Solutions

In today's online world, there are three different common models of managing micropayments. One of the models, called pay-as-you-go, is what one might consider "classic micropayments": a user's credit card is charged on the fly. This model does not work due to many reasons, so instead, two other models are introduced that attempt to solve the shortcomings of pay-as-you-go. Each has its advantages and disadvantages, with none of the models being absolutely perfect.

Pay-As-You-Go

With the pay-as-you-go model, Internet users are charged on the fly for purchases that they would like to make. This means that as soon as the user wants to purchase access to an article or some other virtual good, their credit card will be charged for the amount of the transaction.

Advantages

• Allows the user a pure à la carte experience. They only purchase what they want, and they pay when they want to.
• The merchant can market low cost virtual goods to a user who may otherwise balk at paying a higher price for bulk access.
• When credit card information is stored with the merchant, the low price of individual micropayments may encourage the user to partake in “impulse” buying, similar to how retailers put low cost candy bars, magazines, etc. in check out lanes.

Disadvantages

• Retailers must face the burden of high transaction costs when processing the micropayments, making some micropayments not even worth processing.
• Not having a user pay a sum up front does not create a merchant-customer bond that can encourage the user to come back to finish off their prepaid amount and end up spending more.

Prepay

With the prepay model, a customer authorizes the merchant to charge their card for a certain amount, which is usually converted into a virtual currency. That currency can then be used to purchase whatever that particular merchant is offering online. An alternate form of prepay eliminates the online transaction and instead places gift cards in brick and mortar stores. Customers can purchase these cards and enter special codes on the back of the card online to have their account credited for the amount they paid.

Prepay can also take the form of subscription models where users pay up front for monthly or yearly access to certain content, such as newspapers and premium content in online games.

Advantages

• Paying a large sum up front makes the transaction worth it in terms of the processing fees that get tacked on.
• If physical gift cards are available, users can choose how to pay, which is especially useful when the user does not have a credit or debit card to use online. (Cash is also a way to get kids spending money on games without going through their parents.)

Disadvantages

• Merchants need to maintain a system that tracks how much credit every user has on hand.
• If the merchant has gift cards in brick and mortar stores, they must pay to distribute them.
• With subscription models of prepay, the à la carte experience is lost. Users pay up front for access to everything, whether they want it or not.
• Depending on the prepaid amounts available, users may not easily dish out $10, $25, or $50 for a virtual credit as they would on a pay-as-you-go model.

Examples

• Skype Credits: Users pre-purchase credits that they can use towards making phone calls to land lines from their computers.
• Facebook Credits: Similar to Skype, users pre-purchase credits that they can use anywhere on Facebook that accepts the credits, such as third party apps. (Facebook takes a 30% cut of the credit sales, giving 70% of the sale to the app developers.)
• Nexon Cash: Nexon is an online gaming company that lets users purchase “NexonCash” cards in stores that they can redeem online for a virtual currency to use in their games.
• NYTimes.com: For one monthly fee, customers gain unlimited access to all of the content at NYTimes.com (and via a Smartphone or tablet if they so choose).

Postpay

In the postpay model, instead of paying up front or paying on the fly, users instead pay after they decide to make a purchase, similar to more traditional online shopping models. Postpay is an effective alternative to pay-as-you-go due to microtransactions being aggregated rather than charged individually. What usually happens is that a merchant will track a user's individual microtransactions, and then after a certain amount of time where no more transactions are made, the merchant will aggregate the individual purchases and bill them as one amount.

Similar to prepay, postpay can also adopt a subscription model where users gain unlimited access to certain features and are then billed a standard fee at the end of the month. This is less common, however, than prepay subscription models.

Advantages

• Users do not need to pony up a larger sum of money to start making purchases. The à la carte experience is preserved.
• Aggregating payments can drastically reduce the amount of transaction fees that a merchant will pay.
• The impulse buying that is in the pay-as-you-go model is also preserved in postpay.

Disadvantages

• Merchants need to create a system that tracks purchases and then attempts to aggregate them in a thoughtful manner so as to reduce transaction fees.
• Users can still purchase only one item, say a 99-cent song, and then not purchase anything else, leaving the merchant no choice but to process the microtransaction by itself.
• This does not allow for users without a credit or debit card to make a purchase, as users can with prepay gift cards.

Examples

• Amazon MP3 Store: When purchasing MP3s, the billing is delayed. Amazon waits to see if you will purchase more songs and then aggregates them as one transaction.
• iTunes Store: Similar to Amazon MP3, but the iTunes Store can be considered a mixture of micropayment models, both aggregating micropayments and offering gift cards in stores to prepay.

Conclusions

As you can see, every model of micropayments has its pros and cons. Certain models may work better in certain scenarios depending on the user demographic. For example, online games that are targeting kids or teens may find it more lucrative to go with the prepay model that allows them to place gift cards in stores that can be bought with cash. Or, if the merchant wants to leverage the psychology behind impulse buys, then it may pay off to go with a postpay model that does not tell the user how much they have spent until after the fact.

One thing is certain, however. Micropayments in the pay-as-you-go form are dead. Transaction fees are not going anywhere anytime soon, and both prepay and postpay solve that problem, whereas transaction fees are pay-as-you-go's biggest crux. With more and more companies introducing virtual currencies, we will continue to see more and more prepay and postpay models adopted across the web. Micropayments, as they were envisioned back in the mid-90's, were just never destined to survive.