The problem with micropayments

By February 10, 2009Business models, Content

Clay Shirky has a great post this morning: Why Small Payments Won’t Save Publishers in which he argues eloquently that micropayments don’t work except in very specific circumstance.  The full version is very much worth a read.  The key arguments are as below.

  • We don’t like being nickle and dimed – Clay describes the dislike as “both general and strong”, saying that people prefer both subscription and subsidised services.  I’ve always thought that control and value for money are the reasons behind the dislike.  With micropayments systems you never quite know how much you will spend and whether the next article you will click on is worth the 10p you will be charged for it.
  • It has been tried many times in the past by publishers and hasn’t worked – see these critiques, Szabo 1996; Shirky 2000, 2003; Odlyzko 2003 and this earlier post from Clay for some examples of failure
  • Micropayments systems that have worked have all shared a common feature – the user has no choice.  iPod owners have to get their music from iTunes, Cyworld customes can’t go anywhere else for their virtual goods etc.  This is different to news (and hints that the future for iTunes might not be rosy).
  • These days sharing content is as important as reading it, as Clay says “content moving from friend to friend through the social network …. matters so much, in fact, that we will routinely prefer a shareable
    amateur source to a professional source that requires us to keep the
    content a secret on pain of lawsuit. (Wikipedia’s historical advantage
    over Britannica in one sentence.)”
  • martinowen

    I think there is a way in which micropayment will work. I am trying to build an intelligent product in which the functions provided lead to a long term relationship with the user. It is a service where intelligence of what the user does with the service/product enriches the experience of the service/product. We both crowd source and personalise. This goes beyond what passing stuff from person to person can offer – the customer buys an offer that is customised and significantly it is a serial buy – there is something new to buy tomorrow or next week that is appropriate to them.
    The revenue model clearly has to address and follow some degree of “free” – however it is a big jump from “free” to subscription.
    If you are offering an unfamiliar, disruptive service there needs to be some customer-side choice in the degree of consumption – either multiple entry points subscription like LoveFilm – which works because each DVD is a big quantifiable chunk and you have some idea of how many chunks you need in a month or you go to pay-per-view micropayment. I think in a completely new activity, like the one I am building I need to offer a payment learning curve before customers decide what level of subscription they need.

    I would say that the time for micropayment had yet to come, because the kinds of two-way service offering that are adaptive to long term customer needs have yet to appear on the market in any significant way.

  • Until recently I ran innovation for RBS WorldPay (by some measures the biggest online payments business in the world). Here's my two cents:

    – I disagree that the demand for micropayments is small. The demand is there: digital content is a massively expanding $ market. the problem is the 'friction' in the payment process – both in terms of user experience (even PayPal isn't great for that, SMS is only adequate and cards are terrible) and in terms of financial costs…
    – Micropayments (defined as sub-three-USD amounts) are currently crippled by the financial costs imposed by banks. If online payments are card-funded (they usually are) then all card payments *have* to be authorised and received by banks which take an absolute *minimum* of ten cents for processing the transaction, and typically up to a dollar (I won't go into the vagaries of pricing here).
    – Cards are dominant because they offer instant authorisation – everyone knows immediately that they're going to get paid – this is essential online
    – Only if we build up a cash balance (or possibly a debt) in a non-card scheme can we hope to achieve instant authorisation at a cost acceptable to the merchant/content-provider.
    – The only widely used possibilities for this are PayPal (cash balance – but PayPal choose to keep this expensive to merchants even for micropayments) and mobile phone billing of premium SMS (either a cash balance on PAYG or a debt on contract, underwritten by the very high margins of MNOs on premium SMS billing).
    – Micropayments is unbelievably difficult to innovate in. If you choose to take, say, five cents of margin on each micropayment, you need to 20m transactions just to take $1m in margin. Whatever anyone says, 20m transactions in any of your first three years *is a lot* if you are a startup and you also need to get payers to sign up to a new scheme. And you're probably (and rightly) very heavily regulated (eg around money laundering) which adds cost and restricts who you can hire. And you can't accept anything like the level of downtime which other tech startups would consider acceptable: probably no more than 60 minutes *per year* so you need to spend much more on UAT, redundancy and technologists generally. And you can never, ever make a mistake performing settlement.
    – Here's where I think micropayment innovation will come: it will *be* phase two of federated online identity management. I am unwilling to maintain lots of cash balances all over the internet. However I may be willing to maintain one small cash balance which i can use wherever I use my (eg) Facebook Connect login. I can be incentivised to do this by receiving discounts (funded by the savings of merchants because they aren't paying bank charges on card transactions). In this situation I may upload $20, make 20 x $1 payments but only generate banking costs one time (when I upload).
    – This is *not*, sadly, an opportunity for great entrepreneurship. The solution I suggest requires the volume of users which only an established (massive) online identitiy provider (as Facebook and Gmail are both becoming) can deliver – and they will need to build payment platforms which are scalable and ultra-reliable from day one.
    – There have long been rumours that Facebook is working on a payments platform (so they should) and Google Checkout is of course an excellent starting point. So it may not be long before those big businesses solve this problem. But it won't be entrepreneurs who solve it.

