Andrea Bauer

Users are increasingly choosing dead simple SMS mobile payments for micro-transactions on social network applications and gaming sites (it fills the void while they wait for more direct options), but super-high transaction fees are limiting growth.

The problem is that legacy transactions - specifically scams that give users a “free” ring tone with the fine print mentioning a monthly charge as high as $20 - have brought in so much cash to the carriers that they’ve gotten used to taking 50% or more of the total payment in fees. For the market to grow to encompass legitimate transactions, those fees have to drop dramatically. For that to happen, the social networks need to get involved directly in carrier negotiations.

Two companies, both headquartered in Europe, are already targeting mobile payments for apps - Mobillcash http://www.mobillcash.com/ (UK) and Zong zong (Switzerland).

When you buy a virtual shotgun on Mobwars, for example (and they are selling a lot of them, up to $1 million per month) you have to pay real cash. You can choose to pay via a number of services (Facebook doesn’t offer a direct payment solution yet), including either Mobillcash or Zong.

If you choose Zong, you enter your phone number on the site, get a text message with a four digit code, enter the code on the site and you’re done. It’s by far the easiest way to charge a transaction online outside of Amazon one-click.

Zong’s fees aren’t transparent, but Mobillcash’s are. Mobillcash has a clunkier interface (you have to choose your carrier and go through extra steps), but they show what their fees are because to get, say, $1 into the Facebook app you have to pay $1.50 on most carriers. That implies a 33% transaction cost, almost all of which goes to the carrier. Many of Mobillcash’s payments are way beyond 33%. Zong says they pay an average of a 40% transaction fee to U.S. carriers.

Those transaction fees are severely limiting the size of the market. Lots of merchants and application developers would love to take mobile payments, but paying 40% or more of the transaction to the carriers is a non-starter.

Zong argues that the fees are actually much lower than they seem because conversion rates (when chance that money will change hands once a payment button is pressed) are more than 50%. If that seems low, compare it to PayPal conversion rates that are reported to be a fraction of that.

Regardless, though, any merchant selling an item with actual marginal cost (virtual items are by definition free to produce, so higher payment fees can be tolerated) aren’t going to allow mobile payments via SMS. If the carriers were to lower those fees (or if they were forced to by market forces or the government), a very rich ecosystem could blossom, and the carriers would get the majority of the value created.

What Happens If Carriers Ignore the Opportunity

Chances are the carriers won’t lower their exorbitant payment fees anytime soon. What I’m guessing will happen is that services like Zong and MobillCash, as they add valuable users who like to pay via SMS, will simply offer to move those users to credit card payments. Users still pay by just entering in their phone number and then typing in a 4 digit code they receive via SMS, but the charge would go to their credit card instead of their phone. The difference in fees is so large that customers can be offered a very large incentive to simply store their credit card and use that instead of having the charge go to their phone bill. And checking out is still much, much simpler than typing in your name, address and credit card details.

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Mogees is launching an SDK for Android that will allow developers to charge for applications on the Android Market using its mobile billing platform. In doing so, it’s beating Google (NSDQ: GOOG) to the punch by at least a few months. Currently, Google doesn’t have a system that allows developers to charge for applications, but it plans to fix that by early next year. The Mountain View, Calif.-based startup thinks it hit a unique window of opportunity that prompted it to launch its payments SDK on the Android platform. Handango and MobiHand also sell Android apps, but users must visit their sites to buy them.

CEO and co-founder David Li: “We believe there are many developers who would be interested in getting paid for their applications today, and not wait until next year sometime. Lots of Android phones have been purchased and lots more will be bought through the holiday season. We want to help developers to monetize now.” In response to questions via email, he also pointed out that Google’s Android team hasn’t provided much detail about their billing service other than the fact that developers will get to keep 70 percent and 30 percent will go to the carrier. In contrast, Mogees will charge 10 percent and a 30-cent fee per transaction. As incentive to use the platform, Mogees will give the first thousand developers that sign up free payment processing for the rest of the year, up to $1 million. The company expects to launch additional SDKs for BlackBerry and iPhone by the end of 2009.

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When it comes to charging for mobile apps, payments usually have to go through either the carriers or one of the emerging mobile app platforms such as Apple or Google’s Android. The problem with charging for an iPhone app through iTunes is that Apple takes 30 percent.

A startup called Billing Revolution wants to charge about one tenth as much for a seamless, mobile one-click shopping experience. Already available on other phones, Billing Revolution is announcing availability today for iPhone, BlackBerry, and Android apps.

Once a consumer signs up to pay for things through Billing Revolution, he is presented with an Amazon-like one-click payment option no matter what app is using it. (Didn’t Amazon patent that?). Billing Revolution charges a 3.5 percent transaction fee plus 50 cents per transaction.

