PayPal hosted a partner event for retailers yesterday and began explaining how they’ll be able to implement its tools for in-store payments. The big reveal will happen next month at PayPal’s developer conference in San Francisco, but the company showed a glimpse of how it’s marshaling its resources. It’s important for PayPal to step up with a compelling offering because the mobile payments market is getting crowded with options like Square, Google Wallet and upcoming services like Isis from the cellular carriers and digital wallets from credit card companies.

Scott Thompson, president of PayPal, said in a blog post the company is looking to be a one-stop shop for merchants to help them address every part of the shopping lifecycle. OK, that’s a bit of jargon, but it means PayPal is going to help push out targeted advertising, help with in-store discovery and improve transactions with a handful of options.

In a video provided by PayPal, it shows how users will be able to walk into a store and check in to a location to unlock discounts and coupons. When a consumer goes to check out, he’ll be able to pay by entering his phone number. That leverages eBay’s purchase of Zong and its carrier billing capabilities, though it’s not clear how much easier or more convenient that is for consumers who pay with a credit card swipe. But it does open up the option to use carrier billing for physical goods in-store, which is good for people without a card, though the question of how large the transactions fees will be is important. Right now, carrier billing fees are still much higher than credit card fees, which might deter some merchants.

Users will also be able to scan items in-store and pay for them with PayPal without having to get in line. Customers can just flash their phone to an employee who will confirm the purchase. This is very much like AisleBuyer and it sounds like PayPal is looking to bring this to restaurant bills as well, something Thompson hinted at in his blog post. This is a cool step that makes sense for people who want to get in and out quickly.

Customers will be able to apparently pay ahead for coffee ahead of time and pick it up. Users will also be able to choose how they pay for something after the purchase with PayPal Credit, which seems to leverage eBay’s BillMeLater. All of this appears to work through PayPal’s mobile application and doesn’t seem to require any new investments by merchants. That’s a big concern for mobile payments built on near field communication, which requires many businesses to upgrade their point-of-sale terminals to handle contactless payments.

The new mobile payment tools don’t appear to include NFC payments. PayPal recently introduced person-to-person payments using NFC on Android devices, but the company told me at the time it was just focusing NFC on P2P payments. It sounds like PayPal is trying to work around the hardware constraints of NFC payments at point of sale.

Other shopping features on display included the ability to get push notifications for discounts that can be shared, which appears to build off eBay’s acquisition of WHERE. Consumers will also be able to scan an item in store and find inventory at other locations, something eBay got from its RedLaser and Milo pick-ups.

It’s unclear how soon all of this will come together and how many merchants will sign on. But providing a complete service for retailers and businesses to not only push out offers and discounts but also complete the transactions makes sense. Merchants can close the loop on transactions and understand how their marketing is doing. This is essentially what Google is trying to do with Google Wallet and Offers though it’s focusing primarily on facilitating targeted marketing, rather than taking a cut of transactions.

PayPal’s payment initiative is part of eBay’s broader commerce platform called X.commerce, which it’s building off the acquisition of Magento.

But there’s also a lot of questions to be answered. For instance, will consumers find this more convenient than a card swipe? Will PayPal make it any easier for people to set-up and manage accounts? Do all of these parts work well together in one solution? And how aggressive will PayPal be in selling this to merchants and consumers? I’ll be interested to hear more and I think PayPal can be a big contender if it gets its execution right. This is going to be a big market but it will require not only great tools but a lot of smart selling to consumers and merchants.

To hear more about mobile payments, check out our GigaOM Mobilize conference Sept. 26 and 27 in San Francisco.

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Zong, which was backed by Matrix Partners, Advent Venture Partners and Newbury Ventures, works with 250 carriers around the world to enable transactions that are placed on an operator bill. The systems is used to facilitate payments for digital goods and services in 45 countries.

The pickup signals how PayPal is bulking up to take on the mobile payments market. It recently said it expects to do $3 billion in mobile transactions this year and has hit 100 million accounts. It said it has more than 8 million customers making purchases on their mobile phones through PayPal, with $10 million in mobile payments a day.

