercator.

"From a consumer’s perspective it suggests that every aspect of that app should have a backup," Sloane said. "Any government or business that relies on a single company for critical services will experience a failure of some magnitude in some timeframe. That leaves one question: How big a failure and how often?"