BOKU and ZONG are new online payments companies that facilitate payments of virtual goods though mobile phone bills. Their primary clients are online businesses that sell virtual goods, which they connect to mobile network operators that facilitate the payments.
Boku was launched in 2009 as a merger between Paymo and Mobillcash. The company allows merchants to vend their products without forcing consumers to fill out a long credit card form. Instead, by partnering with Boku, their customers pay by simply entering their mobile phone number and get charged via phone bill at the end of the month. Boku CEO Mark Britto has been expanding the company by reaching out primarily to mobile network operators in other countries. Today, the company works with over 260 mobile network operators across 67 different countries. It has more than 110 employees.
Zong is nearly identical to Boku. Another “bill-to-mobile” company that deals with virtual goods, Zong possesses essentially the same revenue model but a slightly different way of paying. In 2011, Zong was acquired by eBay and currently acts as a service of PayPal. Today, the service is in 30 countries and works with over 120 carriers.
In addition to Boku and Zong, a myriad of other similar bill-to-mobile payments companies exist: For instance, Mopay, BilltoMobile, PayOne, Fortumo and SmsCoin. Because of this quickly filling niche, both companies have begun looking for ways to expand to physical goods.
Boku, as well as its competitor Zong, currently only deal with sales of virtual goods – for example, music, video games, or items within video games. The reason for this is because MNOs charge exorbitantly high rates, ranging from 30%-40% per transaction, when an item is charged to a consumer’s monthly phone bill. These rates are high for several reasons. First of all, the payment infrastructure that currently exists for MNOs is old and not well suited for this billing function, making it expensive for phone companies to use (more on Premium SMS below). Next, purchasing an item through Boku or Zong essentially extends free credit to the purchaser until their next bill. Since this is risky for MNOs, transaction fees are necessarily high.
These huge fees make selling physical goods unprofitable given the margins. However, since something like gold pieces in a virtual economy cost nothing to make in the real world, merchants can take the 30-40% hit as long as ease of processing leads to higher sales. Often times it does…online merchants who start using Boku or Zong report higher “conversion rates” (the proportion of website visitors that actually end up making purchases) than before. This is evidence that consumers don’t want to pull out their credit card and type down all their information for just a small impulse buy.
Using Boku, all consumers have to do is pay by typing down their mobile phone number instead of their credit card number. Boku then sends a text message to their phone asking them to confirm. Once they do, by texting “Y” back, the payment goes through. With Zong, a similarly simple process exists. A consumer buys something by entering their mobile phone number and then receives a text with a confirmation code. They then enter this code back into the computer, completing the payment.
Since Boku launched, the transaction fees have been steadily dropping, from the 30-40% indicated earlier to just under 10% today.
One of the reasons why transaction fees have been decreasing is because of the gradual switch from Premium SMS billing to Direct Operator Billing. PSMS is a decade old technology that came into popularity with purchasable ringtones. With PSMS, buyers could download ringtones or other services from a content provider by sending a text to a special SMS number, called a short code, and then be billed by receiving a higher than normal charge on that SMS. Because this process tends to be needlessly lengthy and cumbersome (i.e. the maintenance of short code numbers, and involvement of unnecessary parties) payment companies have been switching to a process where content providers can simply bill the mobile company directly when a purchase is made.
Of the 10% transaction fee, mobile companies keep anywhere from 5-45% and pay Boku the remaining balance as the service fee.
There are several reasons why both merchants and consumers might find Boku useful. First of all, no registration is ever required for the service. In fact, users don’t even need a bank or credit card account to use the service. Merchants, despite the high transaction costs, benefit from Boku if it facilitates impulse buys and increases their sales. Several reports have indicated that merchants see higher conversion rates with “bill-to-mobile” services than with existing payment methods.
Cell phone companies benefit as well, since it allows them another entrée into mobile payments markets. Although mobile carriers may decide to go the way of ISIS, Boku and Zong are both advertised to carriers as turnkey operations – essentially all MNOs have to do is agree to the partnership, and the payment companies will handle the rest. For this reason, carrier relationships have been essentially trivial to obtain; both Boku and Zong have partnerships with all the largest carriers in the U.S., Canada, and essentially all the other countries they operate in.
Boku has begun developing some additional services for the merchant. Recently they rolled out something called Boku 1-Tap. To be clear, this is NOT the same as NFC’s “one tap”. Rather, it allows merchants to initiate a transaction by making a call to Boku. The purchase information is then updated on the customer’s phone and all they have to do is “tap” a button to finalize the transaction. This is one of the ways Boku has started to branch out to more brick and mortar stores.
The service has not neglected the possibility of NFC payments either; their service, Boku Accounts, essentially pairs the bill-to-mobile payment structure with NFC technology, allowing consumers to pay at NFC terminals by tapping their phones. They envision allowing users to add NFC access through a SD card or through a special NFC sticker.
Even though Boku and Zong have enormous global reach, they still suffer from the fact that their target market is limited to buyers and sellers of virtual goods. Whether they will be able to break into physical goods by lowering transaction margins even further remains to be seen. The companies will also have to devise a way to mitigate the risk that they and MNOs face by extending credit to their mobile users.
#6 in the Series ABCs of Payments. The ABCs of Payments will examine a new company or innovation in mobile payments each week.
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