Micropayments

February 18, 2010

Last week a friend and I went to Boston for a meeting. When we got to the subway system, we needed tickets. The smallest amount we could purchase was $5, yet our subway rides, like most subway rides within the central area of Boston and Cambridge, were $2 each. So after 2 subway rides each, my friend and I were each left with an extra dollar of credit we threw into the trash can. Clearly, the people who work for the government in Boston thought this was very clever at their meeting when they decided on the card pricing. The city wins when people have to pay too much for their subway cards. The problem is that the people lose. This win/lose mentality is push thinking, and it isn’t going to be a viable strategy in the pull era.

In Boston, we had to use a proprietary system that produces a special card that can only be used on that subway system. That proprietary approach isn’t going to last ten years either. In ten years, we’ll have a micropayment system that works on our mobile phones, and probably in other ways as well.

How will it evolve?

Micropayments are an important part of the pull ecosystem for consumers and businesses alike. We all want to stop carrying cash and a wallet full of proprietary cards and special accounts for riding public transit, paying tolls, paying for parking, buying a cup of coffee, getting something in a vending machine, purchasing something inexpenive online, and enabling pay-as-you-go systems that will help bring new life to industries that see no middle ground between free and “too much” for their consumers. This will be especially important for media, because consumers will want to get content all around the web and need a fast pay-as-you-go system for dropping a few coins on a web site to pick up a song or read something valuable.

We want an application on our phones that will pay for anything easily, without having to sign up for a new system every time we make a new kind of payment. But in micropayments, all the “solutions” trying to get traction are proprietary, hoping to become the big winner in a tough race. And that’s exactly the problem. Everyone has a micropayment startup, and every company offering micropayments is offering a completely closed, proprietary system.

At the top of the heap, Visa, Amazon, and Google have all tried and essentially failed to provide e-coin and e-cash that’s easy and relatively inexpensive. The reason is that the infrastructure they are working on is heavy, designed for larger transactions. The fees are usually around 3% and they typically charge $0.30 per transaction. So several companies have the idea that you can use your Visa card to fill an account, and then use the money in the account easily as you go throughout your day. None of these credit-card based systems can ever work – too expensive.

One company, Rixty, lets you put cash into machines at convenience stores and converts it into e-cash that can be spent online or in real life. This could be good for low-income people and maybe for kids, but it’s not going to be mainstream.

Another not-so-new idea is to let people pay via their mobile phones and the bills go straight to their mobile-phone bill. Companies like Boku, which has raised over $25 million in venture capital, BlingNation ($8m in funding and an RFID chip that sticks to your mobile phone), and Zong, which now has a deal with FaceBook, are getting traction, but how will we use them to pay for content online? What happens when we no longer need mobile operators and their high fee structures anyway? Clearly, this is a transitional strategy that has too many limits to become universal. Yet the winners here may be able to transition to a more open strategy down the road.

There are virtual currencies. Many of them are useful for gaming and online worlds, but I don’t see them as a universal solution for buying a subway ticket or a cup of coffee or a candy bar.

Everyone has a proprietary solution, a lot of money has been raised, yet there are more companies in the graveyard every day. Tipjoy tried and failed. Google also tried and failed. Amazon.com is making a small amount of progress with Amazon Payments. PayPal seems to be smart enough not to get into this game, but they do have special rates for those who want to build a payment system that people can fill up with their PayPal account (Twitpay, for example). Google is rumored to be developing a new micropayment system to be announced later this year.

What we’re missing is what we have in the identity space with OpenID – a set of open protocols that lets everyone set up a micropayment company that charges low fees. Banks could do this, but they get more money from the Visa system. I think we’ll keep lurching toward a solution without really seeing any clear winners until a consortium emerges that can set royalty-free standards and create a level playing field for any company to build a payment system on top of. Something like the GSM system, which lets any company put up a cell phone tower and collect fees if people use it. If you hear of anything forming, let me know.

Are there others you think are viable candidates? Tell me in the comments, please.

For more on Micropayments, read PaymentsNews.com and PaymentsViews.com.