The Green Sheet Online Edition
March 26, 2012 • Issue 12:03:02
Insiders report on payments
Micropayments are no small matter
Micropayments are of no small consequence to merchant services. Banks, the card brands, acquirers, ISOs and merchant level salespeople could wind up paying big for ignoring micropayments.
Dave Kaminsky, Research Analyst at Mercator Advisory Group, said, "As Americans move further away from cash, merchants who focus on small-ticket transactions are forced to accept the constraints of card-based payments as a reality." I doubt this can last forever.
Micropayments have been on the radar for decades. And there has been no shortage of new companies with technology "breakthroughs" that promised to break open the market. Companies like Digicash Inc., Bitpass Inc. and First Virtual Holdings emerged to facilitate e-commerce but never caught on with consumers or merchants.
More recently, companies like BoxPAY Ltd., Dwolla Inc. and Google Inc., along with several mobile payment pure plays, like BOKU Inc. and Isis, have been eyeing micropayments, and consumer adoption is picking up, primarily overseas. (In the United Kingdom, for example, digital micropayments grew 15 percent between June 2010 and June 2011, slightly more than prepaid card payments at 14 percent, according to the PricewaterhouseCoopers LLP report, Precious Plastic 2012.)
I think of micropayments as transactions that might otherwise be paid by cash. Brick-and-mortar establishments, where micropayments are most common, include: specialty shops, like those selling coffee, ice cream, bakery items and other fast foods; theaters; and convenience stores.
There are plenty of vending machine applications, too: soda, candy and movies are just a few. And there's no dearth of online applications for micropayments: books and news; television and movies; and music seem to top that list.
For this discussion, let's define micropayments as tickets between a penny and $20, online or in-person. In its 2009 Survey of Consumer Payment Choice, the Federal Reserve Bank of Boston reported that debit cards and cash were the top two choices for consumer payments.
At that time, the average adult in the United States made 64.5 payments in a typical month; 19.0 were made with debit cards and 18.4 with cash.
Card companies lag
Moving micropayments to electronic methods hasn't been realistic for most merchants. The existing credit and debit card fee structure - charging a percentage of the ticket total for each transaction - wasn't intended for very low-value transactions.
Even PayPal Inc. has had to develop a special, reduced charge for what it defines as micropayments. (For transactions of $12 or less PayPal charges $0.05 plus 5 percent of the transaction; PayPal's standard assessment is $0.30 plus 2.9 percent.)
So, are the card companies revamping pricing or technology platforms to support micropayments? Discover Financial Services appears to be. In July 2011, it heralded a new micropayment solution for digital content providers that aims to slash transaction fees for those companies by as much as 71 percent _ without resorting to transaction aggregation. No complicated offline sign-up procedures, either.
Discover's offering is a "micropay-in-a-box solution" from online payment company Mazooma. It is for digital content merchants who are on CardinalCommerce Corp.'s Centinel Universal Merchant Platform. "The micropay solution addresses a key pain point in the digital goods vertical market," said Janet Kapostasy, Vice President, Financial Institution Services at CardinalCommerce.
To facilitate secure, instant payments, Mazooma connects online customers to their online bank accounts from a merchant's checkout page.
"With Mazooma's micropay-in-a-box solution, Discover merchants selling digital content can enjoy instant, online payments, as well as ease of implementation, less technical resources and consolidated settlement and reporting," said Farhan Ahmad, Director of Emerging Payments at Discover.
Visa Inc. and MasterCard Worldwide haven't been very active in the micropayments space, at least in the United States, although both companies support low-cost micropayments in Australia.
Visa's Payclick, a prepaid hosted service intended for purchasers of online content and for person-to-person (P2P) payments, was introduced in Australia in 2010. And last year, Visa reported it had beefed up its network and is working with Fiserv Inc. (a leading provider of transaction processing services to banks) to support card-based P2P applications for U.S. cardholders.
American Express Co. has developed a new prepaid product, Serve, which it describes as a "digital alternative aimed at consumers who currently rely on cash, check and debit cards." Customers set up Serve accounts online or with a smart phone app; funds are stored in a prepaid account. "It's a flexible, easy to use platform, which from day one brings tremendous assets to the alternative payments space," said Dan Schulman, Group President for Enterprise Growth at AmEx.
Schulman added that partnerships with e-commerce, gaming, entertainment and social networks are a "cornerstone" of what AmEx hopes to accomplish with Serve, which is built on the technology AmEx acquired in 2010 with its purchase of Revolution Money Inc., an alternative payment solutions provider.
Is mobile the answer?
Mobile payment applications, especially those based on near-field communications (NFC) technology, are positioned to support electronic micropayments, provided the card companies can come up with a viable interchange model. But like everything in payment innovation, mobile payments present a chicken-and-egg conundrum: with seemingly low consumer adoption providers aren't rushing to the starting gate.
A recent consumer survey by Auriemma Consulting Group revealed just 23 percent of smart phone owners would switch to another provider or handset for payment functionality.
Younger consumers (under age 45) were more likely than those older than 45 to want to use their smart phones for purchases (41 percent versus 20 percent). Among consumers who aren't interested in mobile payments, 73 percent cited security concerns, ACG reported.
Dr. Patricia Sahm, Managing Director at ACG, believes banks and other payment companies can overcome consumer resistance by voluntarily adopting liability limitations on all disputed transactions, not just those tied to credit cards. She also said more needs to be done to boost the appeal of mobile payments to retailers.
"The card networks became so ubiquitous by providing retailers with a convenient form of payment that functioned efficiently with virtually all retailers' point-of-sale designs," Sahm said. "Having similar standardization ... could help to advance mobile payments."
To maintain relevancy in the micropayments space, card companies need to make micropayments inexpensive and viable - whether that involves new platforms, new risk parameters, new technology partners or some combination of all of these.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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