Mobile Micropayments to Target U.S. Teenagers

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An alternative payments start-up says it is planning to offer an online micropayment system for cell phone users in the United States.

Paymo Inc. introduced its service four months ago, and it is now running in 39 countries. The San Francisco company said last week that it plans to bring the service to the United States in the next several weeks for customers of AT&T Inc. and Verizon Wireless and expects to have more carriers on board by the end of January.

Paymo's service lets people charge e-commerce transactions to their cell phone bills.

Terry Langlais, Paymo's director of marketing, said her company's payment method is aimed at consumers as young as 13, who lack payment cards.

"Thirteen- to 20-year-olds might not have credit cards, but they do have cell phones," she said. "We're a payment network that allows consumers to charge digital goods … to their cell phone bill."

The idea of charging e-commerce payments to a phone bill is not new, but it has had a rocky history. Carriers have largely been reluctant to let third parties put charges on their customers' phone bills, but this reluctance has faded in recent years, Ms. Langlais said.

"I think in the last two years, things have really changed quite a bit," she said.

Still, she said, her company's prospective merchant base is restricted by the terms set by carriers. The carriers get 30% to 50% of each transaction; Paymo gets 10%; and the merchant gets the rest.

Carriers ask for such a big cut because they risk having to reverse transactions, as when a teenager runs up a bill and the parent calls up asking to undo the charges, Ms. Langlais said. "Large surcharges" are "insurance that doesn't happen all the time," she said.

Though such fees may be steep compared to the interchange rates paid on cards, they are appropriate for digital goods, Ms. Langlais said. Merchants "don't mind taking that hit from the carrier's charge because there is no cost of goods sold," she said; virtual products cost little to nothing to replicate. "You can't buy a Ferrari with your mobile phone."

Other carrier rules and government regulations typically restrict Paymo transactions to $10 or less, and Ms. Langlais said she expects the average transaction to be less than five dollars.

Since her company is hoping to attract consumers without credit and debit cards, its biggest competitor in the United States would be prepaid cards, she said. Against prepaid, Paymo's biggest selling point is its speed in funding a transaction.

"If you have a prepaid card, how do you prepay it? You have to go purchase the prepaid card," she said. In contrast, Paymo requires no enrollment by the consumer, who can make purchases by typing in his or her phone number. The only extra step is responding to a confirmation text message, which is sent to the phone for authentication purposes.

Paymo also said last week that it had hired Jon Prideaux, a former Visa Inc. executive, to be a senior adviser.

Another company, Inc., has taken a similar approach to e-commerce with landline phones. The DeSoto, Tex., company started its service last year with AT&T landline customers in five states. It said its fees were comparable to what merchants pay for credit card acceptance, though consumers were limited to $60 a month in spending.

Since then Etelcharge has faced problems with growth; its Nov. 14 earnings announcement stated that it has taken in $135,000 in revenue from its inception to Sept. 30 but had a cumulative net loss of $17.5 million in the same period.

"In order to continue in business we must continue to raise capital, as revenue from operations will be insufficient in the short term to meet our working capital needs," the company said in a press release.

Another contender in this space is Valista Ltd., formerly iPin, which was co-founded by Paymo's chief technology officer, Alexandre Gonthier, to put e-commerce payments on Internet service provider bills. Today, it also handles payments for cell phone and video game content.

Bruce Cundiff, a director of payments research and consulting at Javelin Strategy and Research in Pleasanton, Calif., said, "Digital content purchases certainly have taken off, but the landscape is littered with failed micropayment solution attempts."

Paymo has a strong executive team, he said (Mr. Cundiff used to work with Mr. Gonthier at iPin), but he was only "lukewarm" to the idea because of the limitations on its potential market. "I don't know if the core business of digital content is enough to sustain a business, even now," he said.

If Paymo can somehow make itself a payment method for microtransactions in the physical world, such as for parking fees and transit fares, it would have a wider potential market, he said. But first it needs to attract its target online audience, which may be difficult if the carriers have not agreed to help promote Paymo.

"They've worked their way into the ecosystem of Verizon and AT&T. That's all well and good, that's fine, but at the same time: How are they going to make consumers aware and how are they going to gain merchant acceptance?" Mr. Cundiff said. "Those are the ever-important things when starting a new payment system, and they have to happen simultaneously, and there has to be some level of value that the consumer sees immediately, that the merchant sees immediately."

For e-commerce, much of the challenge in making payments — even micropayments — has been eliminated. Apple Inc., for example, stores payment information to make song purchases easier for consumers, then aggregates the purchases to keep its own costs low.

"There's still a need" for a system like Paymo's, Mr. Cundiff said; "it's just that the solutions that have been created to fill that need didn't fit the bill if they haven't dislodged existing payment mechanisms … The card networks still reign; and I'll throw PayPal in that, too," he said.

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