“Commerce is changing. With mobile phones, we walk around with a mall in our pockets. PayPal helps to make money work better for customers in this new commerce reality — no matter how they want to pay or what device they’re using,” said Scott Thompson, president of PayPal. “We believe that Zong will strengthen this value by helping us reach the more than 4 billion people who have mobile phones, giving them more choice and security when they pay.”

EBay has been on a buying spree as it sharpens its mobile and local ambitions. It recently bought Magento to launch to a commerce platform. And it previously bought WHERE, GSI, RedLaser, Milo and others to help the company move into local commerce. It shows that e-commerce is increasingly turning into mobile commerce and that the big opportunity is in tying together online and offline actions and purchases. While online commerce is big, the larger market by far is real-world transactions. Those are increasingly influenced by smartphone-wielding consumers, and now the next step is to facilitate more transactions through the phone. It’s a market that Google, Square, the carriers and a host of others are vying for.

The purchase of Zong suggests that we’ll see more acquisitions and mergers as the mobile payments market heats up. Juniper Research just predicted that mobile payments will be a $670 billion market by 2015. Others competitors like Boku could be ripe for acquisitions as companies look to prepare for the boom in mobile payments. The Zong acquisition is expected to close in the third quarter of this year.

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That means developers will be able to include payments in many more applications, giving them another way to make money through in-app purchases. Zong has already enabled this on Android and HTML, but the expansion positions its well for other mobile, web and TV platforms. Developers just need to get a user’s mobile phone number and then they send them a text message confirming a purchase, which is billed to their mobile phone.

Zong has found success helping developers sell virtual goods. But over time, it sees mobile payments handling a lot more transactions, including, eventually, physical items. Gaming consoles make a lot of sense because developers are already selling virtual items in-game. By expanding to Flash, it enables a community of some 3 million developers to include more payment options. Unity is one of the top mobile game development platforms, known for providing developer tools for building 3-D games. And by expanding to interactive TV, Zong hopes it can be a payment option as TV apps emerge.

“Mobile payments are gaining traction on all platforms and devices because the convenience is unrivaled,” said Zong CEO David Marcus.  ”Zong’s new platform enables merchants and developers to integrate mobile payment in virtually any environment, be it on a PC, a mobile phone, a tablet or a television.”

Zong also announced that its one-touch payment system for Android is now ready for Android 3.0 Honeycomb tablets. As we’ve talked about, mobile payments through carrier billing is emerging as a viable option for many digital purchases. It offers a quick way to pay for items using an existing phone account, which is convenient for consumers. The problem has been higher fees associated with mobile payments, which have traditionally been through premium SMS. But as Zong and others enable more direct carrier billing, the fees are dropping below 20 percent, opening up the potential for transactions of more products.

It makes sense for Zong to expand and equip more developers with the tools for mobile payments. It will work more for digital goods right now because of the higher fees, compared to credit cards. But those fees will likely come down even more, opening the potential for more sales. But what opposition might Zong face from platform owners, who are increasingly looking to own the purchase process because they can take a cut of the transaction? That could be one thing that slows down mobile payment providers if it becomes tough or impossible to keep offering payments on some platforms.

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Fresh from PayPal’s renewed push this week to win over Internet and mobile payments, AT&T is rolling out a trial of direct carrier billing with Zong, BilltoMobile and Boku. The trial represents the biggest push to date in the U.S. for direct mobile billing, which allows a consumer to buy a product and have it added directly to their wireless bill. Verizon Wireless rolled out a partnership with BilltoMobile earlier this year, but now AT&T may help accelerate the adoption of direct billing by extending the service through some of the biggest names in mobile payments.

This could be a major turning point in helping accelerate the growth of mobile payments, a market that could be worth an estimated $633.4 billion by 2014. Consumers have already been able to pay by phone using services like Zong and Boku, but most of those transactions in the U.S. are through premium SMS (simple message services). Premium SMS billing has had limited appeal with merchants, however, because it often requires fees from the carriers of up to 50 percent of the total transaction.

