I propose that we need truly micropayments for a variety of digital objects and services. Before I talk about why this is needed and how I think it can be accomplished, I need to define what I believe a micropayment is and an example use case of why it could be huge.

What Are Micropayments?

For me, micropayments are truly small. I'm not talking about a buck or two, either. I'm talking about so small that PayPal's 30 cent charge plus their percentage makes PayPal impossible to use for this style of micropayments. I'm talking about 1 or 2 cents. Literally. The point here is that it's a price so low that even the poorest among us (those that own computers or mobile phones, at least) will consider it basically free. After all, if you're walking down the street, chances are you can find a penny or two to pay for it within minutes.

You might wonder what the use of that is for. Read on...

Uses For Micropayments

This came to me when I was talking to a friend about ad-based applications for mobile. Ad supported apps are now popular on the iPhone platform, as well as for platforms like Android, where the carrier is less involved with creating a wall to keep the great apps out.

With a really well targeted ad spot, a developer might be able to pull in $5 to $10 CPM -- that is, $5 for every 1,000 impressions. A great social web site might get 20-50 cents per CPM. (Sources: Search for facebook CPM rates, and general rates -- I forget where I've read the rates, but it's also not too far off what I've personally seen.)

What if, instead, I could charge a user 2 cents for an application? I'm not talking about the next Microsoft Office, either. I'm talking about the simple apps that are either free or ad-supported already. Even developers need to make a living, regardless of how generous they are with their time. Anyway, if I could charge 2 cents that would be the equivalent of a $20 CPM rate if each app was used just once or $2 if the app was used 10 times. That doesn't sound like much usage, but it's definitely more than I've used each of the apps on my iPhone. It's also a higher than most ad rates for social or broadly targeted sites.

This could be extended to a subscription model, too. Instead of charging 2 cents for a one-time download, what if I could charge a cent per month, or 12 cents per year? An application used just twice a month would end up with an equivalent CPM rate of $10. And without the intrusion of the ads.

I don't find $1 applications to be particularly expensive. I know, however, that if I start buying them all the time, the cost will add up quickly. However, at a penny or two, even buying a lot of applications, this won't add up fast enough for me to worry about. However, I would be giving more developers money. Right now I don't simply because, eventually, it will add up to too much money.

Enabling True Micropayments

There's a catch with micropayments currently. They can't be done for just anyone at this level. If PayPal didn't have a 30 cent charge for each transaction, it would work great. Even using the postal service to mail a penny or two in ends up costing even more -- 42 cents here in the US.

So, how can micropayments work, then? The primary way is through a credit-based system on a given platform. Take the XBox 360, for instance. On it, you can purchase credits. The credits are worth pretty close to a US penny a piece. Digital items could, theoretically, be priced at just one or two credits a piece. However, I have not seen anything priced this low. Additionally, a user can't just buy a couple of credits: I think they have to buy at least $5 worth at a time. This is OK for some, but if I just wanted to spend a couple of pennies on a particular object, it no longer works as it's no longer at the level of "free" -- there is now some sort of minimum in place.

Direct micropayments do exist, though. Every month I have a 4 cent charge on one of my credit cards. This is for my usage with Amazon S3 (that charge gets me hundreds of megabytes of storage). Amazon DevPay doesn't allow this directly, either -- they also have a 30 cent transaction charge. They can do it, though. Why can't I?

Understanding the Downside

Once enabled, though, there are still downsides. The first is well known and well understood: volume. Just like making money with ads, you must have eyeballs looking at your content and now paying for it. And that's the second downside: folks still have to pull out their credit card (or something) to make the payment. This is still not as easy as it is at the gas station or grocery store where no signature is needed -- just a quick swipe and go. It is still a hurdle to go through that ad-supported services don't have.

Missing Solutions

You might be wondering why there aren't any solutions for this? Well, there are -- or, at least, there were. I searched around for some and found a few sites that have changed focus and others that are just completely gone now. Without diving deeply in to each of their offerings, the sites I looked at were no where near as simple to use as Amazon or PayPal or they were just competitors with similar fee structures.

