Verizon announces BilltoMobile as a mobile payments provider

Verizon has agreed to use BilltoMobile, a service with roots in South Korea, as a mobile payments provider. The move that could help jumpstart the use of low-cost mobile payments in the United States.

The announcement was supposed to be announced at the CTIA mobile trade show in Las Vegas this week, but the companies moved up the announcement to today after VentureBeat inquired about it. The relationship between Verizon and BilltoMobile is a big reason that BilltoMobile has become a valuable company. Last month, we reported that Korea-based Danal bought back a controlling stake in its U.S. mobile payments subsidiary, BilltoMobile, in a transaction that valued San Jose, Calif.-based BilltoMobile at a little less than $100 million.

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Ownership of the subsidiary was previously divided among founders, employees, the parent firm Danal, and Morgenthaler Ventures. Danal, which pioneered mobile payments in Korea, wanted to regain control of the subsidiary because the alliance between BilltoMobile and Verizon made the subsidiary more valuable.

If BilltoMobile succeeds with its ambitious plan of lowering the cost of mobile payments, then the market for mobile payments might finally take off in the U.S., where it has stalled for years because of the high fees of mobile carriers.

BilltoMobile was founded in 2006. Entrepreneur Paul Kim spun the company out from Danal in May 2007. At the time, Morgenthaler Ventures and Danal invested $9.5 million in the spinout. The basic idea was to create a mobile payment service that sidestepped the big fees mobile carriers charge online merchants.

Typically, in the U.S. and Europe, mobile carriers charge as much as 50 percent of a transaction to complete a purchase that is billed to a user’s mobile phone bill. In South Korea and much of Asia, such fees are much lower, and that’s why mobile payments have flourished there.

Other mobile payment companies such as Zong and Boku bill their transactions to short codes (such as the 90999 text message code that users can message to make a donation to Haiti survivors via the Red Cross, or the voting codes popularized by American Idol). The problem is that there are high costs built into the shortcode system. There are lots of text-message aggregators, and the system is unreliable, with very little transparency.

Mobile payments are supposed to be an easy way to pay for things. If you buy a tractor in the FarmVille social game on Facebook, you can either enter a hard-to-remember 16-digit credit card number, or you can use a mobile payments service to simply pay via a mobile phone number. The service sends you a text message, and you verify you made the purchase.

The ease of such purchases  encourages people to spend more money than they might otherwise. But sometimes the user will make an error in the reply and send the wrong number. Those transactions are not processed, but the online merchant that has provided the service to the user never learns why it failed.

Going direct to carriers can cut some of these costs and improve transparency. BilltoMobile rival Zong uses a direct relationship where it can; about 80 percent of its deals are direct with carriers, but it acknowledges that every company’s goal in the industry is to set up direct relationships with big U.S. carriers. Zong says it has the technical capability, but not the deals in place, to work directly with U.S. carriers.

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BilltoMobile aims to charge fees of less than 20 percent of a transaction. It does so by bypassing the short codes to connect directly with mobile carrier billing systems and their subscriber databases. It took a couple of years for BilltoMobile to create this system and to strike deals with U.S. carriers. But it can accurately measure whether a particular transaction has gone through and offer verification to all involved. Instead of just using a PIN number, BilltoMobile can require users to enter a ZIP code or other information that the carrier has and that BilltoMobile has access to.  The system promises to be more secure and reliable than other methods. BilltoMobile is expected to announce a deal with a big U.S. carrier soon, and the service will launch at that time.

In the meantime, Danal has seen its fortunes rise in Asia, where it introduced the service and signed up partners such as online game companies NCSoft and Nexon and social network Cyworld. Today, more than 50 percent of all digital content purchased in Korea is billed to a mobile phone account.

Last year, Danal’s stock price jumped roughly 15-fold in South Korea’s stock market. Part of the reason for the stock appreciation was BilltoMobile’s announcement that it had signed an unnamed U.S. mobile carrier. Danal found that the fate of its stock price lay in the hands of the subsidiary in which it had only a minority interest. So it found itself all but forced to buy back a controlling interest in BilltoMobile.

Competitors are plentiful and include Obopay, PayPal, Zong, Boku among others. BilltoMobile has about 20 employees. Carriers might not like the fact that the service cuts the fees they get. But the theory is that the volume of transactions will grow, as they have in South Korea, and will result in higher overall mobile payment revenues and more online commerce.

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