Direct billing, which both Zong and Boku offer overseas, would bring those fees down to somewhere in the teens — well under 20 percent. Mobile-payment leaders are hoping that by connecting directly into an operator billing system to bring down the fees, they’ll be able to spur adoption among merchants, who may be attracted by the simplicity and relatively frictionless process of billing to a carrier, and also among consumers. A user would simply enter in their phone number when they want to purchase a product and then get a text message confirming the purchase before the transaction is posted to their wireless bill. It’s still more expensive than credit cards or the 5 percent plus 5 cents that PayPal said it will charge for digital goods this week. Mobile payment companies hope the ease of use will help trigger impulse transactions that might have been held up by the lack of a PayPal account or credit card.

“We’re not trying to cannibalize credit cards or an other payment options; it’s incremental,” said Jim Greenwell, CEO of BilltoMobile. “There’s no registration, no friction. Just input the phone number and get a text message confirmation. That’s as safe as you can get if you’re doing an impulse purchase.”

BilltoMobile, in partnership with its largest shareholder Danal Co. of South Korea, is among the leaders in direct carrier billing, which is much bigger in Asia and Europe than in North America. Greenwell said Danal has processed $3 billion since the company launched ten years ago. While most of the purchases are for online digital goods, 20 percent of transactions in South Korea are for non-digital products and services such as movie tickets and dating sites. Zong has also built a strong direct carrier billing business and said now 60 percent of its payment volume is processed through direct carrier integration.

It’s unclear how long the AT&T trial will take, but coupled with PayPal’s pledge to compete for mobile, we may be seeing the start of a mobile payments boom in the U.S. With so much money at stake, it’s surprising that it’s taken this long.

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Papaya Mobile, a Chinese social game maker with more than 3 million users, will support Zong’s one-click payment system, which enables users to buy virtual goods and currency and have their purchases added to their carrier bill. Papaya Mobile said developers who use its virtual currency system will also be able to utilize Billing Revolution for one-click credit card purchases.

The Zong announcement opens a new era for Android developers, who have been waiting for in-app purchase solutions. It’s been one of the reasons why some developers have been slow to write for Android because it was harder to monetize than the iPhone, which has had in-app purchases for more than a year.

This appears to be the first of several options on the way. We wrote back in June about Zong and Boku both trialing in-app payment purchase systems for Android. PayPay also announced earlier this year it would support in-app purchases for Android and was reportedly also in talks with Google to become an alternative payment system for Android Market. Combined with Google’s moves to expand the number of countries whose consumers can purchase Android Apps, and the pieces are falling into place for more dollars for Android developers.

Android Market has grown to 90,000 apps, with more than half of them free, which is sort of fitting for Android’s open source roots. But as Android looks to compete with the iPhone, RIM and come-back candidate Windows Phone 7, it needs to expand its developer base by accommodating app makers who want to make money from their apps. The deal with Zong is the first of many that should get Google to this goal.

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Post and thumbnail photos courtesy of Flickr user Marcin Wichary

What panelists disagreed upon was how to do it, and who would win. One key tension was around near-field communication, or NFC, the use of short-range wireless to exchange data that has never really gained traction. Geoff Iddison, who leads e-commerce and mobile for MasterCard, is a huge NFC proponent — which is kind of counterintuitive, considering NFC would replace physical credit cards. Iddison pointed to Nokia’s inclusion of NFC in all its phones, indications that Apple and Google are getting in on the game, and reports from NFC manufacturers that they have a backlog of orders. MasterCard has been actively working on NFC standards, he said, adding that mainstream use of the technology should happen within six to nine months. The benefit of NFC will be bringing dynamic redemption of coupons and security to the point of sale, things that credit cards can’t do, Iddison said.

Tapping a phone at the point of sale to pay for something is hardly more convenient than swiping a credit card, said Osama Bedier, the VP of platform, mobile and new ventures for PayPal. While NFC might be useful for things like checking into a social service a la Foursquare, one of the big benefits of mobile payments is getting around the physical point-of-sale transaction bottleneck, he said. So PayPal is working on ways to make money digital like allowing customers to deposit a check by taking a picture of it, bypassing banks.

Zong CEO David Marcus is also ambivalent about NFC, saying it’s already a good experience to buy a cup of coffee at Starbucks with a credit card. The opportunity is to innovate around customer relationship management, offers and other functions associated with payments, he said. Zong primarily offers mobile payments for virtual goods, but Marcus sees that as a sort of gateway drug to familiarize users with the mobile payment function online and then move that to the offline world.

