The E-commerce arm of Walt Disney Co.'s ABC network wanted to cash in on a hot new video game it was promoting called Alias Underground. After lining up an ad sponsor, it started offering the game on a promotional basis as a free download. It quickly became a hit, and ABC.com concluded it could generate cash by offering new versions of the game every few months, which users could download on a subscription basis.
There was just one hitch: The production, selling, and customer-support costs would have exceeded revenue generated by the subscriptions. But it would be profitable if Disney could get a service provider to process the sales of each monthly download, saving Disney from paying high fees on each small-value transaction.
The answer was Webpay International AG's Click&Buy software, which lets merchants sell low-priced merchandise online without the hassles of dealing with the high fees charged by credit-card companies. When consumers want to download a version of Alias Underground, they either log on to Click&Buy or, if they're not already signed up, fill out a quick registration form. Then, ABC.com gives them the choice of either buying the game or buying a subscription to have future versions of the game delivered on a regular basis. Click&Buy sends consumers a lump-sum invoice once a month for the subscription plus purchases made at other Click&Buy merchants.
Since ABC.com began offering the Click&Buy option about a year ago, revenue has more than offset production and customer-support costs, turning a potential money-losing venture into a winner. "ABC had transaction engines capable of processing online payments, but when we looked at the financials of charging users a few dollars per download, we realized the only way we could do it was through Click& Buy," ABC.com VP Harry Lin says.
Demand for so-called micropayment systems is growing quickly. Some 14 million Americans made digital-content purchases of $2 or less in 2004, up from 10 million in 2003, according to market-research firm Ipsos-Insight. That's prompting merchants to turn to micropayment-system providers such as BitPass, Peppercoin, and Webpay.
PayPal, the payments subsidiary of eBay Inc., has built a micropayment system for Apple Computer's iTunes that allows customers to download and start listening to music while they're still browsing for other songs. "With digital music, customers want to consume the product while they're shopping," says Peter Ashley, director of merchant services at PayPal.
One approach to micropayments is the pay-as-you-go model, in which customers are charged each time they make a purchase. However, to get around high card-transaction fees, some micropayment service providers aggregate small payments from a single customer into one bulk payment in order to save on transaction fees. "For orders from the same customer, we can turn three or four $1.95 orders into one order," says Bob Nix, Peppercoin's VP of engineering.
Peppercoin's software approves and processes card transactions right at the merchant's site, avoiding the need to send each transaction through the card network. "Our algorithms allow us to provide the bank with the same assurance without moving the transaction back and forth," Nix says.
Peppercoin allows merchants to set parameters such as the amount of time to wait before aggregating transactions. For example, a merchant might choose to wait a week before submitting a customer's transaction.
Visa and MasterCard take too much of transactions, Mashboxx CEO Wayne Rosso says.
However, aggregation makes sense only if a merchant has repeat business from a single customer. "You need to have that customer come back regularly," says Jeff Fogel, VP of sales at Moneris Solutions, a joint venture of Royal Bank of Canada and Bank of Montreal serving 350,000 merchants.