  • Tks George – these are problems indeed, although I think some of the other issues I mentioned are also a factor.

    Over the last couple of days the hippy in me has been wondering if a gift based micropayments system might just work. Radiohead famously tried something similar and I gave $10 to a random WordPress developer earlier this evening 🙂

  • Until recently I ran innovation for RBS WorldPay (by some measures the biggest online payments business in the world). Here’s my two cents:

    – I disagree that the demand for micropayments is small. The demand *is* there (digital content is a massively expanding $ market). The problem is the ‘friction’ in the payment process, both in terms of user experience (even PayPal isn’t great for UI, premium SMS is only adequate and cards are terrible) and in terms of financial costs…
    – Micropayments (perhaps defined as sub-three-USD amounts) are currently crippled by the financial costs imposed by banks. If online payments are card-funded (they usually are) then all card payments *have* to be authorised and received by banks which take an absolute *minimum* of ten cents for processing the transaction, and typically up to a dollar (I won’t go into the vagaries of pricing here).
    – Cards are dominant because they offer instant authorisation – everyone knows immediately that they’re going to get paid – this is essential online
    – Only if we build up a cash balance (or possibly a debt) in a non-card scheme can we hope to achieve instant authorisation at a cost acceptable to the merchant/content-provider.
    – The only widely used possibilities for this are PayPal (cash balance) and mobile phone billing of premium SMS (either a cash balance on PAYG or a debt on contract, underwritten by the very high margins of MNOs on premium SMS billing). Both are crazily expensive at the moment, often a third of the value of the micropayment.
    – Micropayments is unbelievably difficult to innovate in. If you choose to take, say, five cents of margin on each micropayment, you need to 20m transactions just to take $1m in margin. Whatever anyone says, 20m transactions in any of your first three years *is a lot* if you are a startup and you also need to get payers to sign up to a new scheme. And you’re probably (and rightly) very heavily regulated (eg around money laundering) which adds cost and restricts who you can hire. And you can’t accept anything like the level of downtime which other tech startups would consider acceptable: probably no more than 60 minutes *per year* so you need to spend much more on UAT, redundancy and technologists generally. And you can never, ever make a mistake performing settlement.
    – Here’s where I think micropayment innovation will come: it will *be* phase two of federated online identity management. I am unwilling to maintain lots of cash balances all over the internet. However I may be willing to maintain one small cash balance which i can use wherever I use my (eg) Facebook Connect login. I can be incentivised to do this by receiving discounts (funded by the savings of merchants because they aren’t paying bank charges on card transactions). In this situation I may upload $20, make 20 x $1 payments but only generate banking costs one time (when I upload).
    – This is *not*, sadly, an opportunity for entrepreneurship. The solution I suggest requires the volume of users which only an established (massive) online identitiy provider (as Facebook and Gmail are both becoming) can deliver – and then they will need to build payment platforms which are scalable and ultra-reliable from day one.
    – There have long been rumours that Facebook is working on a payments platform (so they should) and Google Checkout is of course an excellent starting point. So it may not be long before those big businesses solve this problem. But it won’t be entrepreneurs who solve it.

  • I read it very carefully and found that micropayments are not a good way because paid content has already been tried and has failed, and it is completely counter to the nature of the Internet.

  • I read it very carefully and found that micropayments are not a good way because paid content has already been tried and has failed, and it is completely counter to the nature of the Internet.

  • Hi
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