eBay Buys Zong For $240 Million In Cash To Boost PayPal’s Mobile Payments Technology

eBay has acquired mobile payments company Zong for $240 million in cash. The transaction is expected to close in the third quarter of 2011.

Zong has been one of the pioneers in the mobile payments space, adding a compelling new way for consumers to pay for items online. Simply put, it lets you pay for things, particularly virtual goods online, via direct billing to your mobile phone. Consumers simply enter their mobile phone numbers in the payments process.

When a user wants to purchase an item, he can enters his cell phone number on a site, the site sends a text message to the phone, the user confirms the transaction with a short reply, and all the charges show up on his phone bill. Zong powers this entire transaction. The company has partnered with over 250 carriers worldwide to offer the technology to mobile phone users.

eBay says that Zong will add ‘complementary technology and talent’ to its PayPal division, giving consumers more ways to pay for virtual goods and products online. Scott Thompson, president of PayPal, said this in a release: “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…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.”

Zong, which was founded in 2008 by entrepreneur David Marcus, has raised a total of $27.5 million in funding. Matrix Partners’ Dana Stalder, who was the former CTO of PayPal, is on Zong’s board of directors.

Stalder tells us that he’s spent a lot of time looking at financial services technology, and Zong was one of his first investments in the venture world. “It was clear to me at the time that we had space to build something big here,” he explains. In the digital goods category, carrier billed payments account for 50 percent of payment volume. It’s a frictionless payments mechanism, he says, and this makes it ideal for digital goods. For digital good providers, carrier billing provides the highest conversions and Zong helps PayPal shore up this category.

Last year, Zong was spun off from its European parent, Echovox, and Marcus moved to the U.S. to run the fast growing company, which landed a pretty big deal last year with Facebook to become a an early mobile payment provider for Facebook Credits. Other partners include IMVU, Sulake (makers of Habbo Hotel), Big Fish Games, Sony Online Entertainment, Zynga, Playdom (owned by Disney), and Bigpoint. The company also launched Zong+, an extension of the mobile payment startup which lets users bill microtransactions to credit, debit and prepaid cards (instead of their phones).

Marcus wrote in a post on the company’s site: I am so excited by the unique combination of PayPal’s 8 million merchants, brand power, risk management expertise, and financial stability, with Zong’s Carrier DNA, its largest direct carrier payments network, product innovation, and best-in-class carrier billing technology. This industry first is going to allow us to scale what we’ve built over the course of the past 3 years (and then some) in a massive way!

Zong faces competition from Boku, which was also rumored to be the target of an acquisition as well.

eBay and PayPal have been on a bit of an acquisition spree, so it’s not surprising that the e-commerce giant made another big buy. PayPal is facing competition from fast growing startups like Square and even Google, and the payments company needs to add compelling technologies to help draw merchants, consumers and local businesses. As we’ve seen in the past few months, PayPalacquired local payments and advertising company Where, and shelled out cash for mobile payments company Fig Card as well.

Zong provides a seamless payments product that could help improve conversions for online merchants and digital goods (PayPal processed $3.4 billion in transactions for digital goods in 2010), and in the end, frictionless online payments is PayPal’s bread and butter. In fact, PayPal justupped estimates of the amount of mobile payments transactions using the technology this year; doubling the estimate to $3 billion in mobile total payments volume (TPV) in 2011.

PayPal’s CTO Patrick Dupuis tells us the acquisition is an expansion of vision fo enabling commerce anytime anywhere, adding another payments source for PayPal’s 9 million merchants. Marcus tells us that PayPal’s ability to scale and accelerate with Zong’s built made it an appealing new home.

Another draw for PayPal—Zong has pretty massive international reach, offering mobile payments in in 21 languages and 45 countries. The service’s technology is especially appealing in countries where mobile phone usage is high (as opposed to internet connectivity). Zong should also help PayPal expand its footprint in developing countries.

In terms of integration, PayPal and Zong arent’s saying much as to how Zong will be branded in the future. Marcus says he will be staying on at PayPal.

Unsurprisingly, Dupuis says that Marcus and his team will have a critical role in PayPal’s future transformation in the payments business. Stalder echoes this sentiment, explaining that PayPal, with Zong in hand, is in a better position to create the digital wallet of the future.