Micropayments

I attended the HBSTech event on the Evolution and Future of Micropayments last evening in Mountain View.

Presenting were:

  • Preston Roper, VP of Marketing, BitPass
  • James Hall, co-founder of FTVentures, a fund with deep experience in micropayments 
  • Peter Ashley, Director of Merchant Services, PayPal
  • KC George, Manager of Product Innovation & Coordination, Visa USA

The session was not as interactive as I’ve become used to when attending other tech events in the Valley and was more of a "hold your questions until we’re done" affair but it still was very informative with lots of juicy snippets after the jump.

Standard credit card fees are $0.25/transaction + 2% of the purchase price. This cost structure makes it difficult for merchants to embrace credit cards for small transactions (we’ve all seen the "minimum purchase $10" sign on the counter).

PayPal

Standard payment structure is $0.30/transaction + 2.9% but to address the micropayment opportunity they have a new structure which is $0.05/transaction + 5% which is easier when you need to make up your margins with volume.

Remember Beanz and Digicash? Why did they fail? The network effect never kicked in for them. PayPal saw that the network effect was key and used "friction" between buyers & sellers on eBay to set up their network. Offered $25 to open up a PayPal account and spent $250 million to essentially "buy" a network. 

Pretty much everyone on the panel credited (or accused) Apple of blowing open consumer’s expectations of online content costs by setting the $0.99/song purchase price on iTunes. Apple gets around the erosion of volume by clearing your credit card for a greater amount than the 99 cents because they are betting that you’ll come back later in the week to purchase more. This is called aggregating transactions so you only pay one transaction fee for multiple purchases.

Could not answer any questions about recently announced PayPal mobile payment system because ebay is in pre-earnings "quiet period."

Visa

  • 14k member banks, 500 million cards in the US.
  • Define micropayments as transactions that are under $2. "Small Ticket" transactions are under $25.
  • No public announcement of their micropayment strategy but they’re working on it.

Visa is taking its existing "no signature required" service for small transactions one step further and testing an RFID-based "contactless" system. No swiping required – just get in proximity and confirm an amount to conduct a payment.

Fraud – Visa has found only 5 – 6 basis points of total small ticket transaction value impacted by fraud. "Hardly worth the trouble to rip someone off for a hamburger."

BitPass

Ringtones and iTunes really got the market going for premium digital goods. BitPass has a long history of providing a micropayment infrastructure, worked with Microsoft in the past on their Digital Wallet initiative.

CNN Pipeline offers 24 hour access to their streaming videos for $0.99 under their "day pass" program but it’s basically a loss leader to get people in the door quickly when there’s breaking news. They then use the contact info to upsell you to their monthly or annual subscriptions. Smaller publishers don’t have the brand strength to use the loss leader method so they often go with the shareware model of free version/paid version where the free version has severe limitations.

BitPass has found that this doesn’t really work well because the free version usually has such a poor experience that it turns most customers away. Better tactic is to use a micropayments platform to assign a small value to the trial version so you’re able to subsidize a superior experience and have a vested and qualified customer.

20% of all transactions in the offline are under $25. $1.3 Trillion market according to the Tower Group (online portion of this is $4.5 million). Where is the need for micropayment technology? Where ever you’re fumbling for change (ie. parking meters) or the point of purchase online (ie. Times Select for content, Ringtones/Games on mobile, OnDemand for cable, or iTunes.)

New Technologies & Trends

Smart Cards failed because there was not widespread adoption by the merchants. Succeeded in France because technology was underwritten by government and the France Telecom. RFID is the new Smart Card but will succeed in the US because we’re seeing widespread interest.

Visa testing RFID on phones for payment in a sports stadium in Atlanta. There are "smart posters" sprinkled throughout the arena where you can download additional content.

Biometrics? Question from audience on Pay by Touch, a service which lets you use your thumb print to pay for your groceries. This may work for groceries because of the target market (busy moms with babies in tow) and grocery stores (need squeeze out every last bit of their margin) but most people are freaked out by the prospect of tying their fingerprint to their bank account.

Mobile carriers in a great position to aggregate payments but will most likely stick to ringtones, wallpapers, and things that supplement the mobile experience. If they branch out beyond that, they will need to (1) lower their margins which are between 30-50% compared to Visa’s 2%, and (2) will need to address complicated regulatory issues across all 50 states. This is unlikely. 

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