Payment Industry Perspectives: Q&A with Zong CEO David Marcus

zong-logoAs we continue our look at the Facebook payments ecosystem, today we turn our attention to mobile payments provider Zong. Zong, originally a division of Echovox, allows consumers to purchase virtual currency, virtual gifts, and other in-application features or items through mobile phones. Unlike other mobile payment companies, Zong has focused its efforts primarily on North American and Western European markets.

We recently spoke with Zong CEO David Marcus about his thoughts on the mobile payment space, and Zong’s role in it.

Inside Facebook: How did Zong evolve from a business idea to the global mobile payments company that it is today?

david_headshotDavid Marcus: Zong has been around for almost nine years, under Echovox. We began by helping media companies monetize their TV audience through mobile entertainment applications. To do that, we built connectivity to about 100 mobile carriers. Two years ago, we realized that leveraging that infrastructure to build a mobile payments product for gaming and social networking was a smart thing to do. It took a over two years to build the payment layer on top of our infrastructure, and we launched Zong in its current incarnation in September 2008.

What value does Zong bring to the Facebook Platform economy?

zong-paymentZong offers a seamless payment system. It removes the friction associated with traditional payment methods like credit cards with service that’s easier and faster. If you’re in a virtual world and want to buy a collar for your virtual pet with a credit card, you would go to your purse, get your credit card out of your wallet, and type in your credit card number, expiration date, and billing address. In most cases, halfway through, you’ll start asking yourself, “What am I doing?” and abandon your purchase. By contrast, your cell phone is always next to you: you know your number by heart, and it takes five seconds to complete a payment.

Zong’s conversion rate is now close to 70 percent, meaning seven out of ten users who get on our payment IFrame, successfully make a payment. Credit cards have a conversion rate that’s lower than 5 percent on average.

How do you ensure that conversion rates stay high?

We’re present in 16 countries in North America and Western Europe and add one to two countries per month. We’re now focused on developing our Asian and Latin American footprint. One thing to put in perspective is that there are other players in the market that claim they have coverage in a country when they have only one carrier. Zong has more than 95 percent wireless subscriber coverage in each of our countries. Not having complete or close to complete coverage in a country contradicts the promise of high conversion rates that mobile payments claim to bring. In the US, Zong has over 97 percent wireless subscriber coverage, and 100 percent in Canada and Europe. 80 percent of the time, we’re directly connected to our 94 carriers. There’s no additional intermediary, whereas all the other players in the market go through aggregators, which charge more transaction fees.

The toughest part of the business is managing relationships with carriers. Zong has a team of 10 in Europe and three in the US for this purpose. We’ve made a lot of money for our carriers. They know that they can trust us.

What are some of the dynamics at work in your value chain?

Mobile carriers take a substantial piece of the transaction revenue, so mobile payments are one of most expensive transactions out there. In Europe and the US, carriers take between 30 to 45 percent of a transaction. Zong fees are very small, and they depend on volume. Selling physical goods with high cost of goods doesn’t work with mobile payments; however, it’s really the best solution out there for a virtual economy where goods have a 100 percent gross margin.

Some developers adjust the exchange rate between what they’re netting and the amount of virtual currency they’re issuing, so there are cases where customers get less virtual currency than they would with credit cards; however, ultimately, even developers who absorb the transaction costs make more money thanks to the unmatched conversion rate of Zong.

From the consumer perspective, the way it works is that you choose a payment method, and then you see what packages of virtual currency you can get at what price. Zong enables users to make payments they otherwise wouldn’t make, either because they don’t have a credit card or bank account or because there’s too much friction involved with completing a payment. In over 90 percent of the cases in games, it’s an impulse buy, and we realized that in most cases users had little price elasticity. Users were more or less indifferent between spending $2 or $4 dollars because the payment process is so seamless (no checkout experience).

What will it take to bring mobile carrier fees down?

Zong is having very interesting discussions with all of our mobile carriers. First of all, the mentality of carriers is one of mobile content, not of payments. This needs to change. If carriers reduce the cost of transaction, their addressable market will become much larger. Currently you can’t use mobile payments for goods or services that have a gross margin below 60 to 70 percent. Mobile payments are for high margin digital goods and services. We’re hopeful as we have very constructive discussions going on, but it’s hard to tell how long it will take for these transaction costs to decrease substantially. It’s getting better though: carriers used to keep 70 percent of the transaction.