Boku co-founder Ron Hirson nailed down a few actual predictions for when this all will happen. Remote mobile payments will grow this year. Next year, the competitive landscape will become clear with AT&T, T-Mobile, Discover and others’ “Project Mercury” mobile payments joint venture. And in 2012, he believes the market will consolidate. Borrowing the company names of the panelists on either side of him, Hirson proposed the combined entity might be called “MasterPaloku.”

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What’s cool about how both Zong and Boku do this is if you want to buy something within an app, you can make the full transaction without ever leaving the app or logging in, unlike on the iPhone platform, where Apple controls the process. Both companies have relationships with carriers across the globe to enable the (admittedly somewhat kludgy) process of charging mobile purchases using premium SMS.

The Boku purchase flow on Android

Both Boku and Zong are providing access to Android app developers by application. If you want to get started, go to http://www.boku.com/android or http://www.zong.com/android (they’re even in sync on the URLs!).

PayPal announced Android in-app billing in April. Android also allows developers to charge for their full apps using Google Checkout or direct billing on T-Mobile.

http://www.youtube.com/v/1870G-PRg8o&hl=en_US&fs=1&

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Most notably, Zong is Facebook’s mobile payment provider of choice, an enviable position given the popularity of virtual goods on that massive platform. Along with the funding, Matrix General Partner Dana Stalder, a former PayPal exec who led PayPal Mobile as well as the company’s developer platform, will join Zong’s board.

Competitor Boku raised $25 million in Series C funding from DAG Ventures, Benchmark Capital, Index Ventures and Khosla Ventures in January. And of course, there’s a certain eBay-owned company that scoffs at the notion of “PayPal killers.”

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The social network also said it’s rolling out a new feature that makes it easier for application developers to advertise to new users based on what applications they’ve used in the past. The same feature also lets developers advertise to current users as a way to encourage repeat visits to their applications.

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Despite the early-mover advantage PayPal has, and the presence of rival offerings from Internet giant Google, there are plenty of retailers who only accept credit cards for online purchases. That eliminates their ability to sell to those without credit and those concerned with security online. There are a few ways rival online payment services can find success against PayPal, wrote Jim Friedland, an analyst at Cowan & Co. earlier this week, citing a few examples: providing a neutral independent platform (PayPal is owned by web retailer eBay), extending credit to shoppers, and offering lower transaction fees.

And startups are still searching for other opportunities online. Just last week online bill pay startup eBillMe raised $12 million from Canaan Partners and New Celtic Ventures. The company offers vendors an alternative to credit cards by allowing shoppers to receive a bill at their online banking portal. This allows shoppers to avoid putting their personal information on the merchant’s site and allows for a cash, rather than credit, transaction.

But online sales are no longer limited to the PC. U.S. consumers are starting to use their mobile phones to make purchases, and this could be a growing market in the years to come. But there are challenges ahead. Bigger players such as PayPal and credit card companies already offer mobile-payment products, and the current U.S. market for mobile-pay services is still small.

Only 1.5 percent of U.S. consumers have ever used their mobile phones to make a payment, but almost 50 percent are aware that they can do so, according to a survey released this week. The research, commissioned by financial firm Mercatus, predicts that with better services and customer education the percentage of people who will make payments from their mobile phones is likely to grow in five years to 15 percent among those ages 18-30.

The growing use of smartphones and shopping sites optimized for mobiles require payment options that are easier than keying in a 16-digit credit card number. Startups such as angel-backed Billing Revolution and Zong, which launched earlier this month after raising more than $12 million in venture capital, are tackling the problem of buying on your mobile phone. Zong sends purchase information to carriers, who then bill the subscriber for their purchases, and Billing Revolution offers a mobile credit card processing platform. In April, Obopay scored $20 million for its money-transfer-via-mobile efforts.

While the opportunity in mobile is still just cresting the horizon, enterprise customers provide an immediate opportunity for startups seeking to streamline transactions. In March, two startups offering an online billing platform for companies delivering Software-as-a-Service (SaaS) products raised money. Zuora brought in $6.5 million in first round funding led by Benchmark Capital for its platform. Rival Vindicia announced a $5.6 million round led by DCM and Leader Ventures.

