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Taking Care of the Pennies

One of the most frustrating things about writing e-commerce or Internet related articles is that they tend to go out of date very quickly. For example, it often seems that as soon as I have completed a review of a product then its vendor adds some key new features that negate many of the points that I have made in my article.

However, one area where this has not been the case is with micropayment systems. I first addressed this topic back in 1998 in the very first issues of the newsletter, but since then very little has changed and the articles I wrote then (see links list below) are essentially as relevant and valid today as they were almost four years ago.

For those of you new to the topic, micropayment systems enable e-tailers to sell small pieces of content – for example access to a restricted area of a Web site, or the single use of a program – in return for a small fee, usually a few cents. These small payments cannot be handled using traditional, credit card based systems because the cost of processing the payment is far higher than the amount being processed. And so specialized payment systems – so called micropayment systems – are needed to deal with these very small amounts.

So why has there been relatively little progress made in implementing micropayment systems? Basically, consumers have been conditioned to expect the Internet to provide them with the information they seek free of charge and they have thus been reluctant to pay for access to content. With some exceptions – such as the Wall Street Journal – few sites have been successful at charging for content.

For a long while this consumer resistance was not a major problem for Web sites as they were able to cover their costs through advertising revenues. However, advertising dollars have dried up over the last 18 months and content-based Web sites are now desperately looking for alternative ways of financing their businesses. Add to this the fact that many competing Web sites have gone out of business making it more difficult for readers to go elsewhere and get free content, and you will understand why micropayment systems are being looked at seriously again.

So if you are considering implementing a micropayment system, what are the options open to you?

There are basically two types of solution available, either through partnering with a company that already has the ability to deal with small payments (for example telephone companies or ISPs) or to sign up for an Internet-specific micropayment service.

Billing Aggregation

There are several services around – for example eCharge, Trivnet or iPIN – that enable consumers to add the cost of their Web purchases to an existing bill.

In broad terms here’s how these systems work:

  1. The customer clicks on a URL and confirms they are willing to pay for the purchase.
  2. The purchase amount is added to the buyers existing telephone or ISP bill.
  3. The money is then passed to the e-tailer, less any applicable fees.

On the surface these solutions sound ideal. From the customer’s perspective, ease of use is the biggest attraction as their purchases are simply added to their normal bill. And from an e-tailer’s perspective, they are dealing with companies who have vast experience in dealing with micropayments and should therefore hopefully benefit from their robust and efficient billing systems.

However, the down side to these systems is their limited availability: if a customer does not have a relationship with an ISP or telephone company that provides a billing aggregation service then they will be unable to purchase from your Web site.

eCharge http://www.echarge.com
Trivnet http://www.trivnet.com
iPIN http://www.ipin.com


Internet-based Micropayment Systems

As noted above, traditional credit card payment systems are unsuitable for micropayments because the cost of a transaction is more than the money being collected. These Internet-based micropayment solutions get round this problem by using tokens often referred to as “scrip” or “digital bucks”.

Here’s a summary of how these systems work:

  1. The customer buys a quantity of tokens and stores them electronically on their computer or smart card. The cost of the tokens is charged to the customer’s credit card just like a normal transaction.
  2. As the customer moves through the Web they pay for content etc. by using these tokens.
  3. Once they have used all their tokens, they return to the token vendor to purchase more.
  4. The e-tailer passes the tokens he collects to the token vendor who forwards them their money, less any applicable fees.
Qpass http://www.qpass.com
RocketCash http://www.rocketcash.com
Millicent http://www.millicent.com


The advantage of these token-based systems is that the costs are kept down because the number of credit card transactions is low. Credit card fees are only incurred when a customer tops up their account, not each time they buy something on the Web. However, a significant disadvantage is that it gives the consumer a lot of extra work, having to sign up for a program and then store and manage their supply of tokens.

As a result of this shortcoming, there has now emerged a new category of micropayment systems. These solutions are basically a compromise as they allow consumers to use their credit cards to make online purchases but transaction charges are kept low so that e-tailers can use the systems for small – but not tiny – payments.

The best example of this new category is the Amazon Honor System, which is a micropayment solution with a difference: in order to avoid the fairly widespread objections to paying for content, Amazon has designed it so that all payments by customers are voluntary. And not only are these payments voluntary, but a customer may refund themselves for any reason and with no questions asked up to 30 days after a payment is made. There is no process by which a merchant can contest a customer-initiated refund.

Although at first glance this may seem a rather strange solution, it is actually based on a sound principle, that is, if your content is truly valuable then people will be willing to pay for it. And those people who don’t pay probably wouldn’t have paid anyway even if the payment had been mandatory.

To use the system, content providers simply place a small graphic on their Web site inviting visitors to pay a small sum (minimum $1) in return, for example, for downloading a file or accessing a restricted area of a Web site. If a visitor decides to pay they are transferred to a co-branded page on the Amazon Web site where they make their payment via Amazon’s 1-Click system. There are no fees payable by customers, while e-tailers pay 15% plus $0.15 per transaction.

So do I think that the time is now right for micropayment systems to take of?

Frankly, I haven’t changed my mind since I first looked a t his topic almost four years ago. Here’s what I wrote then:

“Will these micropayment systems succeed? For now, I don’t think so. At present it’s all just too difficult for the consumer, having to download and install a software “wallet” and then to set up an account with a broker to buy and download digital cash. And even once set up, consumers are likely to resent being continually badgered for payments no matter how small.

From a content provider’s perspective, the real killer for many will be the widespread availability of free information and services: how can a vendor hope to charge for content when it’s available free elsewhere? Even those with unique and compelling content will find themselves competing for a share of a small revenue pool.”

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