Getting Close

You might also be wondering about PayPal's micropayments. They do offer a solution that almost gets there. However, they are targeting under $10, not under 5 cents. Their fee is 5% plus 5 cents for this. Normally, they charge 3% plus 30 cents. This means most of your transactions will need to fall under $12 or it will actually be more expensive. And even at 10 cents, 5-10x what I'm talking about, the fee is effectively over 50%. Even if that was acceptable, it would have to be done under a different account or you risk losing a lot of earnings to a single receipt in the hundreds of dollars charged at 5%.

[UPDATE: The next two paragraphs added shortly after publishing.]

Amazon Flexible Payment Service comes much closer, but it has a limitation that doesn't appear to be controllable by the seller. They do have a tiered rate chart with different charges for over $10, under $10, and under 5 cents. For transactions sourced from a bank account, the fee is 2% plus 5 cents for any amount. For transactions sourced from a credit card, the fee is 2.9% plus 30 cents (same as PayPal) for amounts over $10 and 5% plus 5 cents for amounts under $10 (same as PayPal micropayments). So, none of these payment methods will work.

However, if the payment is sourced from Amazon Payments balance that the user already has, the fees are finally acceptable: 1.5% plus 1 cent for over 5 cents and up or 20% for amounts below 5 cents, though it has a minimum of 0.25 cents -- which would be 50% of a half a penny charge. This could actually work if you can enforce payments coming only with an Amazon Payments balance transfer. If not, you'd ultimately lose money. (They also provide other services that help aggregate these payments from a single user -- but that doesn't really help if you only ever collect a penny from each user.) Finally, Amazon Flexible Payment Service is in limited beta and so there is no guarantee of being able to use it just yet.

Getting Over the Hurdle

First, if you haven't figured out what the hurdle is, it's actually quite simple: it's the credit card companies. They have processing fees. If they didn't, I suspect PayPal would either charge just a percentage or have a sliding scale where payments over the $12 mark would be charged at the normal rates. That's how they must be making money, though -- through the occasional payment above $12 but still at the micropayment rate of 5%.

Obopay is a mobile payment solution that gets around the credit cards and, indeed, there is absolutely no charge for receiving money of any size. To the receiver. The sender has to pay 25 cents. That's just too large and the fee is put on the wrong side, in my opinion. That said, I could charge a penny and it would be up to the sender to decide if that's worth a 2500% transaction tax (or more if they also use SMS and get charged by their carrier for the SMS).

This means that the solution can't be through credit cards. At least it can't be there yet. We've already talked about platform based credits. That can work, but still has some problems. Some of the now-defunct solutions tried to tack fees on to other bills, such as your phone bill. Like obopay mentioned above, these also didn't go as low as I'm talking about.

Finding the Solution

We've seen that there doesn't appear to be a current solution that can work at the 1 to 5 cent level on an individual basis. A large enough company can create their own platform and credit based system. I, as an individual or small company, can't, though. That means the only way, currently, to charge a small fee for some content is to charge an advertiser on behalf of the customer, and combine all of the charges in to a single payment to the seller. This has to change.

I suspect the ultimate solution might need to be in a scaled currency. Call it a microbuck. Let PayPal (or whomever) charge 5% plus 0.05 microcents per transaction. Then I can charge a single microbuck for an object. Then, a microbuck has to be defined as a single US penny for it to work at the level I'm talking about.

(Amusingly enough, that's almost a single Japanese Yen. Except that instead of charging 5% plus 0.05 JPY, PayPal charges 5% plus 7 JPY.)

Can this work? Maybe. See my Amazon charges for evidence that a large company may want something like this. I suspect that, for now, Amazon loses money on these small payments and could use a solution. If not, give the little guy access to that level of payment. Please. :)

What do you think? Silly idea that's already failed? Or something needed to have an option at the level of ad revenue but without the ads? Or is content that's only worth two cents forever required to monetize through ads?

(And, for the record, this is just my two cents. ;) )

Posted by Shane on December 16, 2008 3:15 PM | Permalink