Silicon Valley's Hottest Innovation

Have phone, will shop

This mobile payments start-up is competing with credit cards and cash

Dawid Bilski

What do you use your phone for? Making calls, surfing the internet and playing games? What if you could pay the parking meter charge with it or buy a can of cola? No, not with near-field communications enabled devices — just add the tab to your monthly mobile bill, or deduct the amount from your prepaid minutes; no fumbling for the right coins or fishing out your credit card. Sounds almost too easy, doesn’t it? That’s what San Francisco-based Boku is planning to do next — simplify real-world purchases using your mobile.

The four-year-old start-up is already a leading player in the mobile payments space where it is most commonly used in online game and digital purchases. But CEO and co-founder Mark Britto has a greater vision for the company. “As mobile payments continue to evolve and become even more ubiquitous around the world, our vision is that everyone with a mobile phone will be able to transact using Boku with a wide variety of merchants across a huge range of industries.” That includes mundane things such as parking and, possibly, even vending machines.

Reaching out

When Britto first thought of the idea of Boku, he already had a couple of start-ups to his name. Given his sales and financial services background, and his conviction that mobile was “the wave of the future”, the 45-year-old got together with former colleagues Ron Hirson and Eric Ringewald, both of whom had also founded companies in the past, to create a company that would enable consumers to use their mobile plans as currency, since the cellphone is the one device most people in the world now have. (Hirson and Ringewald have since moved on from Boku.)

Investors such as Benchmark Capital, Index Ventures and Khosla Ventures came on board and with the first round of $13 million, Boku launched into business with a bang — it bought out two British mobile payment companies, Mobillcash and Paymo, and in one swoop became one of the largest players in the space, with 170 mobile carriers as partners in 53 countries. Since then, it has raised two more rounds of capital — total funding is now around $75 million — and Boku has only grown bigger, with over 260 mobile network operators in 68 countries, over 110 employees and an unconfirmed $195 million in revenue last year. “Boku’s significant scale, technology and management team impressed us right away,” says Ravi Viswanathan, general partner, NEA, which was part of a $35 million investment round in the company last year. 

Clicking on success

Why Boku’s prospects are bright

why Broku's prospects are brightThe first transactions were in the virtual world, where people could buy goods and coins in their online games and social networks, using Boku. Now, the field has expanded considerably: there’s been what Boku calls a “mammoth leap from virtual to digital goods” and the company is also taking baby steps into the physical world — last month, it rolled out a pilot project in six cities where you can pay for your parking with your mobile. If transactions are turning towards more sophisticated products, the method of operation remains disarmingly simple. When you’re ready to buy, all you do is click ‘mobile’ as the payment option on the screen and key in your mobile number. Reply ‘Y’ to confirmatory text that you receive instantly, and you’re done. 

Of course, there’s frenetic activity going on behind the scenes. Boku has to persuade merchants to sign up for this new payment method and then strike deals with mobile carriers to allow their subscribers to make online purchases using their phones. It’s been pretty successful so far: merchant partners include Facebook, Sony, Electronic Arts, Gameloft, Playspan and others, which expands its scope from the virtual world to the digital, allowing customers the purchase of games, movies, TV shows and music. The company also says it reaches a potential customer base of 3.7 billion people across the world. That includes close to 218 million in India, where Boku processes transactions for Airtel, Loop Mobile, MTNL and Uninor customers indirectly through a local aggregator. But it’s not an easy business.

Getting the numbers right

On the face of it, direct carrier billing appears to be a win-win for all stakeholders. For merchants, it’s a way to reach and monetise a larger customer base. For operators, it’s an additional revenue stream. And customers get accessibility and convenience, since they don’t need to set up bank accounts and link them with their phones or use their credit cards, and security, since they have to confirm every transaction. Trouble is, carrier billing is prohibitively expensive: against the 2-3% discount rate credit card companies charge merchants, mobile operators can charge anywhere from 10% to 40%. Their reasoning: minutes are a high-margin commodity and they want to safeguard those margins even when moving to a different product type. 

There are also several competitors in the mobile payments space, such as Zong (a PayPal company), BilltoMobile, mopay, PayOne, Fortumo and smscoin. And given that Boku’s USP is that it doesn’t require a bank product or prior authentication, it’s also competing against other modes of payment such as cash on delivery and prepaid cards. An attempt last year to expand into offline, in-store purchasing didn’t pan out as planned. The experiment, conducted jointly with Mastercard and Vodafone in the UK, involved customers setting up a debit card linked to their phones that could be charged against SMS or an NFC sticker on the back of the phone. There wasn’t enough motivation for customers to go to all that effort, and the project was shelved. 

But Britto and his team remain optimistic about Boku’s prospects. “In the next five years, I see carrier billing as a payment method becoming even more mainstream as Boku continues to expand into new verticals, moving from virtual goods to digital goods and ultimately, into physical goods and services,” he says. Industry experts share that optimism. Juniper Research expects content revenue billed via direct carrier billing will increase from $2.3 billion in 2012 to reach $13.1 billion in 2017, growing at an average 41.4% over the period. Adds NEA’s Viswanathan, “Boku needs to continue innovating and producing more use cases. It’s on a good growth trajectory in an exciting and disruptive market.”