Boku & Zong: what does the future hold?

Having previously written about emerging payments companies, such as Square, Klarna and FaceCash, I wanted to look at two similar mobile phone players; Zong and Boku.

Zong and Boku are similar in that they target online purchases, using the mobile phone as payment method, rather than a credit card.  The user simply selects Zong or Boku as payment option at the online merchant and enters their phone number.  Both companies then perform a verification process with the customer’s mobile phone – the process differs somewhat between the two companies, but is quick and easy – and the transaction is charged directly to the phone bill – no credit cards involved.  To enable this, both Zong and Boku have entered extensive partnership agreements with phone carriers across the world.

Zong and Boku have both been very successful in capturing micropayments on Facebook and online games.  By making their APIs available to the merchants, their models are highly flexible and integrate seamlessly into the broader online experience.  They also aim to expand into other digital goods, but have yet to proven this model.

The issue is that the carriers take a big cut of the transactions, which makes the method of payment expensive compared to credit cards.  This clearly limits its attractiveness to merchants, who are likely to only accept Zong and Boku if a considerable proportion of their customers don’t have credit cards or are uncomfortable using them online. 

To get around this issue, Zong has added a credit card option, where instead of being charged directly to their phone bill, the customer is charged to their credit card.  This is a very similar model to PayPal and seems like the right approach to capture larger-ticket purchases outside Facebook and online games in the short term.

However, in the longer term, one has to question whether either of these players offer anything unique in terms of technology or business model to expand beyond the social networks and evolve as independent companies.  My bet would be that they are either bought by a larger payments player or pushed out of the market by better a technology.