Daniel Wolfe, American Banker, and Alex Vorro report that Facebook is reportedly trying to expand its payment system.
INN reported on how insurers are utilizing social networking sites to interact with their customer base. Given the popularity of Facebook, and the myriad options it holds for marketing, customer service and, now, perhaps even as distribution channel, these possible developments in payments are something upon which insurers should keep a watchful eye.

Analysts warn that Facebook’s efforts to promote an alternative currency may be unnecessary and that demand for a Facebook payments system will likely be minimal unless there is a corresponding market for products or services available through the site.

Offering more payments services through Facebook could be popular with users, “but the recipient would have to see value in Facebook credits,” said Bruce Cundiff, a director of payments research for Javelin Strategy.

Facebook has recently opened up its payments system to eight software developers that offer games, calendar tools and other simple applications.

Gareth Davis, a Facebook platform manager, told the Los Angeles Times that Facebook was developing a system that would promote microtransactions by allowing people to buy its virtual currency and spend it within games and other applications.

Cundiff added that the most successful virtual currency systems, such as in Second Life, provide a mechanism to convert electronic funds back into real dollars. After selling digital goods in Second Life, “you could turn that into actual value in your first life,” he said.

INN add that Gwenn Bezard, a research director at Aite Group LLC, said this concept “is a warning signal to me” because it is an unnecessary step. By asking users to convert cash to credits, “you add complexity when you really don’t have to,” Bezard said. “You can address micropayments in a more mainstream way” without requiring a manufactured currency.

Daniel Wolfe adds that two payments models could work through Facebook

1. Person-to-person payments, like PayPal or

2. Facebook-operated store, like Apple’s App Store.

The existing Facebook gift shop suggests that the social networking site is leaning in the latter direction.

But this does not always work.

Google introduced its Google Checkout service in 2006, offering inexpensive credit card processing to online merchants.

But the dip in the economy reduced advertising spending; Google made a significant price hike in March prompting some merchants to defect to PayPal and alternative payment solutions.

Bezard cautioned that “the difficulties for Google should be a warning for Facebook.”