Micropayments: A Viable Business Model?

Issues and Challenges

There are many different issues and challenges that affect micropayment systems. It is a challenge to both build the actual system and to get people to actually buy into making micropayments. Below is an analysis of those issues facing micropayments.

Jump to: Technical Challenges | Social Issues | Economic Challenges

Technical Challenges

Electronic micropayments are stored and transported in digital form, which introduce a new host of problems for the development of secure electronic payment systems. Since digital payments are represented as simple byte arrays or sequences of bits, nothing in them prevents the copying of them. There are several technological challenges for micropayment systems whose fulfillment is a major issue of implementation [1,2]:

  1. Security of micropayment systems is a challenge of security in the technology being implemented. Failures of the underlying technology, software or hardware, can substantially decrease the trust on a micropayment system.
  2. Scalability of a design is necessary to adapt to the changes that may emerge if a system cannot respond to the potentially rapid increase of the transaction traffic.
  3. Reliability of a micropayment system is crucial, as it must serve customers 24 hours a day, seven days a week, with no point of failure at any time.
  4. Interoperability of currencies like digital cheques and tokens should be able to be applied in different micropayment systems and be fully interexchangeable between systems and protocols.
  5. Anonymity concerns relate to the amount of knowledge other parties have of others. Merchants or banks usually have no anonymity, while customers may have at least partial anonymity. Anonymity is a technical challenge that is defined on a fine line.


Security prevents and detects attacks on a payment system and fraud attempts. A robust security system is also vital to authenticate appropriate payment information. Security is to a certain extent a subjective concept, and felt differently by each user. Users often interpret security as an equivalent for guarantee customers feel secure if they receive the paid products, while merchants feel secure if they get the money for the delivered products.

The main security concerns are the non-repudiation, authentication and authorization, data integrity, and confidentiality. The security of micropayment system depends on the underlying trust and security models applied.

Several micropayment systems rely on the security of the underlying infrastructure, which is the lower network levels and physical devices that handle the connections and information storing. These systems are usually susceptible eavesdropping and data tampering and they cannot be trusted to provide adequate security services. No trivial assumptions about the security level of the underlying technology should be made in respect of the design of the micropayment system.


The problem with most existing micropayment schemes is the heavy load on the trusted, centralized broker. A broker is required to handle accounts, distribute and cash coins, provide security and a host of other tasks. Eventually the broker has to take some action for every transaction. As a result, the broker load is always O(n) in the number of transactions. Brokers therefore present scalability traffic jam for any system using micropayment schemes [5]. Token-based systems are generally those that have scalability problems, originating from the fact that they have a central administration for the issued or received e-coins/tokens. DigiCash's eCash is an example of such a payment system. In general, brokers have to register the issued tokens in a central database. In such schemes, the number of tokens to be issued was much higher than the number of accounts administered [6].


Reliability has been a problem for many of micropayment systems. Many micropayment systems depend on cryptographic mechanisms to control credit transfers. The reliability of such systems is of considerable importance. Yet most commercial cryptographic systems are less reliable than one would wish. Attacks are continuously reported on systems such as satellite TV decoders, automatic teller machines, and utility meters. Minimizing the risk of such failures is primarily a systems engineering issue, concerned with careful requirements engineering and thorough testing. The implementers of micropayment schemes often invent their own cryptography and operational practices from scratch, which often fail. There is a perceived need for design secrecy and operational secrecy. Rather than discussing the problems each micropayment companies have found, the motive to remain unique and individual has created large holes in the robustness of cryptography of their systems, inherently reducing the reliability of current micropayment systems [7].


Interoperability between micropayment systems is rarely provided let alone addressed. Interoperability is impossible because token-based systems create new currencies - eCoins, scrips, merchant-specific tokens, etc. These currencies do not define exchange rules or rates. Funds represented in one system can hardly be converted into funds of another systems. Some systems need extensions to allow customers to withdraw their money and exchange them back to dollars. Many micropayment schemes require customers to buy specific scrips for each merchant they want to pay. eCash is supposedly a system that offers the possibility to pay anywhere on the Internet. However, eCash licensees cover only the customers and merchants of a particular bank. Customers can only pay merchants that were affiliated to the same bank [8]. Of course limiting the interoperability of one system with another may be a business model, but it makes the concept and practice of micropayments too cumbersome and restrictive. The profit from allowing e-payments to be interchangeable will likely be more beneficial.


