People have been talking about how to do micropayments for ages it seems, but mostly for economic reasons micropayments have yet to take off. It?s clearly too expensive from a transactional standpoint to charge one penny on your credit card and then have the retailer be reimbursed from the credit card company for that transaction. Even if you could drive the cost of the original transaction to nearly zero, you still have the added expense of reimbursing the seller a possibly negligible amount of money. Unless the seller is doing very significant volumes of fairly expensive micropayment transactions, a micropayment system isn?t worth the cost.
Let?s attack this problem the Web 2.0 way. Let?s turn the whole situation on its head and violate some of the prime tenants of any financial system. Let?s throw out payment guarantees. Now before you click off to the next Ebaums World video, hear me out. These are micropayments; so dropping a small percentage might just be the cost of business. Let me explain.
Imagine we are selling downloadable merchandise such as accesses to privileged content on a website. Let?s say the price per unit is something like a penny or two. You sign up for a micropayment account where you initially deposit $20. With a key in hand from the micropayment company, you go to the seller?s website and purchase items. The seller, standing behind his product, ?loans? it to you for the promise of payment. At the end of the month, the billing happens. If you don?t do anything, the micropayments you owe are transferred from your account to the seller?s account. After the payments owed to the seller exceed some reasonable threshold ($50) the micropayment company actually pays the seller.
However if you choose, you can login to the micropayment company?s website and deny payment on any or all of your micropayments. You are presented with a list of everything you ?owe?, all of which are checked and you may uncheck them as you want, for whatever reason. If you don?t login and uncheck them, the payments are automatically deducted from your account and credited to the seller.
Obviously it?s going to be inconvenient to login to the micropayment website every month and unclick several hundred payments, so most users will just let the payments flow through. The seller understands that the consumer can deny payment whenever he wants so they don?t expect to see 100% of what they are owed. The micropayment company essentially has interest free loans on all the users and merchants of the system so they work like a bank and make money by investing the capital tied up in their systems. The user must cough up $20 to establish the account in the first place, so they are not dead weight to the micropayment company. Customers arriving with micropayment keys are valid opportunities to make money to the seller though they may not close on all business.
There will always be some idiot that decides never to pay however this is a known risk of doing business so the cost to the seller is built into the price. The desire to create a product that the consumer is happy enough with after the transaction to not deny their payment will incent the seller to make a higher quality product. The consumer will feel in control with a system like this and so be much more willing to make micropayments because he knows he can rescind it if he really wants to.
A dollar buys 100 purchases at one penny apiece so the buyer is probably going to purchase frequently and eventually loose track of everything they have bought. The seller is, of course, going to like the ?purchase easily? mindset. As the actual transaction to the seller?s account happens possibly weeks after the buyer gets the product, the buyer is probably going to forget if the product was actually worth the micropayment made and hence forget to login and deny it.
What this system relies on is the inherent forgetfulness of the buyer on a transaction so small it?s equivalent to the pennies on the floor they don?t even bend down to pick up. But as we know from watching Office Space, those pennies can add up and make a sizeable business. Given hundreds of thousands of buyers using a micropayment system like this, the numbers become very viable for the seller and micropayment company as well.
If, for example, a website like The Wall Street Journal were to offer access to full articles for either a micropayment fee or it?s established monthly subscription fee, you could see how this system could be phased in with existing infrastructure. Over time, I would argue, the micropayment system would far outstrip profits seen from monthly subscriptions because few people actually read every article of every edition of The Wall Street Journal. I would think most people just want to get the article they are interested in right that second and forget the commitment involved with setting up a monthly subscription and canceling it when it isn?t of use anymore. If the user has ready access to his micropayment key, (possibly because the browser remembers it somehow) they are going to pop that in and buy the article for next to nothing.
Of course, the only way this works is if the product has next to no production cost on a per unit basis. Web pages fit this bill. They are so cheap to produce that most are served out for free by the millions per second. Rather than focusing on the task of minimizing a traditional credit card system to the point where micropayments make sense, remove the absolute one to one accountability and make the system one of ?best effort? instead. The customer will perceive more control, so they will love it. The seller, who is faced with the prospect of making nothing from micropayments, will want to join a micropayment company for free and accept micropayments for the cost of a few lost deals. The micropayment company stands to get major cash injection from customers as they sign them up.
There is no reason an already established player such as PayPal can?t open a micropayment division. The only danger is if several companies gear up and begin competing against each other with incompatible micropayment systems. The right way to mitigate this is to establish an open standard out of the starting gate so that payment keys can be routed to their proper micropayment company and sellers could accept any micropayment key that conforms to the standard.
Obviously there are allot of issues to iron out in an open standard. But could this be one of those projects where all the industry needs to see the light is an established standard and maybe a live reference implementation that uses fake money that business could use to realize the benefits? Are there unforeseen holes in the system that I haven?t addressed here? What do you think about such a system? Do you think people would embrace a no guarantee paradigm? Do you have any better ideas? Leave a comment.