Users are increasingly choosing dead simple SMS mobile payments for micro-transactions on social network applications and gaming sites (it fills the void while they wait for more direct options), but super-high transaction fees are limiting growth.
The problem is that legacy transactions – specifically scams that give users a “free” ring tone with the fine print mentioning a monthly charge as high as $20 – have brought in so much cash to the carriers that they’ve gotten used to taking 50% or more of the total payment in fees. For the market to grow to encompass legitimate transactions, those fees have to drop dramatically. For that to happen, the social networks need to get involved directly in carrier negotiations.
Two companies, both headquartered in Europe, are already targeting mobile payments for apps – Mobillcash (UK) and Zong (Switzerland).
When you buy a virtual shotgun on Mobwars, for example (and they are selling a lot of them, up to $1 million per month) you have to pay real cash. You can choose to pay via a number of services (Facebook doesn’t offer a direct payment solution yet), including either Mobillcash or Zong.
If you choose Zong, you enter your phone number on the site, get a text message with a four digit code, enter the code on the site and you’re done. It’s by far the easiest way to charge a transaction online outside of Amazon one-click.
Zong’s fees aren’t transparent, but Mobillcash’s are. Mobillcash has a clunkier interface (you have to choose your carrier and go through extra steps), but they show what their fees are because to get, say, $1 into the Facebook app you have to pay $1.50 on most carriers. That implies a 33% transaction cost, almost all of which goes to the carrier. Many of Mobillcash’s payments are way beyond 33%. Zong says they pay an average of a 40% transaction fee to U.S. carriers.
Those transaction fees are severely limiting the size of the market. Lots of merchants and application developers would love to take mobile payments, but paying 40% or more of the transaction to the carriers is a non-starter.
Zong argues that the fees are actually much lower than they seem because conversion rates (when chance that money will change hands once a payment button is pressed) are more than 50%. If that seems low, compare it to PayPal conversion rates that are reported to be a fraction of that.
Regardless, though, any merchant selling an item with actual marginal cost (virtual items are by definition free to produce, so higher payment fees can be tolerated) aren’t going to allow mobile payments via SMS. If the carriers were to lower those fees (or if they were forced to by market forces or the government), a very rich ecosystem could blossom, and the carriers would get the majority of the value created.
What Happens If Carriers Ignore the Opportunity
Chances are the carriers won’t lower their exorbitant payment fees anytime soon. What I’m guessing will happen is that services like Zong and MobillCash, as they add valuable users who like to pay via SMS, will simply offer to move those users to credit card payments. Users still pay by just entering in their phone number and then typing in a 4 digit code they receive via SMS, but the charge would go to their credit card instead of their phone. The difference in fees is so large that customers can be offered a very large incentive to simply store their credit card and use that instead of having the charge go to their phone bill. And checking out is still much, much simpler than typing in your name, address and credit card details.