These companies aim to make it easier for SaaS vendors to track and bill all of their customers. They also help customers track and manage multiple software services they might be buying — a task akin to managing household bills from tens or even hundreds of service providers. Tim McAdam, a general partner with Trinity Ventures, says these sorts of billing platforms and ways to track payments still represent a big category and no one has mastered it yet.

With everyone searching for ways to make money online that don’t revolve around advertising, offering seamless but secure online payments will go a long way in enabling alternative business models.

This article also appeared on BusinessWeek.com

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But is simply providing an API to your telephony infrastructure enough to prompt the world to beat a path to your door? Don’t count on it.

To be sure, these APIs are necessary, particularly in the world of voice mashups. Voice mashups combine voice as well as data and applications across multiple systems to create a new, useful service.

One example of a voice mashup is Twitterfone, a free service that takes your voice, converts it to text and sends it to Twitter. MAXroam provides the overall infrastructure and inbound telephone numbers, Dial2Do does the speech-to-text part, and Zong provides some inbound SIP termination. APIs are needed all around — including on the voice side — to make this happen seamlessly.

Voice mashups can be useful in the business space. They can save a ton of money, and can help to enforce both business process quality and consistency. Imagine calling an airline and speaking to an interactive voice response (IVR) system. A certain percentage of calls could easily be handled by the IVR, which can ask all the correct questions to ensure customers have the right information.

There are, of course, times when speaking with a live human being is necessary. So imagine that all the data collected by the IVR about your call is then sent to a customer service representative so that by the time the two of you are connected, they already know exactly why you’re calling. The call could even be routed to a particular rep based on the reason you’re calling.

This is the power of a voice mashup — the ability to treat voice and data interchangeably. While large companies have been able to afford the cost of developing these custom voice mashups, tools and services are now becoming available that let you make your own.

Jaduka started out by providing a voice API to their telephony infrastructure, which is maintained by their parent company, NetworkIP. But Jaduka quickly discovered that while developers signed up for the API, few were actually using it to launch services. The company now offers customized voice-enabled applications to enterprise customers.

Jaduka’s customers currently use over 4 million minutes a month, a number that is trending upward. But that’s a drop in the bucket compared to the more than half a billion minutes a month their parent company serves.

Ifbyphone provides a number of voice-related small business services as well. They also offer a voice API, but it’s essentially driven by web forms, which makes it easy to integrate their telephony services into any web site without needing to be a programmer.

And while not everyone agrees that what Ifbyphone provides would qualify as a proper API, it does offer a range of useful services to small businesses, such as interactive voice response, intelligent call routing and voice broadcast. They are all designed to help small businesses interact directly with their customers in the most efficient manner possible.

Indeed, APIs enable some great solutions. But APIs aren’t solutions in and of themselves. Nor do they necessarily make money.

Consider Ribbit, a company whose business model is to make telephony available through APIs. The thinking is that they’ll make their money on revenue shares as developers create interesting applications.

If Jaduka’s experience is any indication, however, I don’t expect Ribbit will last too much longer without a complete change of strategy. Ribbit might have 4,000 developers, but how many of them are actually making applications on which Ribbit is able to share revenue? I don’t put a lot of stock in the rumor that BT has purchased Ribbit for $55 million.

Even where you’ve got more than just an API, such as the case with Jaduka and Ifbyphone, the prospects for making a pot of money just don’t seem that great. The combined revenue of Jaduka and parent company NetworkIP is thought to be north of $150 million a year. Assuming Jaduka’s share of minutes per month also translates into share of revenue, that suggests Jaduka is responsible for $1.2 million of the revenue. Ifbyphone would not disclose customer numbers or revenues.

I think the market has a lot of potential, but so far, that’s about it. Go ahead and make those telephony APIs available, but don’t expect the world to beat a path to your door, and don’t expect to make any money just by publishing APIs. Figure out who your customers are, find out what problems they have, and develop solutions to meet their needs. APIs can certainly be a part of the overall strategy, but relying on APIs alone to generate revenue is a pipe dream.

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