Mobile Payments on Social Platforms: Q&A with Zong’s Hill Ferguson

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As Inside Social Games continues to track the convergence of games and social platforms, a key theme emerging in 2009 is the rapid pace of innovation happening in payments. Entrepreneurs are rapidly moving to fill the market need as social game developers increasingly turn to microtransactions to monetize their games on Facebook, MySpace, and the web through the sale of virtual goods.

One such company moving rapidly in this space is mobile payment service Zong. Zong, a division of Echovox, offers developers of games and social applications a way for users to pay for digital goods with their mobile phones. (Note: Zong is also a sponsor of this blog.) Inside Social Games sat down with Hill Ferguson, Zong’s VP of Product Management and Marketing, to get his perspective on the state and future of the space. Below, Ferguson discusses Zong’s approach to the market, challenges posed by mobile carriers, and insight into which games and publishers are monetizing best.

ISG: For those that may not be familiar with Zong, can you give a brief history of the company?

hillfergusonHF: Zong is actually a division of Echovox, a company originally founded in Switzerland back in 2000.  We got our start by providing SMS services to major media companies.  For example, we run the “text to vote” services for several hit TV programs in Europe (think American Idol).  After building out connections with the 70+ wireless carriers in 13 countries to power these services, we realized the enormous potential of building a global payment service for merchants and game publishers looking to better monetize their audiences.  So, David Marcus, our founder and CEO, moved his family to Silicon Valley from Geneva about a year ago to create a presence in the US.  Soon after we launched Zong, and so far the response from the market has been incredible.

When did Zong take interest in payments on social network platforms?

The social networks were one of the first places we went for distribution.  Beginning last year we started to see this confluence of a couple very powerful forces which gave us confidence that social networks would be a great channel for Zong.  First, we saw some weakness in the advertising market, making it harder for social applications to monetize.  Then the capital markets tightened up and there was this rush to monetization by application developers.  The response for a lot of developers has been to monetize apps through the sale of virtual goods, currencies, subscriptions, etc., which is right where we want to be.  Fortunately we had the right product at the right time to meet the demand for alternative payment methods.

There are several payment solutions in the market right now. What makes Zong different?

We offer the most frictionless payment experience for consumers.  We don’t require consumers to register and we don’t require that consumers open an account or even have a bank  or credit card account for that matter.  All you need is an active mobile phone and that’s it.  This user experience translates into incredibly high conversion rates, turning more “would be” buyers into actual buyers.  So “ease of use” is our number one differentiator right now.  We obsess over the user experience every day but we know we can continue to improve it.

Another key differentiator for us is how we provide coverage in each country.  When we enter a new market, our goal is to achieve at least 95% consumer coverage.  This means we need to connect with all Tier 1 and Tier 2 carriers.  In the US, for example, we have about 97% of the mobile consumer population covered while our nearest competitor is about 50%.  Furthermore, over 80% of our carrier connections are direct  versus connecting through aggregators.  This results in better payouts to our customers and higher technical reliability.

Finally, we’re an experienced player in this space, having been in the mobile transactions business for 8+ years.  We process over 30 million mobile payment transactions / month and handle up to 2,400 transactions per second during peak periods.  We are carrier compliant in 13 countries with over 70 carriers and we offer customer support in 7 languages.

What kinds of demographics is a mobile payment solution like Zong best suited for? (in terms of age, sex, and location)

About 70% of the global online population does not have a credit card.  Almost all these folks have a mobile phone.  So at a macro level, Zong is very well suited for mainstream audiences.  Because our payment process uses SMS, it may appeal more to a younger demographic who are used to texting.  We see a slight gender bias (towards female), but it’s hard to attribute that to Zong and not the appeal of application itself.  While mobile payment has been around longer in Europe, we see it quickly becoming more popular in the US.  Zong has over 95% consumer coverage in the US and Europe and is rapidly expanding in 2009.  Next up for us will be Canada and Australia in February.  After that we’ll focus on Latin America and Asia. By the end of 2009, we plan to be live in about 40 countries which will give us a global footprint in excess of 3 billion mobile consumers.

What kinds of games and applications has Zong seen the most growth in in recent months?

Social games are definitely the fastest growing customers for us.  We’re starting to bring on more Virtual Worlds, MMOGs and MMORPGs, though, so we’ll see how that effects our payment volume mix.  Direct sales to virtual goods merchants are also picking up.

Which developers have been the most successful so far?

Developers who are using virtual currency and virtual goods as a way to promote more successful gaming experiences are having the most success with Zong.  For competitive games, these types of purchases typically allow the user to advance faster.  For other games and virtual worlds, these purchases go a long way to allow users to create a more personalized and expressive experience.  In either case, having a frictionless payment experience is going to drive more revenue.  Let’s face it, many of these types of purchases are what you might call “impulse buys”.  Put up too many obstacles in front of the user and she’ll bail out of the process.  Zong is a great fit for impulse buys because it’s so simple to use.

Many lament the high fees currently imposed by US carriers.  On average, what portion of payments made through Zong in the US go to carriers?  How does this compare to other large markets for the company?

As usual, it depends.  Generally speaking, though, US Carriers take about 40% of the purchase price at scale.  In Europe, where the market for mobile payment is more mature, carriers take as low as 25%.  In Japan and Korea, for example, carriers are taking as low as 5 to 10% and consumers are basically buying most everything with the mobile phone.  Still, it varies by country, by carrier and by volume.

What are your honest hopes and realistic expectations regarding possible future changes in US carrier fees?

It’s a question of when and not if.  Carrier fees in other parts of the world have been trending downward for the last 5 years.  Not surprisingly, as rates have dropped, usage has grown dramatically.  You have to remember that this is still a nascent market here in the US.  We believe that carriers are starting to pay more attention to micropayment transactions.  The market for mobile voice and data is intensely competitive, so carriers are increasingly looking for new revenue streams.  How fast they move is anyone’s guess, but the economics are hard to deny: when carriers reduce their rates, more merchants will accept mobile payment.  Greater merchant acceptance will lead to more consumer adoption and so on.

Thanks Hill. Any final thoughts?

We’re finding that over 55% of consumers who click the Zong payment button successfully complete a payment.  This is an order of magnitude greater than traditional payment options, like credit card.  Game developers need to be mindful of payment conversion rates because they have a far greater impact on revenue than payment processing costs.  You can learn more about the importance of payment conversion rates on the Zong blog.