Virtual Money at a Retail Powerhouse

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon.com (NASDAQ: AMZN) is setting up its own virtual currency, called Amazon Coins. This follows the lead of Facebook's (NASDAQ: FB) FB Credits and the more obscure BitCoin. Do any of these currencies have the potential to branch out, like eBay's (NASDAQ: EBAY) powerful Paypal service?

Frequent Flyer Miles

Trying to find a way to increase customer loyalty, airlines created frequent flier miles. These miles, earned for every mile flown, are redeemable for future flights. The points kept people flying with an airline to earn free trips. Business travelers particularly liked the points, since they were able to earn themselves personal trips for their work-based travel. Credit cards make use of the same model, awarding points for spending. 

So, there is a long history of using a “currency” of sorts to keep customers locked into a certain business relationship.

BitCoin

BitCoin tried to take this to a new level. BitCoins are a virtual currency. You buy them based on exchange rates to your own currency and then they live in the virtual world and can be used at any merchant that accepts them. This is a good idea, but a risky one in practice.

What a universal Internet currency allows is for customers the world over to buy and sell without the hassle of currency conversions. If you live in the United States and want to buy something from England, that's no big deal if the item's priced in BitCoins. It's a bigger deal if you have to go through the effort of exchanging dollars for pounds, and you'll likely have to pay a fee to your credit card company for the privilege on top of that effort.

Money and Loyalty

Seeing the benefits of a universal currency, and desiring to get a piece of the action, Facebook launched Facebook Credits. This is a universal currency, much like BitCoins, but also a loyalty play, in that the credits aren't usable on other sites. So, customers buy credits and then use them to buy goods and other things to enhance their Facebook experience.

Be it a tractor or an entire game, the idea makes sense on many levels. The company hopes to someday offer more than just “digital” baubles, too, with some suggesting that customers might buy such things as movies and television shows that stream through the service. It remains to be seen if Facebook can maintain its momentum and the control it currently has over fickle customers, however.

Indeed, Facebook Credits only work if Facebook remains an important website. If customers move on to the next big thing, reduced traffic could make these credits a useless experiment.

Amazon Coins

Amazon's Coins is the newest entrant into the space. The company plans on allowing customers to use these coins to purchase items through Amazon's Kindle device. “When Amazon Coins launches in May, we will be giving out tens of millions of dollars worth of Coins to customers to spend on Kindle Fire apps, games, or in-app items.”

Note that the company will be giving away its new currency at first. This makes it very similar to a loyalty program up front and is obviously an attempt to jump start the adoption of the Coins. The interesting idea to consider, however, is the use of coins throughout Amazon's business.

It clearly has a dominant position in the retail world, allowing customers to use its currency instead of real-world currencies could create a situation in which Amazon suddenly becomes something close to a bank. It would be creating, converting, and storing the currency used to buy and sell real world items on its site. 

There's no way to tell if Amazon Coins are going to gain traction or not, but the possibilities are kind of interesting for a company that has already reinvented the retail industry.

Everyone Wants to be PayPal

Of course the biggest real world success story when it comes to virtual currencies is eBay's PayPal service. When it first started it was an easy way for eBay auctions to be settled. In fact, it was such a benefit that eBay up and bought PayPal in 2002 after its own efforts to create a competing product floundered.

PayPal is now an accepted form of payment on websites far and wide. And all it does is act as a middle man between a customer's bank and retailers. There is even a push to get PayPal into brick and mortar stores. That would put PayPal on par with companies like Visa and Mastercard.

While the virtual currencies aren't today looking for that level of expansion, it isn't hard to see where they might. This is particularly true of BitCoin, which truly does fancy itself a replacement for real money. However, because of its retail operations, Amazon could more easily turn its virtual currency into a way to pay for both virtual goods and the real world goods that are sold on its retail site--regardless of what country in which the goods are being sold. 

Being a Central Banker is Hard

Of course, managing a currency is hard work. And today's governments might not take too kindly to having their currencies usurped. So perhaps such changes are a long way off. Still, it is easy to see where Amazon Coins could wind up being a very interesting tool for keeping people on its Kindle device. That, in turn, keeps them in Amazon's control.

This, of course, will be even more powerful if the company eventually sells content (books and videos) in its own currency. So while Amazon Coins isn't a game changer today, it is something to watch, because it could wind up being the Amazon version of PayPal.


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, Facebook, Visa, and Walt Disney. The Motley Fool owns shares of Amazon.com, eBay, Facebook, MasterCard, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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