Online Micro-Payments: Has The Time Come?
In the past 12 months, micro-payments have once again become all the rage. A number of ventures have positioned themselves to profit from micro-payments - e.g., high-volume, low-value transactions (less than US$5). These companies include BitPass, FirstGate, Payloadz, Paypal, Paystone Technologies, Peppercoin, and Yaga.
The end of the free lunch era, the growing adoption of broadband connections, the proliferation of digital content, the spread of mom-and-pop sellers, and the music industry-s urgent need to transform the way it monetizes its content are all elements contributing to the revival of micro-payments.
In contrast to the late 1990s, the debate no longer revolves around consumers' demand for digital content and micro-payments. Consumers are sending clear signs that they are ready to pay for digital content, and that they value using micro-payments, as shown by the success of Apple-s iTunes store. Digital content sales are going up. So are micro-payment transactions.
Though it is clear that consumers are increasingly eager to purchase digital content via micro-payments, whether micro-payment ventures like Bitpass or Peppercoin can make a living out of that trend is less obvious.
Micro-payment ventures are keen to point out that they have designed solutions that will circumvent the major problem with micro-payments so far: the cost of processing. Across the board, their solutions offer to aggregate multiple card transactions into fewer transactions in order to avoid repeatedly paying the fixed 15-cent per-transaction fee. This fee has traditionally erased the profit margin on a micro-transaction. Vendors emphasize that the careful design of their products will help to unravel a multi-billion-dollar market just as eBay and Paypal did.
The biggest challenge that micro-payment ventures are facing has little to do, however, with the design of their products, or with merchants' or consumers' appetite for micro-payments. The main challenge rather lies with their market positioning.
In the short to mid-term, selling to large merchants might prove very tough. Since building micro-payment processing software is a no-brainer for a large merchant, the big guys are likely to stick for a while to homegrown micro-payment mechanisms (as Apple has done). Also, a major distributor with a huge catalogue is in no hurry to leverage the network effect created by a unique payment mechanism spanning multiple merchants. Finally, merchants are likely to continue encouraging subscriptions. Rather than having to depend entirely on micro-payments, merchants will continue encouraging subscriptions while making the option of micro-payments available to accommodate those reluctant to subscribe. Therefore, the top end of the market, where the volume of micro-payments is greatest, is unlikely to be a favorable landing spot for micro-payment vendors.
Barred from the top end of the market, micro-payment ventures such as Bitpass and Peppercoin will be forced to focus on smaller merchants. The good news is that the catalogue of digital content put out by small businesses and individuals is expanding, making a number of small merchants likely to embrace their solutions. The bad news is that their catalogues are unlikely to translate easily into brisk sales. Brand, reputation, and concentration of offering are critical factors behind the creation of mass markets. Alas, the digital content of small merchants lacks all of the above. In that respect, mom-and-pop digital content sellers are unlikely to enjoy the market opportunities of hard-goods sellers in the online auction space. True, eBay and Paypal have each made a fortune by facilitating the trade of goods by small businesses. But these goods, while often secondhand, are branded products. In comparison, mom-and-pop digital content shops are unable to supply branded goods, and this shortcoming is likely to hamper the advent of a digital content mass market powered by individuals and small businesses.
So where are micro-payment ventures headed? They are likely to fall back on mid-size merchants to survive. Unfortunately, the digital content industry is highly consolidated (e.g., music), or very likely to further consolidate (e.g., gaming). Thus, vendors are unlikely to get enough volume growth with mid-range digital content merchants.
Micro-payment ventures are right to say the time has come for micro-payments. Whether the time has come for micro-payment processors is another matter.
Gwenn Bezard is a senior analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston, Mass.