Facebook plans to monetize WhatsApp: Ads or mobile payments?

There’s been a lot of media speculation around the strategy that Facebook (FB) will adopt to monetize WhatsApp. Until now, Facebook has avoided earning advertising revenue from WhatsApp, so as not to dilute its users’ experience.

During the company’s 4Q14 earnings call, management mentioned that, presently, the focus for WhatsApp is to expand its scale and build its user base beyond the 1 billion mark. Considering the amount of time people spend on WhatsApp daily and that users send more than 30 billion messages a day, this platform has massive potential in the coming years. It could mean huge profits for the company.

Facebook wants to create exciting business opportunities for advertisers and developers through this platform. It will try to find an optimal plan to monetize WhatsApp—either through advertisements or payments.

Interestingly, during the Q&A session of the 3Q14 earnings conference call, someone asked Facebook (FB) management why the company doesn’t plan to develop a payment system on its platform. In response, Facebook’s management said that the payment business is fixed-fee. And the ad business, in comparison, has more potential for growth and is more revenue-driven. So for Facebook, the ads part of its business is more efficient than payment. That’s why Facebook wants to partner with credit card companies and established payment systems, such as PayPal (PYPL), spun off from eBay (EBAY).

The mobile payment industry is growing fast now, and Facebook can leverage this growth through messaging in this segment. According to BI Intelligence estimates, an extra $300 billion in US payments will be processed on mobile devices over the next four years.

Until now, PayPal has been the preferred mode for mobile payments. After Apple’s (AAPL) launch of its mobile payment system, Apple Pay, in 3Q14, Apple is becoming a major threat to PayPal. Stripe and Square are also emerging as potent threats to PayPal. Market Realist published an article on Square and why Amazon (AMZN) launched a card reader, Must-know: Why did Amazon launch a mobile credit card reader?

According to a recent report from eMarketer and as the chart above shows, the mobile payment transaction in the US is expected to more than double—from $1.6 billion in 2013 to $3.5 billion in 2014. Analysts expect this market to continue to grow at a healthy rate. Facebook can tap this growth by making a move in this uncharted territory.

Apple, Facebook, and Amazon together have a 22% weightage in the PowerShares QQQ Trust, Series 1, ETF (QQQ). You can consider this ETF to gain portfolio exposure to these technology companies.