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

As 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 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 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.