Mobile-Payments Startup Paymo Aims at Tough Micropayments Market

A mobile-payments startup called Paymo Inc., which launched this week with service in 39 countries, hopes to succeed in what has turned out to be a tough market: micropayments for digital content. The San Francisco-based company has more than 300 merchants approved to accept payments on its platform, says Terry Langlais, Paymo's director of marketing, though she will not say how many are live currently, nor will she say how many consumers are using Paymo. Meanwhile, service is slated to begin in the U.S. and 10 other countries by the end of the first quarter, Langlais says, to bring the total country roster to 50. Paymo, which is aimed at 16-to-30-year-olds armed with mobile phones but not necessarily with credit or debit cards, is hoping to reach sellers of games and other digital amusements that appeal to this demographic. To this end, it is hoping to become available on applications running on social networks. One merchant using the service, London-based social-games seller Playfish, appears as an application on the massive social-networking site Facebook, for example. “Seventy percent of the world's online population don't have credit cards but they do have mobile phones,” says Langlais. Paymo's average ticket, she says, is likely to fall under $15, with individual sales running as low as $1 or so and games subscriptions costing $10 or more. Paymo emerges at a time when processors have struggled finding a business case for micropayments, or transactions of about $5 or less. For example, two processors that specialized in this market left the business within the last two years. San Mateo, Calif.-based Bitpass Inc. folded in January 2007, shortly before Waltham, Mass.-based Peppercoin Inc. was acquired by Chockstone Inc., a Portland, Ore.-based gift card and loyalty-services provider that has not made use of Peppercoin's transaction engine. Peppercoin started out processing payments for digital content but soon shifted to physical-world goods. Last month, merchant-acquirer Heartland Payment Systems Inc. bought Chockstone (Digital Transactions News, Nov. 18). “The whole micropayments model has gone off the boil?people have given up on it,” notes Nick Holland, a senior analyst at Boston-based researcher Aite Group LLC who follows mobile payments. The primary problem confronted by micropayments processors is that sellers are often left with little or no margin on low-value goods after accounting for transaction fees. Paymo, which relies on billing by wireless network operators, avoids the costs of credit card interchange. But instead its merchants face carrier charges running from 20% up to 50% of the sale amount, depending on the market and on whether accounts are prepaid or must be billed, to handle transactions. On top of that, Paymo's merchant fee is 5% to 10%, depending on transaction volume. Despite these seemingly steep costs, Langlais says digital-goods merchants seeking a global market will want to use Paymo because of the range of services it provides. “We take care of currency conversions and country [and carrier] regulations,” she says. “We're adding customers to them, customers who couldn't previously purchase from them.” Langlais also points out that merchants are free to surcharge on transactions to recoup their costs. “As carriers get more comfortable with the concept, those fees will start going down,” she says. But analysts like Holland are skeptical, arguing that most content markets have limited potential. “Unless they piggyback on some kind of content craze [such as songs], they're in trouble,” he says. Consumers who want to use Paymo don't have to sign up for an account. When they're ready to buy, they click on the Paymo logo. This redirects them to a server that asks them to choose the country they live in and to enter a mobile-phone number. Almost instantly, they receive a text message stating the product they are trying to buy and the price and asking them to verify the transaction by texting “confirm” back to the server. Once the server receives the text, users are immediately returned to the merchant site. In the background, Paymo works with more than a dozen companies called mobile aggregators to manage messaging to and from the mobile networks. Aggregators act like switching stations for text messages. Paymo's chief executive, Paul McGuire, co-founded one of these aggregators, Sunnyvale, Calif.-based mBlox Inc., before helping to start Paymo nearly two years ago.