Zong has seen tremendous growth over the past year from when the company debuted its mobile payments service from the TechCrunch50 demo pit. Zong’s model of billing micropayments to your cell phone bill caught our eye and sure enough, less than one year later, the startup is picking up serious traction, including a partnership with Facebook to power the purchase of the social network’s new currency. And in 2009 alone, Zong has processed mobile payments for over 10 million unique users worldwide. Today, Zong is launching a new feature that not only expands its payment services, but could make a lasting impact on the micropayments field.

Zong is launching Zong+, a extension of the mobile payment startup which lets users bill microtransactions to credit, debit and prepaid cards. We have an exclusive demo of Zong+ by the startup’s founder and CEO, David Marcus, below. So in addition to making online purchases through their cell phone bill, Zong customers will also be able to link any type of payment card to their Zong account through a one-time entry process and continue to purchase goods by simply entering their mobile number and confirming the security transaction code sent to their phone.

So if I wanted to buy credits on Facebook via Zong’s payment service, I would now have the option to enroll and pay via Zong+. Once I create and account with all of my credit card info, Zong will automatically bill my card. But each time I want to make a purchase via Zong+, I will only need to enter my mobile number. Zong will then send me a transaction code via SMS, and I will need to enter that code to complete the transaction.

Zong is also incentivizing the use of Zong+ by offering users merchant credits (a cost which Zong swallows) if they purchase a certain amount. In fact, Zong will double whatever amount of credits your buy, if you sign up for Zong+. And there are benefits to using Zong+ (besides the incentives). Zong allows you to make larger transactions, in the range of $9.99 or higher, via Zong+.

Zong’s other method of payments, via your mobile phone carrier account, works in a similar fashion. You enter your mobile phone number to pay for a virtual good and then you get a text message on your phone with a pin number. Once you enter that pin number, the charge will be reflected in your cell phone bill.

But this cell phone carrier model has proven to have some complications, which may be why Zong is looking to expand its offerings to different models. Zong and other mobile payments platforms, such as rival Boku, face high fees that mobile carriers charge to the payment systems (which are inadvertently passed on to the consumer via the merchant), creating a potential obstacle in the business model.

Zong recently launched a subscription feature to mitigate this issue and potentially produce lower fees for the end users. Marcus told me in September that many U.S. and European carriers that Zong works with are contemplating reducing these fees by building large-scale models to process payments that would in turn lessen the pressure on the mobile payments startups as well as the applications and social networks using the systems.

But this new system will undoubtedly open new channels for Zong and perhaps even attract additional merchants to adopt its payment systems. Merchants who may have previously been frustrated with the high fees from carrier rates, will now find themselves able to enjoy greater transaction completion at the typical card rates. And as Zong+ is able to increase the amount of the tendered transaction, the startup could even give PayPal a run for its money.

One of the first merchants that will be utilizing Zong+ is social network hi5. The social network’s director of business development, Rajat Kongovi, says that because of Zong+’s flexibility and frictionless model, hi5 will be able to offer a wider variety of virtual goods at more varied price points and give users more freedom of choice. Of course, it’s important to point out that the mobile payments method via cell phone carrier has gained serious traction internationally, where many virtual goods buyers don’t have a credit or debit card but do have a cell phone. So Zong+ may not be take off in some regions, but the service will undoubtedly offer users a more varied and dead, simple way of using your credit card for purchases.

So when will Zong and Zong+ hit Facebook more extensively? Marcus told us that while Zong is currently being used on a limited number of apps to buy currency at the moment, the mobile payments system will be rolled out to a greater user base “soon.” I think that Zong+ only enhances the service and definitely gives it a leg up over competitors on the mobile payments space as well as competitors in the micropayments space such as PlaySpan and Live Gamer. Zong has become a powerful hybrd with the launch of Zong+. Watch your back, PayPal.

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Over the past year, we’ve written frequently about mobile payments startups and the potential future of this technology. Rivals Zong and Boku both offer essentially the same service—the ability to make a payment for a micro-transactions via your mobile phone. And both companies have been growing steadily, with Boku making acquisitions and expanding internationally and Zong picking up traction via a partnership with Facebook.

Today, Zong is upping the ante by offering a subscription service, which lets Zong customers to extend a recurring bill-to-mobile option of up to $9.99 a month. Basically, Zong users can now charge a flat-rate for multiple purchases instead of the existing pay-as-you go model.

