A growing number of mobile payments companies are promoting systems that charge purchases to users' phone bills rather than credit or debit cards.
Since Apple Inc.'s tight control of the iPhone precludes this approach, the payments firms are gravitating to Google Inc.'s Android — which itself is emerging as the handset of choice for the consumers most likely to use their phones for banking and financial activities.
On Wednesday, Zong Inc. and Boku Inc. each introduced tools that let software developers weave their payments systems into applications for Android phones. These systems could be used, for example, by a video game developer to sell additional levels to someone who has downloaded a game that was given away for free.
Executives say charging these small purchases to a phone bill would appeal to consumers more than keying in a card account number. However, analysts said the niche appeal and low price of these digital products mean there is little threat to card issuers' interchange revenue.
"People don't want to have to whip out their credit card to buy things," said David Yoo, Boku's senior vice president of strategy. When that is required, "there's a lot of drop-off" — consumers decide not to make the purchase after all.
Hill Ferguson, Zong's vice president of product and marketing, agreed, saying, "any time you ask a consumer to type anything — be it their name or a credit card or a password or what have you — it's hard." Offering a one-click alternative tied to the user's existing phone-billing system "opens up a whole new world of monetization options for Android developers, because they now no longer have to send users through complicated forms" or charge for their apps up front, he said.
Neither Boku's service, called Paymo, nor Zong requires users to type in a card number. They click a button to approve purchases within the app, and the alternative payment providers handle everything from there. The user does not need to do anything else until the phone bill arrives. (Zong also offers a version of its system that lets users keep a credit card on file, so they can charge items to cards but still use the interface for making charges to a phone bill.)
Mobile banking and payment systems are increasingly converging on the Android platform. Javelin Strategy and Research recently published findings that show Android users are more active mobile banking customers than users of the iPhone and other smart phone platforms.
"Android is the fastest-growing mobile platform today," Ferguson said. "The growth of Android has just been stellar, and we expect that to continue."
Boku and Zong said they are encouraged by the increased number of payment options on Android. "Competition is a healthy thing and certainly a sign of a market worth pursuing," Ferguson said.
Yoo said the different payment products can serve different audiences. "A lot of users throughout the world … don't have credit cards, or they're in the demographic where they don't typically use their credit cards to buy things like this," Yoo said.
The Android market is attractive to payments companies for several reasons.
Google's Android Marketplace, the digital storefront for apps that run on Android handsets, handles payments through Google's homegrown payment system, Checkout. However, Google does not require that users have a credit card on file with Checkout to download free apps. This is a problem for developers who wish to give their apps away and then charge for content updates later. Yoo said that people who want to make an in-app purchase without a pre-existing Checkout account would have to type in a credit or debit card number on the spot.
Google has promoted Android as an open system where developers have more latitude than the iPhone App Store, which Apple strictly controls. Apple routes all payments through its own iTunes service.
However, merchants have criticized Checkout for being difficult to use, and payments executives said software developers are open to evaluating alternatives.
Launched in 2006, Checkout was at first tightly integrated with AdWords, Google's successful advertising platform — merchants could even get free transaction processing if they advertised with Google.
However, last year, Google revamped its business model, and made its pricing nearly identical to that of rivals like PayPal Inc., the payments unit of eBay Inc. This drove away some merchants who said Google's technology felt unpolished, and that the pricing was the only reason they were willing to put up with those flaws.
Though some observers suggested then that Google's fee change was done to deliberately drive away users before eventually phasing out Checkout, Google has instead done more work on the system to bring it closer to what merchants expect to get for the price being charged. Checkout has limited built-in support for carrier billing on Android — it works only for T-Mobile customers in the U.S. with post-paid accounts. A Google spokeswoman said the company welcomes new payment systems on its platform.
"Certainly Google Checkout has not been doing very well," said Gwenn Bezard, a research director at Aite Group LLC of Boston. Zong and Boku might "see a weakness here," he said.
Indeed, Ferguson said Zong hopes its product can make up for what developers see as the remaining shortcomings of Checkout, particularly its difficulties with handling in-app payments. "When you're talking about consumer payments, ease of use always trumps everything else," he said.
The rival smart phone platforms, Research In Motion Ltd.'s BlackBerry (which uses PayPal to handle app sales) and the iPhone, leave much smaller cracks for alternative payment systems to enter than Android.
"Going against PayPal and going against iTunes and the Apple fortress where everything is integrated, it could be more challenging" than going against Checkout on Android, Bezard said. "Android could be a lower-hanging fruit."
Aaron McPherson, a research manager for payments at the Framingham, Mass., research firm IDC Financial Insights, said that banks have little reason to fear losing interchange revenue, because they are not losing transactions.
"You don't know how much of that" digital spending "would have gone on a card" if Boku and Zong were not options, McPherson said. Would consumers "have used a credit card or would they have just not bought it?"
Bezard agreed, saying that though the activity on Google's platform may not bode well for its Checkout system, Boku and Zong are addressing a niche market. "In the overall scheme of things, banks have other things to worry about," he said.
Still, McPherson said there is certainly an opportunity on Android for a new payment system.
"The way it's done today is either really kludgy, or you do a subscription outside the app," he said. "The whole goal behind all of this is you don't leave the app."
Leaving the app could mean losing a sale, he said, since phone users are less likely to buy new content for a game when they are no longer playing. "The best time to get you to buy something is when you're in the midst of a game," he said.
That payment providers are increasingly battling for the Android audience is a sign of the "maturation of the system," McPherson said. Someday, there could be multiple options for developers to use for payment, and those options would coexist and compete "kind of the way acquirers compete today" in the bank card space, he said.
This story has been reprinted with permission from American Banker.
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