IHT : The Evolution Of Micropayments

Wednesday, August 29, 2007

…Micropayments have arrived – just not in the way they were originally envisioned.  The 99 cents you pay for a song on iTunes is a micropayment.  So are the tiny amounts that some operators of small Web sites earn whenever someone clicks on the ads on their pages.  Some stock-photography companies sell pictures for as little as $1 each.  From the earliest days of the Web, the expectation was that a handful of companies would provide platforms – or perhaps a single ubiquitous platform – that would enable Web users to pay a penny, a dime or a dollar for a bit of content such as a newspaper article, a comic strip or a research report.  Simply clicking a link would complete the transaction.  Sellers of content – at the time, newspaper companies – were among the most interested in the idea as they looked for revenue that did not depend on advertising.  And the Web, rather than being a threat to their business, would allow them to expand their audience vastly.  But the problems proved insurmountable.  Many micropayments companies have shut down, been acquired or changed their business models over the years.  Among them: DigiCash, CyberCash, First Virtual Holdings and Peppercoin.  They used various systems, but in general users paid into accounts with their credit cards and then drew from those accounts.  The economic and technical challenges were enormous.  Consumers were reluctant to pay even a tenth of a cent for something they believed should be free.  “There is a certain amount of anxiety involved in any decision to buy, no matter how small,” Shirky [Clay Shirky, adjunct professor in New York University’s interactive telecommunications program] wrote in 2000.

It turns out, however, that consumers are more than willing to pay for certain types of content in certain situations.  Consumers “expect to pay for music and movies, but not so much for the printed word,” said George Peabody, an analyst with Mercator Advisory Group, which serves the payments industry.  “Closed loop” systems like iTunes are the most successful, Peabody said.  That’s where consumers have a continuing relationship with the merchant and usually pay with their credit cards.  “Open loop” systems, where the consumer pays many merchants through a single payments processor – the way micropayments were originally envisioned – are much less successful…..But cost is still a problem of closed-loop systems.  The fees for every transaction are too high to make tiny payments worthwhile for many online content sellers.  For most merchants, according to the report, purchases of less than $1.50 aren’t worth it.  One solution is to aggregate purchases, or group purchases over a period of time, and then process the payments in a single transaction.  That’s how iTunes works.  But credit card networks like Visa and MasterCard, which charge fees for transactions, “aren’t really happy with that idea,” said Peabody, because it means less money for them.  Visa and MasterCard have recently promoted their efforts to serve the “small payments” market – encouraging consumers to use cards for parking meters, for example.  But so far, they have stopped short of widely supporting aggregated-payment systems.  There are “operational challenges,” said Pam Zuercher, Visa’s vice president for product innovation.  Visa is evaluating such systems, she added.  Merchants can aggregate payments through another company, but that adds to costs and “implementation has been tough,” Peabody said.  Programs like AdSense from Google, which allows even the smallest Web publishers to have relevant ads placed on their sites, make micropayments unnecessary.  The program pays Web publishers what are often very small amounts each time a reader clicks on an ad.  Looked at another way, AdSense is based on micropayments.  “All the criteria are there,” said Compaine, the Northeastern University lecturer, “but the money isn’t coming from the end user; it’s coming from the advertisers.”

Reference : http://www.iht.com/articles/2007/08/27/business/micro.php

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