Zong says that the subscription feature is initially launching in photo and video sharing site Photobucket and OMGPOP, a real-time social gaming platform. The advantage for Zong’s users is that each time they want to make a mobile payment for a transaction, they won’t have to re-enter their info. The monthly membership fee will appear as a line item on the user’s monthly mobile phone bill. Currently, the feature is only available for U.S.-based mobile users but will soon expand its subscription service to customers in Europe, Canada and Australia.

As we’ve written in the past, Boku, Zong and other mobile payments platforms face high fees that mobile carriers charge to the payment systems (which are then passed on to the consumer), creating a potential obstacle in the business model. The subscription option is an interesting alternative that could lower fees for the end users. Plus, David Marcus, CEO of Zong, told me earlier this month that many U.S. and European carriers that Zong works with are contemplating reducing these fees by building large-scale models to process payments that would in turn lessen the pressure on the mobile payments startups as well as the applications and social networks using the systems.

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Mobile payments for micro-transactions on the web are catching wind and there are several players in the space vying for the top spot in the field. Today, Boku, a recently launched mobile payments conglomorate of sorts, is announcing a slew of new customer acquisitions as well as details of its international expansion.

Boku, which acquired competitors Paymo and Mobillcash and raised $13 million in Series A funding back in June, doesn’t require users to have a credit card or bank account to make a micropayment. Users enter their cell phone number on the site, reply to a text message and then all virtual charges are automatically charged to the user’s monthly cell phone bill. As we’ve said in the past, it’s ridiculously easy.

Because of its acquisition of Paymo and Mobillcash, systems that had significant international reach, BOKU gained a strong base of users around the world. Today’s announcement adds availability of the payment service in Finland, Indonesia, Slovenia and Taiwan, bringing the company’s global reach to 56 countries. Boku’s marketing chief Ron Hirson tell us that they are seeing a strong foothold in Southeast Asia and will be expanding to the Phillipines within a few weeks.

Boku has also added a number of online gaming sites, social network applications and the social networks themselves over the past few months, including Playfish, HitGrab and Gambit. Boku says that currently they have over 1000 customers that use its mobile payments platform. So far, Boku has powered 6.5 million online mobile transactions.

But competition is stiff in this field and one competitor in particular, Zong, has also witnessed strong growth over the past few months. Most recently, Zong was chosen to test a pilot program for mobile payments for Facebook’s virtual currency, Credits. While Zong may not have had the organic international base that Boku has (Zong is available in 19 countries), this partnership is sure to help Zong’s global reach thanks to Facebook’s ever growing presence and popularity around the world. Zong also reached a big milestone a few weeks after processing mobile payments for 10 million unique users in 2009.

However, the potential obstacle to Boku, Zong and other mobile payments platforms are the high fees that mobile carriers charge to the payment systems (which are then passed on to the consumer). Boku told us on June that different cell phone carriers charge varying fees that range between 10% to 50% of the purchase price, which is a hefty amount in transaction fees.

But if mobile carriers lower their fees, mobile payments have the potential to be the go-to way to pay for microtransactions. David Marcus, CEO of Zong, says that many U.S. and European carriers that Zong works with are contemplating reducing these fees by building large-scale models to process payments that would in turn lessen the pressure on startups like Zong and Boku as well as the applications and social networks using the systems. Marcus feels confident that if this does happen, the sky is the limit with mobile payments.

Regardless, as shown by growth witnessed by both Boku and Zong, mobile payments are catching on and attracting the attention of some of technology’s giants, like Facebook. And of course the rivalry and ensuing competition between the two companies could continue to spur further innovation and growth. It will certainly be fascinating to see which startup comes out ahead.

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While advertising revenues have been disappointingly low for most applications on Facebook and other social networks, another option app developers are increasingly turning towards is micropayments for virtual goods or premium features. Both Facebook and MySpace have admitted that they are working on their own payment systems, and Apple could play a role as well since it already has a payment system in place for iPhone apps (although even Apple is running into some bumps).

While the bigger players are fiddling with their payment system plans, nimbler startups are moving in to fill the gap. One of these is Spare Change Payments, which is trying to become the Paypal of micropayments. A year after launch, more than 700 apps across Facebook, MySpace, and Bebo use Spare Change for micropayments. Spare Change is processing $2.5 million a month in micropayments, which is a $30 million annual run-rate. The apps that are having the most success with micropayments are games and ones that sell virtual goods.

