Here come the mobile payment wars

Mobile payment start-up Boku, integrated into social game Puzzle Pirates.

(Credit: 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."

[RobertAPierce]

"It's quite an idea, and one with invariably will raise plenty of questions about economics, social-media revenue, and the big one--security."

Ok, so security is the big question.... yet there is no mention of it in the article, no discussion of the security considerations, risks etc at all?

What happens if someone finds someone else's cell phone? Can they just go on a shopping spree with that phone until the person realizes the phone is missing and manages to alert the phone company? How do you prevent someone else from using it if they simply borrow your phone to make a call?

Also, texting is certainly not secure, the information can be accessed, spoofed and hacked in a bunch of ways.

This is an interesting idea, and I can certainly see a lot of potential, but it raises a lot of questions that are not covered in the article.

[kakrohn]

Good comment, but all the items you are concerned about can happen with ANY form of payment.

People lose their credit cards all the time and anyone could pick it up and use it (most places don't ID).

Large companies everyday get hacked into and leak customer's personal info (including SS#, CC#, etc).

Hackers can access your PayPal or online banking passwords and take over your account that way too.

[SullivanDavid]

I have never liked charges that are added to my phone bill. It just feels creepy. And I've never had a good experience with it. For quick and easy micropayments, check out TwitPay. Pay someone with as little effort as typing "@some_twitter_name twitpay $5 for service"

[yacahuma]

I would not use this kind of service. My father's wallet and phone was stolen at gun point. Who do I call? Credit card have a big support infrastructure and experience.

[cvaldes1831]

We should just institute what the Japanese have been running for years rather than trying to reinvent the wheel. It's already accepted in a G7 country.

[T_Tran]

Yup, cvaldes1831 is absolutely correct. When the iphone was first launched here in America, a survey was conducted in Japan if they would convert to an iphone and everyone said no. They are 5 years ahead of us in phone technology, since they use their cell phone for almost everything. This includes swiping it at the grocery store like a debit/credit card, using it as a library card, paying for sports tickets at the ball park, etc.

[ivorycruncher]

Um, yeah, MAJOR security hurdles to clear on this one. Phone numbers are widely known, and easy to find and/or steal. Credit card numbers are not. You will never convince me that mobile phone numbers are as secure or even more secure than credit card numbers. NOT going to happen. Convenience is pointless if you compromise security to get it.

[kakrohn]

Just because someone knows your cellphone #, doesn't mean they will get the security text message... unless they stole your cellphone. But that could happen with credit cards and online passwords too.

[Vegaman_Dan]

It's not hard to spoof a cell phone hardware address. There are plenty of cell phones on the market now that are 'blank' and meant to be programmed live on the fly to a new number. All that new phone has to do is register on the network before yours does and it gets the address/ID for your number.

Once that happens, the crook can rob you blind, then disappear. Your cell phone company will be charging you for the bill and it would be up to you to defend yourself. Cell phone companies aren't exactly great on customer service now- can you see how this will improve once people are calling up saying they were ID Spoofed and ripped off?

No thank you, I will not be using this service.

[worried1]

You are correct in that security was not mentioned except to call anyone interested in security "secutity freaks". Maybe the author does not feel security is important but I do and I agree I do not need extra charges on my cell phone bill. As one said what if my cell phone is lost or stollen and it was not locked how do you prove it was not you. I will keep my credir card as long as I can. The phone companies will not help you if a charge is posted just look at the scams for overseas charges and tell me if any phone company has ever helped in having the charges dropped.

[kzemach]

Something that these companies need to consider: Opt In, not this free for all. Take any small business, or even many large ones. We pay for our employee's phones. We do NOT want to go through all their phone bills to find out if they're charging personal stuff to the company via text message. The bill payer on these phones needs to validate the acceptance of the phone number. If this is already implemented, the article needs to say so.

You can already do stuff like this in Europe too. It's pretty awesome being able to pay for parking, public transit, etc. just by using your cell phone.

paybox.at is one used in Austria.

[vgraybeard]

You don't have to wait for this. Just get AT&T. They've been adding unauthorized charges & services from themselves and companies you've never heard of, for years. If and when those charges are discoverd, it takes months to get them removed and you will never get a satisfactory explanation. It's
already to easy to add small charges that can go un-noticed. I'm not suprised to see that AT&T is in
the middle of this one.

[AndrewRich]

Can I redeem my banked Flooz and Beenz with this new service?

[johandmeyer]

Another mobile payment and money transferring service to keep an eye on is www.globa.com.