What’s your process for screening applications that are interested in integrating with Zong?

Mobile carriers don’t want anything to do with adult content or gambling, so we need to make sure that the application isn’t falling into any one of those categories. Applications like Zynga’s Texas Hold’Em are casual pseudo gambling and not considered real gambling because you can never get money back. It would, however, be problematic if you could put money on table and get more out.

How’s your coverage in developing-country markets?

We’re working hard on expanding our global coverage and we’re adding about 2 countries each month. But, while the developing world is interesting for some application developers, you have to consider the GDP factor. In some of these countries, the disposable income level is very low. The price points that users would gladly use in the US  don’t in these countries. A $9 dollar transaction in the US may translate to five cents in Latin America. And since, most developers don’t index virtual currency to GDP, transactions don’t happen. Even five cents for a virtual cowboy hat may be a lot to ask for if people don’t have enough to put food on the table. It’s harder for people in developing countries to pay for something that will not materially improve their lives. Even in Portugal, a country where Zong is live in, and that has a substantially higher GDP than developing world countries, the average transaction is almost divided by 10 compared to the US.

How is Zong unique from other mobile payment companies?

No other mobile payment company offers a 97 percent wireless subscriber coverage in the US or in Europe. For some of them it’s below 50 percent, which means that half of the users who try to make a mobile payment can’t pay because their carriers aren’t connected! Also, none of the other players has a single direct carrier connection – they use aggregators. Downfalls to working with aggregators include: One, they take an additional fee of an already very expensive transaction; and two, there’s a huge credit risk. Financially, most aggregators are fragile because they’re in a thin margin business with high operational costs. It’s financially dangerous for a large company to trust millions of dollars in a payment system that relies solely on aggregators.

What are your thoughts on Facebook’s upcoming virtual currency test?

For application developers, having a unified payment method that’s fast, easy and converts better is definitely a must. From the end users perspective, it’s great: they’re more likely to execute a transaction that has the Facebook brand attached to it. Allowing users to use Facebook “credits” across applications is also very interesting. Some bloggers estimate that the virtual economy on Facebook has reached $500 million dollars a year, so if Facebook executes its currency system well, the number of transactions could easily double quickly, and we’d be talking serious money here. This could be a pretty good business model for everyone involved.

How much transparency does Zong provide application developers on transaction details?

We have live reporting on the API. Developers who want to build on analytics can do so through the API. On top of that, Zong provides different dashboards, one of which is dedicated to consumer support. Developers can track transactions by reference number, phone number, user ID, etc.

What’s the most frequent customer support issue you have?

The most frequent problem we’ve seen is that a user successfully buys virtually currency or a virtual good, but the application doesn’t credit the points due to some technical problem on the developer’s end. In this case, we inform the developer so that the user can be credited. Zong offers users a localized end user experience. If you log into Facebook in France or Norway, for example, you’ll see content and hotline services are in local languages.

What’s your favorite Facebook application that has integrated with Zong?

One of my favorite applications is a virtual paintball game based on flash called Paradise Paintball. In the game, if you want to buy a bulletproof vest, you can do so while as you play. It’s one of best integrations we’ve seen. Another favorite is SmallWorlds, which is a virtual 3D world. They were innovative in how they drove traffic to payments: they designed a Zong ATM available at different spots in the game.


What are the user demographics of the gaming applications you’ve interacted with?

Mob Wars, Mafia Wars, and their clones are all very successful among male users because they appeal to male competitiveness, whereas virtual pets applications, such as Fluff Friends and Pet Society, are popular among women. Based on surveys, the gaming population on Facebook isn’t that young. For example, Texas Hold’Em appeals to a much older demographic.

What does the future hold for mobile payments?

We’ve just touched the surface of what we can do with mobile payments. First, applications didn’t monetize at all. They thought they could monetize with advertising. Then, applications began adding a virtual economy on top of what they already had. Now, applications are built solely with the goal of monetization in mind. That’s a huge difference. The first monetized applications included Texas Hold’Em, Mob Wars, and Friends for Sale. A new stream of applications is being made by real game developers in Flash, like SmallWorlds. They’ve thought about monetization from day one and integrated it into game play.