Anonymity is an especially interesting requirement in respect of both the user and the implementation of the micropayment systems. Contemporary micropayment schemes have compromised the security by giving full anonymity only to merchants, while the user has only partial anonymity [2]. The deprivation of anonymity eases the traceability of transactions. The possibility to trace one's own transactions can, however, also be seen as an advantage for the customers, since they are interested in a service that allows them to check what they bought using their account. However, even a single micropayment transaction, such as request of adult content, can be uncovered and cause the user inconveniencies. Though totally anonymous micropayment systems would be ideal from the viewpoints of many users, the contemporary payment systems offer only partial anonymity [4]. This may not be a problem in every system, since the users seem to accept the degradation of the security level to be able to purchase goods easily.

Partial anonymity usually necessitates the collecting of long-term logging data of the micropayments of the user [2], which could yield significant information of purchase patterns of single users when the protection is not adequate. CyberCash has very low anonymity. They record user identities, exchanged amounts and times of all transactions. Other schemes have similar low anonymity for the sake of traceability, where all actions are linkable by any observer. Privacy is rarely guaranteed and anonymity is not supported [5]. This is not necessarily desirable when the users identity and purchases are visible to merchants and banks that can use this data to manipulate prices and advertising.


Many of the discussed technological issues have not been met in the contemporary micropayment systems, especially those intended for public and wide utilization. The technology of electronic payments will surely evolve as the networks and servers get faster and micropayment implementations are optimized. Still, any technological issues must not take away from usability. If the micropayments are too hard to use, only minor user groups may be interested, as it currently is.


Social Issues

A micropayment system would require users to pay to access each website, or in the case of online newspapers, each article. Since the vast majority of websites are free to view once a user has internet access, charging for access to content brings some social challenges. These challenges include:

  • Barriers to access - placing even a small fee on websites deters users
  • Change of habits - fees may place economic burdens on lower socioeconomic classes and change the viewing habits of internet users
  • Assessment of the cost - fees force the user to continually determine if content is worth the cost

Barrier to Access

A barrier to access online content by any means will deter some users. Barriers, such as forcing users to create an account or pay a fee, make them less likely to reach the desired content. Users like Rita McGrath, a professor at Columbia Business School, "close that window and go away" when prompted to pay 99 cents to view a newspaper article [1]. McGrath views these requests as annoying disruptions that do not contribute to a positive user experience. Being unable to directly view content, especially to ask for payment, is an interruption to internet users who are accustomed to free content. Because there are plenty of other free sources available on the internet, the payment popup is simply an annoyance that will make them turn to another source. The free content available on the internet is easy to find with search engines like Google. Free content is an evolutionarily stable strategy, in that it works well when everyone is using it and it is resistant to changes [2]. In an environment of free material, a website that charges is going to be at a disadvantage and avoided by users.

Example: In 2003, comic strip writer McCloud began charging readers 25 cents to view his work. This fee irritated some discussion board posters who think all web content should be free. They believe paying to view webpages is in violation of the gift economy that was part of the early Internet era. In their opinions, all content on the Internet should remain free.

Change of Habits

Charging for use may place a burden on lower socioeconomic classes and change their Internet usage habits. They may be unwilling to pay to access all of the same content they were viewing while websites were free and must then limit what they view. They would be unable to view the same mass of content of someone who is not as fiscally burdened. Micropayments are only small charges, but when aggregated across a month and a family, the sum could be burdensome for a family on a tight budget.

Additionally, studies have shown that habits change drastically when users switch from metered to flat rate pricing [3]. In 1996, AOL switched to unlimited plans and the average time spent online per subscriber tripled in one year. Another study found that consumers are willing to pay more for a flat rate plan than they would have under the metered plan, which was assessed to be a case of risk avoidance [4]. Consumers were unsure of what their final usage was going to be and wanted to ensure that there was a maximum cap on their spending. In the case of micropayments, users would be paying a cost per website which has previously been free, so the case is not exactly the same, but it gives an idea of how users will respond to micropayments. Users would likely prefer another model of payment, perhaps subscriptions, in order to avoid the risk of running up a large bill. A subscription would give them unlimited access and would remove the hassle of assessing individual costs.