Over a million people have already signed up for Spare Change. Hundreds of thousands of those use it actively on a monthly basis. And it is not all nickels and dimes. Last year, 250 people spent more than $1,000 apiece on digital goods through Spare Change.

Now, the company is making it easier for consumers to pay through Spare Change with a new payment widget that pops up in each app instead of sending people off to a separate payments page. You can choose between several payment methods including a credit card, Paypal, Spare Change credits, or through your mobile phone bill. Once you buy a minimum of $2 worth of Spare Change credits, you can use them as currency for apps that charge as little as $0.10 at a time. It is also introducing a PIN ID for users who choose to tie their accounts to a credit card so that they can use the same PIN across any app that uses Spare Change. The experience is designed to be familiar to anyone who has ever downloaded an app from the iTunes store. You enter your PIN, and then go back to the app. The company accepts payments from 190 different countries.

The first app to launch with the new widget is Mind Games on Facebook. It requires developers to add only three lines of code. Spare Change will roll it out to MySpace and Bebo soon. Spare Change is designed specifically for social networks. Customer support is done via the direct messaging systems inside each network, and the company analyzes the social graph to sniff out fraud. For instance, it looks at how many friends someone has and other factors to assign risk scores to individual consumers. Spare Change has been bootsrapped with only about $500,000 in seed funding, and two of the co-founders (Mark Rose and Simon Ru) previously worked at Paypal.

For micropyaments, Spare Change is much cheaper than Paypal, which offers its own micropayment option. Paypal charges 5 percent plus $0.05 for transactions less than $12, but only for premium accounts that qualify (otherwise, for most small accounts, it is the normal rate of 2.9 percent plus $0.30) . In contrast, Spare Change takes a processing fee of 8 percent for each transaction. CEO Lex Bayer points out that while Paypal has a micropayments offering, it does not seem to be a huge priority. “PayPal is not well designed for micropayments or digital goods,” he says. The logic driving Paypal is to encourage larger transactions because that is where Paypal makes more money.

A bigger concern for him should be if Facebook, MySpace, or Apple ever decide to jump into the micropayments game. Meanwhile, he has an opportunity to stake out a piece of the micropayments market and fight it out with the other startups eying the same prize. For instance, Zuora recently launched subscription billing for Facebook apps, Zong and Mobilecash are trying to tap into mobile payments (although the fees are still too high). Whoever figures it out first will be collecting more than just nickels and dimes.

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Global mobile payments network Paymo and social network hi5 have partnered to let members in 24 countries use their mobile phones to purchase hi5 Coins, hi5’s virtual currency. Countries where Paymo will be made available to hi5 users include the U.S., Canada, France, Hong Kong, Thailand, Russia and Colombia.

Paymo’s mobile payment system doesn’t require users to have a credit card or bank account. Users enter their cell phone number on the site, reply to a Paymo text message and then all virtual charges on hi5 are automatically charged to the user’s monthly cell phone bill. It’s pretty easy and similar to UK mobile payments service, Zong. Paymo says that over 75 percent of the online community worldwide does not have a credit card but 3 billion consumers own a mobile phone. With that in mind, the company is hoping their system, which avoids credit cards or bank accounts, will take off.

Unlike some of its competitors, such as Zong and Mobillcash, whose systems are limited to certain regional areas, Paymo can be accessed in 45 markets around the globe, enabling mobile payments in Europe, North and South America, the Middle East, Africa and Asia. Paymo recently expanded service in the U.S. after striking deals with mobile carriers AT&T, T-Mobile and Virgin Mobile to allow users to make online purchases using their phone.

Mobile payment systems are gaining traction from social networks, but the issue of costly fees charged by mobile carriers to the payment systems (which are then passed on to the consumer) remains a serious problem. Paymo says that it typically charges users a transaction fee of 10% of the purchase price. The company adds that different cell phone carriers charge varying fees but most are in a range of 20% to 40% of the purchase price, which is a pretty large amount in transaction fees. As we said in our earlier analysis, this could pose a significant roadblock to these types of services, which channel user payments through mobile carriers. It appears that it would be hard to sustain these fees in the long term when transaction charges could be drastically decreased if payment networks accepted credit card or bank account payments. Still, with such a vast coverage area of the world, Paymo appears to be ahead of some of the more regional services. Paymo says that Facebook, which has a widespread international following, would be the next partner it hopes to land in the social network space.

