This week, Inside Facebook is taking a deeper look at the key players in the Facebook payments ecosystem. Over the course of the past two years, user-pay has become a popular model for successfully monetizing applications and games, and a variety of companies have developed solutions enabling developers to more frictionlessly accept payments from Facebook’s increasingly global audience. As you can read on our Q1 report on the state of the Facebook payments ecosystem, this market has been growing at a healthy pace despite common negative sentiment on social monetization.
To kick off our series, today Inside Facebook speaks with Paul McGuire, CEO of mobile payments company Paymo. Paymo is one of a growing class of companies that allows consumers to purchase in-game items, subscriptions, and other digital goods through mobile phones. Users authorize payment through a PIN sent to their phones, and the charge is applied to their phone bills. We spoke with Paul recently about his company and his thoughts on the future of the mobile payment space.
Inside Facebook: At what point in time did you realize the business opportunity in providing a mobile payment solution on Facebook and other social networking platforms?
Paul McGuire: We have a background in mobile solutions and saw that they weren’t merchant friendly. It was hard for online and application developers to use premium Short Message Service (SMS) to reach customers. Four billion people have a cell phone, so the technology was there, but there was no global payment platform. As some social networks go international and target the youth demographic, the cell phone is the perfect device.
Who are the key players in your value chain?
We thought hard about how to build the business in a way that scales and benefits all players in the chain. Look at the way MasterCard and Visa built their businesses using the four party model (consumer, mobile carrier, payment reseller, merchant). The reason why they use this model is because it’s far more scalable compared to American Express’s model of directly acquiring merchants. We’re following the highly scalable model.
What’s your transaction model?
A large percentage of costs is imposed by the mobile carrier. This percentage can be as low as 10 percent in Japan and the UK, and as high as 60 or 70 percent in other markets. The merchant typically gets 50 percent of a transaction.
The cell phone is being used as an authentication and billing device. This transaction is more secure than a credit card transaction because the consumer 1) submits his/her cell phone number, 2) receives a text message to validate payment intent, and 3) sends a text message back to confirm. The carrier then charges the cell phone bill and deducts credit.
What kinds of companies would you consider to be your strategic partners?
Today, our primary partners are online companies, including online games and social networks, that sell digital goods at a low marginal cost, so it’s not a big deal if they make only 50 percent of the consumer price. Our partners include hi5, Social Gold, Playfish, Super Rewards, and Offerpal Media.
How do you distinguish your mobile payment system from competitors’?
The obvious difference is that we have international reach. Second, we have better and unique technologies that make a huge difference for merchants. It’s the early days of the mobile payment space, so we made investments in our technology platform. Third, we’re careful about complying with mobile carrier guidelines and take them very seriously. Fourth, we deliver high conversion rates. Paymo is quick, easy, and frictionless. Using Paymo, conversion rates are four to five times greater than usual, and chargebacks are few because of the dual factor authentication (verification of the cell phone number plus positive confirmation for the transaction from the consumer via text).
What’s your reaction to Facebook’s entry into the virtual goods ecosystem?
We think it will be good for the market as a whole. What it will do is increase user demand. We see ourselves as an enabler of transactions. We’re a payment network, so we’re an ideal solution in the US and other countries for virtual currency and micropayments. We’re excited about what’s happening in the social networking and gaming space.
With mobile carrier rates significantly higher in the US, please compare the mobile payment space in the US versus abroad.
We’re seeing high transaction volumes in the US, South America, Europe, and Asia. With most technologies, the US leads Europe and Asia, but not with cell phones. The US is behind, but is catching up fast. Mobile carriers are getting their arms around this challenge. In the next few years as processes become more efficient, carriers will figure out that lower fees will drive up volume. Pure economics and regulatory pressure will push down carrier charges – this will happen, but not quickly.
In this economy, how is your company doing?
In this recession, we’re seeing positive growth as people spend more time on social networks. From the user’s point of view, a small purchase for a virtual good doesn’t feel like a huge cost. People can have fun without hurting their wallets. In terms of financial performance, we’re doing well. We raised $5 million dollars last year. Monthly growth is at about 20 percent or more.
What are best practices among application developers who have integrated with Paymo?
The challenge for merchants is to have compelling content and offer services that consumers want to buy. There’s no good in having a mobile payment option if consumers don’t want to buy. A lot of merchants are adding a mobile payment option, but haven’t figured out the content or how to deliver value at a price point that the consumer is willing to pay.
How will the payment space evolve in the next several years?
Today is kind of like the end of a beginning. Mobile payments will become a mainstream payment method. Costs will fall as mobile carriers see the economics of charging lower transaction fees. In the short-term, mobile payments need to be scalable, reliable, and trustworthy.
Are there any other comments you’d like to share with Inside Facebook readers?
As a general principle, mobile payments are an extremely exciting opportunity. It’s important to realize that having clear and understandable content is a prerequisite to adding payment methods. Don’t be scared of implementing mobile payments: the cost structure shouldn’t deter application developers from implementing mobile payments because having mobile payment solutions provide access to a new set of customers.