Assess the Cost

Micropayments force the user to assess the value of every website or article to determine if it is worth the cost. This thought places a mental transaction cost, or the energy required to make a buying decision, on the user every time a purchase is considered (5). If every website requires a small fee to view it, then this cost is placed on the user many times over a short period of time. Additionally, below a threshold value, it is much harder to assess the value of certain goods (6). Society currently values printed newspapers at a certain cost, but is each article worth a certain number of cents? Users must prepay for each article and they are unsure of the content they will receive. This is unlike Apple's iTunes, in which users make small payments per song, but they know exactly what they are buying. With a website or article, it can be a little unclear what you will be seeing or reading. This forces the user to determine the cost of a good when he does not even know clearly what the good is.


Economic Challanges

There are several economic challenges regarding the widespread implementation of micropayment systems online. These issues, if left unaddressed, can significantly affect the way people use the Internet on a personal level.

Transaction Costs

One of the strongest arguments against micropayment systems is the inability of companies to keep transaction costs low in relation to the actual transaction amounts. Micropayments apply to sums less than $10 and deal with sub-dollar transactions on a regular basis, thus transaction costs must be low enough to justify the adoption of such a system. Historically, micropayment companies have been unable to sufficiently reduce transaction costs for a pay-as-you-go implementation due to the large number of micro-transactions for each individual user. In recent years, companies such as Apple and Facebook have moved to either a prepay or postpay model, in which customers either purchase virtual currency beforehand or pay an accumulated sum after each time period. While such aggregated payment schemes have proven effective with the popularity of iTunes and Facebook credits, it remains undeniable that billing and transaction costs must be factored into literally every cent we spend on the Internet.

Mental Transaction Costs

In a system where we have to pay for almost everything on the Internet, what accumulates is not only micro-transaction cost but also mental transaction cost [1] the energy required to decide whether something is worth buying or not regardless of its price. We already face a multitude of choices everyday with regards to what to access online in this digital era of the information explosion, and every additional decision that we must make simply adds on to the uncertainty and anxiety we face. Micropayment supporters believe that a simplified implementation can minimize the intrusiveness of micropayments and improve user experience, but their argument only creates double standards for the decision making process [2]. A transaction cannot simultaneously be worth enough to warrant a decision and worth so little that the decision is automatic. The only transactions that users can approve without thought are ones that cost them nothing, thus any micro-transaction of positive value will incur mental costs through its requiring a decision. Furthermore, mental transaction costs actually rise below a certain threshold value, a phenomenon that places micropayments at an even greater disadvantage. For instance, it is easy to think that a copy of today's newspapers costs $1, but readers face much more difficulty and anxiety in deciding on the value of each article or word. Such a dilemma will only be replicated and exacerbated if all online content were to be broken down into their components and individually valued within a micropayment system.

The Value of Free

As we evaluate the economic challenges posed by micropayments, it is also important to consider what we are moving away from by potentially implementing such a system. Micropayment at a higher level of integration within the Internet implies that in addition to books, music, movies, etc., we will be paying for more rudimentary forms of information like webpages and news articles. The primary reason why most online content have historically been free is the unbeatable competitive advantage that a price of zero provides. Anyone offering free content is allowing Internet users to spend the bare minimum the effort to go online and retrieve the information in exchange for the information itself. In a sense, free is the stable strategy [3] because it offers a benefit that cannot be beaten, only matched. While many online creators would like to be rewarded for their efforts, it is downright impossible for micropayment systems to encompass every leaf and branch of the Internet ecosystem, and there are many who would gladly exchange compensation for viewership. In other words, the continuing presence and availability of free content will present the biggest challenge to anyone who starts charging for their work. From a user perspective, any form of barrier to usage like explicit payment will discourage usage [4]. Behavioral economics argue that the simple act of one click to pay for a webpage will deter us from using the Internet since we have been accustomed to paying nothing. Under these circumstances, there is greater incentive for users to seek out free content in replacement of their priced counterparts, once again propelling the establishment of a free Internet community outside the scope of any micropayment system.