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The problem is that legacy transactions – specifically scams that give users a “free” ring tone with the fine print mentioning a monthly charge as high as $20 – have brought in so much cash to the carriers that they’ve gotten used to taking 50% or more of the total payment in fees. For the market to grow to encompass legitimate transactions, those fees have to drop dramatically. For that to happen, the social networks need to get involved directly in carrier negotiations.

Two companies, both headquartered in Europe, are already targeting mobile payments for apps – Mobillcash (UK) and Zong (Switzerland).

When you buy a virtual shotgun on Mobwars, for example (and they are selling a lot of them, up to $1 million per month) you have to pay real cash. You can choose to pay via a number of services (Facebook doesn’t offer a direct payment solution yet), including either Mobillcash or Zong.

If you choose Zong, you enter your phone number on the site, get a text message with a four digit code, enter the code on the site and you’re done. It’s by far the easiest way to charge a transaction online outside of Amazon one-click.

Zong’s fees aren’t transparent, but Mobillcash’s are. Mobillcash has a clunkier interface (you have to choose your carrier and go through extra steps), but they show what their fees are because to get, say, $1 into the Facebook app you have to pay $1.50 on most carriers. That implies a 33% transaction cost, almost all of which goes to the carrier. Many of Mobillcash’s payments are way beyond 33%. Zong says they pay an average of a 40% transaction fee to U.S. carriers.

Those transaction fees are severely limiting the size of the market. Lots of merchants and application developers would love to take mobile payments, but paying 40% or more of the transaction to the carriers is a non-starter.

Zong argues that the fees are actually much lower than they seem because conversion rates (when chance that money will change hands once a payment button is pressed) are more than 50%. If that seems low, compare it to PayPal conversion rates that are reported to be a fraction of that.

Regardless, though, any merchant selling an item with actual marginal cost (virtual items are by definition free to produce, so higher payment fees can be tolerated) aren’t going to allow mobile payments via SMS. If the carriers were to lower those fees (or if they were forced to by market forces or the government), a very rich ecosystem could blossom, and the carriers would get the majority of the value created.

What Happens If Carriers Ignore the Opportunity

Chances are the carriers won’t lower their exorbitant payment fees anytime soon. What I’m guessing will happen is that services like Zong and MobillCash, as they add valuable users who like to pay via SMS, will simply offer to move those users to credit card payments. Users still pay by just entering in their phone number and then typing in a 4 digit code they receive via SMS, but the charge would go to their credit card instead of their phone. The difference in fees is so large that customers can be offered a very large incentive to simply store their credit card and use that instead of having the charge go to their phone bill. And checking out is still much, much simpler than typing in your name, address and credit card details.

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The way it works is that you enter your mobile phone number to pay for something on the Web, maybe a virtual cowboy hat for 5 cents. Then you get a test message on your phone with a pin number. If you enter that pin number in a widget on the Web, the charge will be reflected in your cell phone bill.

Using mobile phones to bypas the issues that micro-payments still have on the Web is a smart move. Nobody wants to use a credit card for small purchases of a few penies or dimes, because the finance charges are too high. Whether anyone wants to pay even a few pennies for a Facebook app is a whole different matter.

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In the videos, a naked puppet interviews people (or other puppets) to talk about “social media,” making fun of Israel’s interview style. The puppet is naked as a spoof on Israel’s book, Naked Conversations, about the importance of blogging for companies.

The new sponsor, Zong, a Switzerland-based mobile platform company, is providing “significant funding” to sponsor the parody Shel Israel show created by Feldman.

This will be a serious ego blow to Israel, who has been mocked by Feldman and bloggers around the quality of the show and has publicly attacked Feldman over the parody.

The fact that the parody, but not the official show, is now receiving financial support from third parties is a reflection of the entertainment value of the two shows. Not only do some people find the parody very funny, Feldman has also landed fairly well known entrepreneurs in his interviews. Now that Feldman is making money from the show, it’s probably here to stay, much to the real Israel’s chagrin.

As I’ve disclosed before, Feldman and Israel are both friends of mine. I hosted the launch party for Shel’s book, Naked Conversations at my house in February 2006, and Feldman is staying at my house this week.

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