PayPal today announced that it has signed a definitive agreement to acquire Zong, the mobile carrier-billing leader, for approximately $240 million in cash.  This is a strategic move for PayPal, designed to deepen its leadership in eCommerce payments and further define it as a major player in mobile payments.

When I left PayPal in late 2008 to become a venture capitalist, I focused much of my attention on finding innovative companies in the financial services space.  Zong is the first investment I made in the category.  At the time, it was being spun out of a mobile content company and looking for a Series A investor to help it become a mobile payment leader.  It was clear to me then that Zong was building a payment network that was highly complementary to what I had helped build at PayPal and would be strategically valuable in shaping the future of mCommerce.

Synergies Start with Digital Goods

Mobile Carrier Billed payments systems, where Zong is the clear leader, have almost solely existed in the digital/virtual goods world. Most of the world’s largest digital good platforms derive 15-50% of their payment volume through mobile carrier billing systems and more than 70% when purchases are initiated on a handset.  These systems reduce friction in the payment flow (i.e. fewer clicks) and expand addressable markets to the billions of consumers with mobile phones, but no bank card.  This incremental volume, while at a higher cost of payment, has become foundational for most digital good merchants.

While PayPal has done a nice job of serving digital good merchants, the addition of a mobile payment option will significantly increase PayPal’s relevance in this important category.

Securing Leadership in mCommerce Payments

One of the most notable trends emerging from the rise of smartphones is the dramatic shift of eCommerce volume from the web browser to the mobile browser/mobile app.  Gilt Groupe has publically stated that more than 10% of its explosive gross merchandise sales are now coming through mobile devices.  Similarly, its has been rumored that nearly 20% of Groupon’s gross merchandise sales are originated on mobile devices.  PayPal, in fact, just a few weeks ago announced that it expected $3B of its total payment volume to occur on mobile devices in 2011.  Given these early data points, I would guess that more than 25% of eCommerce will occur on mobile devices by 2015, strongly ahead of what many analysts are predicting.

As mobile commerce soars, the friction that the standard checkout flow entails will simply break down.  Entering Bill-To, Ship-To and Payment Info on a mobile device doesn’t work.  Consumers will need a seamless process and merchants will require checkouts that offer equal or better conversion rates than they’ve experienced on the web.  Herein lies an opportunity for PayPal to create a single universal checkout for the mobile web.  A wallet in the cloud.  With the addition of Zong to the PayPal family of services, PayPal increases its set of assets that aid in delivering the best mCommerce checkout experience.  Zong brings PayPal millions of authenticated mobile phones to its user base, carrier billing as a form of payment in the wallet, existing mobile payment checkout APIs for Android and Mobile Web, and a team that has been 100% focused on building best of breed mobile payment experiences for the last several years.

Scale Advantages That Benefit Everyone

Many entrepreneurs I meet that are building new payments related businesses underestimate the complexity they have in front of them.  At its core, payment businesses require expertise in risk management, payment operations (connections to hundreds of banks, mobile carriers and intermediaries) and consumer servicing.  I’ve often said that PayPal is actually a “risk management company” more than it is a “payments company”.

While Zong has executed well in all of these areas and recruited top talent with deep domain expertise, the combination with PayPal will improve the quality and cost of service for Zong’s consumers, merchants and mobile carrier partners.

Overall, I think this is a very smart acquisition by the PayPal team.  Hats off to PayPal President Scott Thompson for having the strategic conviction.  It will also mark an exciting new chapter for the Zong team.  I will miss my nearly daily interaction with the Zong team, but couldn’t be happier that I could help bring these teams together and I look forward to watching PayPal continue its incredible success record.

Official PayPal Blog post on the transaction is here.