Here come the mobile payment wars

Two rival companies, Boku and Zong, want to replace your credit card number with your cell phone number. Here's how it might pan out.

Caroline McCarthy Former Staff writer, CNET News
Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos.
Caroline McCarthy
5 min read
Mobile payment start-up Boku, integrated into social game Puzzle Pirates. Boku

Some would say our cell phone bills are high enough already. But two emerging start-ups are hoping to make mobile devices a hub for one of the hottest trends on the Web: micropayments.

Enter Boku, which launched officially on Tuesday with a whirlwind of announcements: its public launch after a year in stealth mode, its acquisitions of smaller companies Paymo and Mobillcash, and a $13 million round of venture funding led by Benchmark Capital with contributions from Index Ventures and Khosla Ventures.

A social-networking, gaming, or retail Web site can install Boku as a payment platform much like PayPal. But instead of entering a credit card number, members enter their cell phone numbers. A confirmation text message is sent to the cell phone, which the member must reply to for security purposes. No registration is required, and the charge goes to that member's phone bill. It's quite an idea, and one with invariably will raise plenty of questions about economics, social-media revenue, and the big one--security.

"We're focused on getting to as many publishers and merchants as possible," said Ron Hirson, an AT&T veteran who leads up marketing at Boku. The start-up is launching with carrier compatibility in 53 countries, integration into a number of social apps (including the ubiquitous "Mafia Wars"), and an official partnership with Hi5, an entertainment-focused social network with a big foothold in a number of Latin American countries. "We want to make this value proposition, this technology that we've built, and get to all the social games, all the casual games people play, (and) MMOs."

But Boku already has an extremely close competitor: Zong, which first launched in the U.S. in the spring of 2008, and which offers the same strategy of facilitating micropayments with a cell phone number, and which has already set up shop in virtual-goods havens like RockYou's social-net apps, teen site MyYearbook, and avatar company Meez.

With both companies now launched, now it's time for the land grab.

"I think we're on for a good boxing match in the ring," Zong CEO David Marcus said in an interview with CNET News.

It looks like it'll be quite the rivalry, since this is a situation where both companies want to achieve PayPal-like levels of ubiquity. Zong says it's more user-friendly; Boku touts a broader global reach. Boku says it's more customizable for merchants that want to install it; Zong says it has an advantage by partnering directly with carriers whenever possible and avoiding aggregation companies that effectively resell carrier relationships.

"We win in the fact that we don't use aggregators in 80 percent of our carrier connections...direct, with no intermediary whatsoever," Marcus said. "These aggregators were basically built to service ringtone companies and wallpaper companies, and have a very different infrastructure than the infrastructure that we've built for payment."

That strategic decision to avoid aggregators, Marcus added, was actually what kept Zong away from purchasing Paymo, which it had been considering before Boku eventually snapped it up. "Until a few weeks ago we were looking at acquiring Paymo as well and passed for one main reason," Marcus said. "They have great coverage in developing-world countries but only work through aggregators, and that's the case with Mobillcash as well."

But its willingness to partner with carrier-relationship aggregators has given Boku the advantage in reach, something that Zong's Marcus acknowledged (though he says it's adding two or three new countries each month).

"We want to build this global standard for mobile payments, and you need the global reach for sure, and we have that immediately," Hirson said of Boku, adding that it has twice the reach of its nearest competitor.

So why is this such a big deal that two start-ups have gotten so gloves-off about wanting to seize market share? With news stories galore about the kinds of dollars that some gaming companies are raking in with the sales of virtual goods--just read any headline about Zynga--the idea of making it easier for people to pay for small in-game transactions is quite appealing. Venture funding for virtual goods-related companies reached nearly $70 million in the first quarter of this year. And both companies say they're looking forward to the extension of Facebook's internal payment system to developers, hoping that they can integrate their products into the platform for even broader reach.

There's another angle to it: social networks and gaming sites are now a global phenomenon. In many countries, and not just those in the developing world, credit cards are far less commonplace than in the U.S. From what it looks like, the anticipated "Pay with Facebook" system may require a credit or debit card. The fact that Zong and Boku don't require either registration or a credit card could make it easier for more people to spend more money online, as much as it may sound an alarm with security freaks.

They also both speculate that their rivalry will likely continue to be a two-horse race, to use another terrible competition metaphor. Dealing with the security infrastructure required, not to mention carrier partnerships, is difficult for start-ups and established companies alike.

"The barrier to entry is fairly high," David Marcus said.

Hirson was a little more vocal about the difficulty of building a company in the space. "I would not wish upon my worst enemy the idea of trying to connect to hundreds of carriers and aggregators," he said. "It is extremely challenging dealing with the numbers of Byzantine rules you have in each country."

It's too early to tell which company will win--especially since market share is dependent on game developer and social-network preferences much more than consumer choices--if there even proves to be a winner. As inconceivable as it may seem right now, the bottom could still fall out of the virtual goods craze. And as consumer habits in both online payment and cell phone use change, so could the chances for success of a start-up that will face such extensive security and expansion challenges.

"We know we're going to attract all kinds of unsavory characters trying to do bad things, and we're trying to build ahead of that," Ron Hirson said.

But either way, this is a space to watch as social networks and gaming companies jump further into the micropayments craze.

"The space is definitely growing, and it's in hyper-growth stage," Marcus said, "and you're going to have major players that are going to enable mobile payments in the very near future."