Introduction
History
Issues
Solutions
References
Micropayments: A Viable Business Model?

History

Micropayments were envisioned to be small payments (from less than one cent to a couple dollars) to be used to sell online content, one link or download at a time, to consumers. This would be a model that replaced the more traditional subscription model. The idea is that users would have access to only those services or articles that they actually want, and the income from these micropayments would supplement the advertisement income so that providers could focus on content. [1] Beyond serving as a revenue source for content providers, micropayments could be used for other ventures such as charging for proxy services, database lookups, and even gambling. [1][2] The reason that micropayments were never in widespread use is that they are not financially feasible unless a business model or system is developed to handle micropayments. Brokers (such as credit card provider VISA) will always want to make money, and it costs money to handle all the payments, which would be numerous in a micropayment system. The normal business model of taking a small percentage of each transaction does not work well on transactions of low monetary value. The micropayment models were also competing against the all content is free business model.

Several companies were very interested in the use of micropayments from the start. Companies such as IBM and Compaq both started developing their own micropayment platform in 1999 in anticipation of the eventual use of micropayments for internet transactions. [1] They even went so far as to try and get the World Wide Web Consortium (W3C) to develop a standard for micropayment mark up. W3C went so far as to develop preliminary HTML standards that included tags such as price, type, duration, expiration and many more. [3]

Currently, there is no clear definition of a "Web micropayment" that encompasses all systems claiming to be micropayment systems. However, these systems all share the goal of minimizing the cost overhead of a single transaction. Most of these micropayment systems try to save costs, including financial risk-management costs, operational costs (including communication, processing, storage), and set-up costs.

Many other companies were also started that tried to make their own successful version of a micropayment scheme. This included BitPass, FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See [4], Flooz, Beenz [5] and many more. These companies all floundered for several reasons. One was that the other Internet companies of the day did not think that they needed micropayments to make money, they were doing just fine on advertising income. [5] Another factor was that consumers expect web content to be free, and although this feeling is changing today, that idea will still present a challenge any future micropayments scheme. [5]

Today several companies are expanding what the name micropayment means. PayPal defines a micropayment to be any payment that is less than $12. If the transaction is less than $12 PayPal charges a lower price for handling that transaction. For its micropayments PayPal charges $0.05 and 5%, whereas it charges $0.30 and 2.9% for its normal payments. [6] Facebook has also ventured into the micropayment realm, using PayPal's new micropayment service for its Facebook Credits. Facebook Credits are a form of virtual currency that consumers pay up front for. The credits can then be spent in apps on Facebook. [7] Apple also uses a form of micropayments for the purchasing of its songs. However Apple's model is slightly different than the intended use of micropayments. Apple aggregates a user's song purchases to one credit card transaction and allows users to prepay by putting credit on their accounts. So Apple uses the aggregate and pay later idea, which seems to be the prevailing micropayment scheme in use by Apple, Facebook and many others.

References