That pretty much kills any app developer using it for micro-transactions. Nobody is going to sell a digital song for $1.00 if they need to pay Billing Revolution 53.5 cents. But it could become an option for larger purchases, and as a way to charge for premium subscriptions for apps that build adoption with a lighter-weight free version.

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Although buying products from your desktop at home has become just as customary as buying products at the store, few have found reason to buy products on their cell phones. In an attempt to buck that trend and make it easier for consumers to buy products from their cell phone, Billing Revolution announced today that it will offer a ’single-click’ billing and payment service that will streamline mobile purchases.

Once consumers are ready to buy something from the Web from a vendor that employs Billing Revolution’s service for payment, they are taken to Billing Revolution’s purchase page where they input credit card information from their phone. Once complete, Billing Revolution automatically sends an SMS receipt to their phone, which contains a link. After clicking that link, authentication is complete and with all future purchases, consumers will need only to click ‘buy’ for a transaction to be completed.

Billing Revolution is taking a risk with this platform that may or may not pay off. Right now, mobile purchases are just a small segment of online commerce and few consumers are willing to buy a product with their cell phones. But if Billing Revolution’s beliefs are right that all it takes is a simple process and the ability to buy products with a single click, it’s in a prime position to capitalize on what it believes is a booming market.

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Slowly, mobile payments are starting to creep their way into the US. Though foreign countries tend to use the service more, the US will eventually catch on when we all realize that paying your bills while out and about can be easy. Verizon has now announced that it will be using Obopay’s service to allow customers to send mobile payments to each other and stores by using their cellphone.

The service will allow customers to walk into participating stores and pay for items by waving a cellphone in front of a register. Both prepay and billing options will be available, with MasterCard getting in on the prepay deal. Though convenient, don’t expect to be paying for a Snickers Bar at the 7-11 anytime soon. A lot more stores need to participate in the program before Verizon and Obopay’s plan can be effective. At this time, Verizon has yet to announce how much the service will cost.

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Motorola signed on to participate in the GSMA Pay-Buy-Mobile Initiative in Europe. Motorola will participate in trials to develop mobile payment activities, and provide feedback to GSMA Near Field Communications (NFC) Technical Guidelines white papers. The trails will also work under the standardization bodies such as ETSI and the NFC Forum. Motorola sees the NFC and associated applications including payments as an area of strategic focus, and sees this as a means to facilitate the development and implementation of an NFC ecosystem.

The concept of using a mobile phone as an electronic wallet has been met with mixed response by consumers. While it’s hard to find someone outside the home without his cell phone these days, which lends the handset to act as a wallet, privacy and security concerns needs to be worked out before it can widely become a mode of payment.

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Octegra has released a white paper claiming that direct-to-bill payments provide the best revenue results for both operators and content owners.

Octegra’s research found that premium SMS purchases primarily benefit the mobile operator, who receives 45% of the revenue, with the content owner getting only 14%. In credit card payments both groups lose out, with the operator getting a 25% cut, and content royalties only forming 12%. In this scenario the third party billing provider scoops 33% of the total revenue. The white paper identifies direct-to-bill payments as the fairest and most profitable method, giving the operator a 27% share, and content royalties forming 30% of revenues.

“The present mobile content business demonstrates zero sum game behaviour, in which revenues are restricted and the operators’ gain is perceived to be the content owners’ loss,” said John Moroney, author of the white paper from Octegra. “As a result, there is little cooperation between these two sides of the industry, with both operators and content owners creating their own mobile portals. Consequently operators building portal services have to pay inflated prices for content, and content owners building off-portal sites have to pay the operators up to 50% of their revenues.”
The report was commissioned by mobile payments service company Valista.

According to the white paper the five parts of the mobile content value chain are Taxes, 3rd party billing providers, portal promotion expenditure undertaken by the content owner, content royalties and operator charges.

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Stanislas Chesnais, CEO of Netsize, gave a talk on the European mobile content market, with some pretty interesting figures. Mobile data accounts for about 20% of operator revenues, on an ARPU of $42-60. More than 70% of mobile content is sold off the carriers’ portals, and Chesnais expected this figure to increase to around 90% in two years. What does this say about the walled garden?

As per usual it is the 16-26 year old age bracket which is the highest user group. These people and those following have grown up with mobile and know they’re going to pay for content (in the words of Chesnais, they’ve “been trained on how to buy things with mobile”).

