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Facebook's Instagram Takes a Major Step Toward E-Commerce

Evan Niu, CFA, The Motley Fool

Facebook's (NASDAQ: FB) popular Instagram service has been slowly adding various e-commerce features over the past couple of years. The subsidiary started integrating third-party e-commerce platforms back in 2017, added shopping to the popular Stories format that has been spreading across social media like wildfire, and is reportedly working on a stand-alone "IG Shopping" app.

"The format is so visually appealing and people are telling stories with pictures so we see both anecdotally and in the data that [Instagram] is a great place for people to become aware of a product in the first place," COO Sheryl Sandberg said last summer. "And we see a lot of small businesses really able to do things on the platform."

Three smartphones showing examples of Instagram Checkout

Checking out in Instagram. Image source: Instagram.

Making it easier to check out

In perhaps its most meaningful e-commerce move yet, Instagram today announced that it was introducing a checkout feature that allows users to immediately and securely purchase a product that they see on the service. Previously, shopping links directed users to the merchant's site to complete purchases, creating extra friction in the process. Instagram will store payment credentials, and will only share necessary transaction data like shipping address and contact information with merchants.

Instagram had previously introduced product tags in the Feed, allowing accounts to identify specific items that may be for sale. Instagram says that 130 million Instagrammers tap these product tags every month, a key signal that expresses interest in making a purchase.

Initially, the checkout feature is only available to a couple dozen partner brands participating in a limited closed beta trial in the U.S. But once the capability is inevitably expanded, Instagram says that businesses will be able to integrate checkout directly or continue to partner with aforementioned third-party e-commerce platforms to facilitate transactions.

Taking a cut

Of course, as Instagram starts to take a more prominent role in the transactions, it justifies taking a cut of the action.

"We will introduce a selling fee to help to fund programs and products that help make checkout possible, as well as offset transaction-related expenses," an Instagram spokesperson told TechCrunch. When pressed, the spokeperson declined to elaborate on how much the fee would be. It's worth noting that in CEO Mark Zuckerberg's lengthy post earlier this month outlining Facebook's "privacy-focused" future, he specifically pointed to commerce and payments as important ways the platform can connect businesses and users.

Additionally, Facebook could potentially use all of the e-commerce tools it is developing to eventually turn Marketplace into an e-commerce platform. Currently, the Marketplace section of its core platform is little more than a classifieds section -- comparable to Craigslist -- where users post items for sale and Facebook plays no role in the actual transaction. Marketplace is presently monetized with ads. The use cases are different, as Marketplace is mostly for finding secondhand items locally, but there is an opportunity to build out Marketplace's functionality as well.

Slowly but surely, Instagram is becoming a legitimate e-commerce platform.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.