Zong Finds Merchants Pay Higher Mobile Payment Fees If Sales Rise

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The mobile payments provider Zong Inc. says that merchants are increasingly willing to pay higher transaction fees in exchange for higher sales.

Zong's platform lets organizations such as Facebook Inc., Sony Online Entertainment and Sulake Corp.'s Habbo Hotel that sell digital goods to offer their customers the option to pay using their mobile phone number, Hill Ferguson, Zong's vice president of product and marketing, said in an interview.

Of the 500 Zong users who responded to a company survey in November, 34% said they chose the mobile payment option because it is "fast and easy," while 23% said they chose the option because it is "fun."

"Consumers will always choose the option that is easier for them," said Todd Ablowitz, president of Double Diamond Group LLC. "If consumers are buying something online or on their mobile phone, the fewer keys they have to press, the more likely they are to complete the purchase."

Carriers set the transaction fees merchants pay, which typically are much higher than those for debit and credit card transactions.

The fees vary by carrier but usually are between 10% and 40% of the sale, Ferguson said. By comparison, merchants may pay up to 3% of the sale to accept credit and debit cards, Ablowitz said.

Many merchants, however, are willing to accept the higher transaction fees if it means more sales, especially if they sell goods with a high margin, such as virtual currency, music videos and other digital content, Ferguson said. The profit margin for merchants from sales of digital goods may be as high as 80%, he said.

Consumers do not need to register or set up an account because the service is set up to give consumers a "frictionless experience," Ferguson said.

Consumers shopping on a participating merchant's website select the "Zong" option at checkout and enter their mobile phone number when prompted. Zong then sends the consumer a test message with a four-digit PIN to enter when prompted during checkout. If the consumer proceeds with the checkout and enters the proper code, Zong determines that the consumer is legitimate, Ferguson said.

The purchase amount shows up on a consumer's next mobile phone bill, or the mobile phone carrier immediately deducts the sale amount if the consumer has a prepaid phone account, he said.

The mobile phone carriers set the spending limits for direct carrier billing, Ferguson said, and these limits differ from country to country. In the U.S., most consumers may spend up to $100 a month and up to $10 per transaction, while carriers in other countries such as Switzerland set no payment caps, he said.

Most carriers will not set rates below 10% for digital goods, but they may set rates in the single digits for merchants selling physical goods because their margins are tighter, Ferguson said.

Zong makes a single-digit percentage of each sale, and the telecommunication operator receives the rest, Ferguson said, declining to provide exact amounts.

Despite some merchants' willingness to pay higher transaction fees, others remain hesitant to support direct carrier billing because of the slower settlement time and possible spending caps, Ablowitz said.

Moreover, unless the consumer has a prepaid phone account, merchants and carriers do not get paid until after the consumer pays, which may take a few weeks, Ablowitz said. Many merchants may not want to wait that long, he said.

Roughly 220 carriers participate in Zong's network, including AT&T Inc., Verizon Wireless, Vodafone, Orange and O2. In November Zong announced an agreement with the Philippines mobile carriers Globe Telecom and Smart Communications.

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