Big Changes in Small Payments

What you need to know about micropayments -- technology that can make it practical for e-tailers to process payments for small-ticket items.
In a perfect world, all of your customers would be able to pay for their purchases with credit cards, but if you sell small-ticket items such music downloads, newspaper articles, trading cards, fonts and so on, that isn't feasible. The good news is that there is an alternative to credit cards, enabling retailers to make a profit even on small-ticket items: micropayments.

Micropayment technology is especially popular among sites selling music downloads or single newspaper articles. Because these items sell for just a few dollars (or less), merchants can't afford to allow consumers to buy them with credit cards -- the per-transaction fees would gobble up any profit from the tiny purchases.

"If you're selling something under $10, you pay the credit card companies more than your profit," said Gartner analyst Avivah Litan.

Micropayment vendors let consumers make tiny purchases by deducting from a pre-paid balance. So a consumer with a $10 or $20 balance can make $0.25 and $1.50 purchases at all her favorite sites, while those sites get a transaction rate that allows them to make a profit on those items.

Despite its benefits, the technology is only now coming into vogue in earnest. At one time, Internet futurists predicted that micropayments would take over the Web, with content providers getting a nickel or a few pennies from every surfer. As it's turned out, using advertising to create revenue has proven to be more user-friendly. And a string of failures by micropayment vendors made the technology look like a passing fad. (The names Flooz and Beenz may come to mind.)

These earlier vendors "were a solution looking for a problem," said Jupiter Research analyst Bruce Cundiff, explaining that not enough consumers or content providers were interested in micropayment to support these early pioneers.

Now, however, as e-commerce continues to surge, micropayment service providers are growing with it. Cundiff points to two factors fueling micropayment use: broadband adoption and shifts in consumer behavior as surfers start to pay for music downloads. The efforts of the Recording Association of America (RIAA) to drive surfers toward legal downloads are working, he said.

Based on a survey by Gartner's Litan conducted in 2002,44 percent of retailers said they had goods and services they would sell if a micropayment system existed.

"We get enough clients looking for micropayment systems to know there's a market -- even big merchants with little things to sell want an alternative," she said.

Starting Micropayments: What To Look For
Micropayments are ideally suited for "small businesses that have no other way to take electronic payment, and for merchants who can't get a good rate on a credit card account," Litan said. So micropayment is not for everybody, and by the same token, micropayment vendors don't offer a "one-size-fits-all" solution, Cundiff said. Merchants need to consider the following as they weigh micropayment solutions:

Cost of the transaction Not surprisingly, this is always the first issue to consider, Cundiff said. He suggests e-tailers ask, "Is this micropayment provider giving me a discount rate that I can survive at if I'm selling in $0.25 increments?"

It's not unusual for a micropayment vendor to charge 15 percent of every transaction, from a penny to $5. That may seem steep, but it allows merchants to be "hands off." In other words, sellers won't need to pay a monthly payment service provider or handle headaches like credit card fraud.

Viability When shopping for a micropayment solution, you should ask yourself: How big do I expect to grow, and will this solution grow with me? Additionally, you should ask enough questions to feel confident that a given vendor will be in business three years from now. Finally, you should determine whether the vendor has an installed user base among consumers that will bring you customers.

Those questions favor the market's dominant player (which is expected to be PayPal, once it launches micropayment later this spring), but experts still recommend considering offers from smaller competitors.

Level of integration Different micropayment vendors offer services that can become a part of an e-tailer's content. Some, for example, provide a digital rights management (DRM) system to protect content from being freely traded once it's bought. Merchants should ask solution providers: How long does set-up take? Is there a one-time set-up fee? Particularly important is whether the solution can be combined with Visa and MasterCard.

Continued on Page Two: The Players

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