There’s some interesting stuff going on with mobile payments, with Chesnais saying that it wouldn’t be a single dominant system but a number of different channels based on what is most appropriate. He said SMS payments will fade and be replaced with WAP billing (where people will be informed they’ll be charged for a page and then click, or not) and interactive video dialling and streaming. This is where you dial a number and the content is streamed to your phone, and you’ll be charged on a per-minute basis.
Of course, there have been several billing scandals which have damaged the mobile content industry in Europe, particularly the subscription model, so the industry is desperately scrambling to clean up its act. As a result, “acquisition costs will be higher,” said Chesnais. “If you cannot cheat the user your return will be lower than before, but in the long run it will be better.”

Other predicted growth areas are pretty much the same as everywhere: mobile tv, full track music downloads, music/video content downloads which will have payment bundled with data traffic charging, community management and multiplayer gaming, and gambling…this last relies on the efforts of several European countries (led by the UK) to encourage the EU to pass a directive allowing this.

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Palo Alto based Obopay https://www.obopay.com/info/ is set to launch sometime Thursday (the site is currently password protected). This is the newest product in the very active mobile payments space (see PayPal Mobile and TextPayMe as well).

A few more details about Obopay have come out since Matt Marshall posted a teaser two weeks ago. Obopay will rely on a java client on the phone instead of sms or text message payments like PayPal Mobile and TextPayMe. While this provides for a richer and more secure interface, Obopay will be of use only to people who have phones that support java:

The first 25 phones that we are porting to cut across 2 of the major carriers (i.e. Cingular and T-Mobile) and one major MVNO that we are in trials with. Five different handset manufacturers are represented in this group (i.e. Nokia, Motorola, Kyocera, Samsung and Sony Ericsson) including the three largest manufacturers. In our porting effort we are targeting all of the handsets that are currently offered by the big 4 carriers that are targeted at our end-user group.

The service itself will allow for person to person payments between phones. Obopay says that “users can send money to almost any mobile handset”, which may imply a text message (or email?) for unsupported phones - I just don’t know how that will work yet. Users will also be issued a debit card attached to the account for real world payments, including ATM withdrawls.

As to fees, the information I have now is “The transaction costs just pennies”. I’ll update as I receive more information.

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PayPal has launched its mobile payment platform, called, of course, PayPal Mobile. Oliver Starr at MobileCrunch had the scoop and was also slashdotted an hour ago.

This spells trouble for existing mobile payment provider TextPayMe. PayPal’s solution is fully baked, easy to use, and has some great features that take this beyond a way to text your friends money.

To use the service, click here and sign in (you must have or create a PayPal account to view this). You need to register a phone and create a PIN. PayPal uses an automated system to call you on the phone and verify the PIN, and the phone is then usable.

To send a person to person payment, you either text the payment amount and recipient’s phone number to PayPal, or call a toll free number and follow the directions.

PayPal Mobile can also be used to pay for stuff as well. It’s called Text to Buy:

Anytime you see Text to Buy next to something you want to buy—on a poster, in a magazine, at an event—you can securely order the item by text message.
Use your phone to buy items like CDs, DVDs, books, electronics, accessories and much more.

To use it, you text PayPal the item number, and they call you back to confirm the purchase. Done.

I’ve confirmed that there are no additional charges for using PayPal Mobile. If you have a business or premium account, normal fees to receive money apply. And, of course, most mobile carriers charge for text messages.

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The Mobile Payments Services Association has changed its name, before it's really got started. The group, set up this year by Orange, Vodafone, T-Mobile and Telefonica Moviles, is now called Simpay.

Simpay is targeting a billion sales transactions paid for by mobile phone a year within five years, and the group is in talks with 14 mobile operators to join the club.

M-payments have failed to set the world alight so far because there are, or have been, too many incompatible systems; they are expensive to implement; the operators levy outrageous charges on the retailers; and there simply aren't enough customers to make the exercise worthwhile for the merchants.

With Europe's mobile industry uniting around a single interoperable platform (to launch in 2004), and heavily promoted brand, the concept of MPayments may turn into profitable reality. But for whom? Merchants will stay away in droves, unless they get more reasonable rates.

Simpay is gunning for big ticket items as well as cheap things, such as MP3 downloads, which would be charged straight to the customer's phone account. For more expensive stuff, Simpay would facilitate payments "using credit and debit cards to complete transactions such as travel bookings, theatre tickets and gift orders".

The Simpay rebranding is refreshingly free of marketing bull - the MPSA founders simply say Simpay will distinguish the company as a separate entity from its founding members and should position the brand strongly in the consumer segment. The Simpay tagline is straight and to the point too: "Pay for Stuff with Your Mobile".

Even the most high-falutin' claim for the Simpay name is relatively restrained. Simpay "also highlights the evolution of the mobile phone from being purely a communications device to being an essential lifestyle tool that enables payments." OK, we'll let you get away with that one.

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