eBay’s $240 Million Acquisition of Zong Will Increase PayPal’s Virtual Currency Capabilities

In what may help PayPal deepen its strength in supporting mobile payments for virtual goods, eBay bought Zong for $240 million in cash.

Zong specializes in mobile carrier billing, where users can put charges on their monthly phone bills, and the company has relationships with more than 250 mobile carriers in 45 different countries. So this could help PayPal serve consumers in emerging markets, where people may not have easy access to credit.

The acquisition also comes at a time when smartphones have overtaken feature phones as the majority of mobile device purchases in the U.S. Yet Apple controls billing for digital goods on its platform while Google strongly encourages the use of Checkout in Android Market, which could limit Zong’s potential in terms of smartphone billing revenue in developed markets.

“Most of e-commerce will shortly become m-commerce,” wrote Zong’s CEO David Marcus in a blog post on the acquisition. “I am so excited by the unique combination of PayPal’s 8 million merchants, brand power, risk management expertise, and financial stability, with Zong’s Carrier DNA, its largest direct carrier payments network, product innovation, and best-in-class carrier billing technology.”

Dana Stalder, who is one of Zong’s investors at Matrix Partners and a former executive at PayPal and Google, said that carrier billing accounts for between 15 and 50 percent of payment volume for digital goods. This figure rises to more than 70 percent when you look at purchases initiated on mobile devices. He brokered an introduction between the two companies about a year ago.

“As mobile commerce soars, the friction that the standard checkout flow entails will simply break down,” Stalder wrote in a statement on the acquisition. “Entering Bill-To, Ship-To and Payment Info on a mobile device doesn’t work. Consumers will need a seamless process and merchants will require checkouts that offer equal or better conversion rates than they’ve experienced on the web. Herein lies an opportunity for PayPal to create a single universal checkout for the mobile web. A wallet in the cloud.”

Stalder told Dan Primack at Fortune that the acquisition was done entirely in cash, instead of a mix of cash and stock, because eBay typically uses cash for such deals.

Zong was originally part of a European company Echovox, but it was spun out last year. The company went on to raise $15 million as an independent company from Matrix Partners, so this is likely a decent return for Zong’s investors. It built its name through supporting billing for virtual currency in social games and it secured a plum deal with Facebook as the first alternative payments company to support billing for Credits.