Micropayments — An Issue of MacroProportions?

The topic of micropayments is a tricky one. Often the source of raging debate, it’s difficult to discuss in a simple way without someone shouting that it’s going to save the Internet while someone else shouts that the whole idea is crap.

So let’s start off by establishing a little clarity with a couple of definitions. The term "micropayment" is colloquial in that it refers to a general idea under the subset of "electronic payments" and not to the specific definition for "micro-" meaning one-millionth part of a unit.

A good definition of electronic payments:

Any method of purchasing, in which the paying takes place by exchanging digitally represented payment instruments – usually through a network connection, can be defined as electronic payments.
"Micropayments – Requirements and Solutions" by Jari Kytvjoki and Vesa Kdrpijoki

Similarly, a good starting definition of Micropayments:

Some instances define the term micropayment as low-value electronic financial transactions.
Kytvjoki & Kdrpijoki

This is only a ‘starting’ definition because the concept of micropayments means different things to different people. Probably the most practical and defining element of the micropayment issue is the cost of payment.

Banks and credit companies all find ways to make money off you, their customer. They do this largely by charging you for a transaction – a quarter per check in the case of a bank or a 14% interest rate on purchases in the case of a credit company.

But they don’t just charge the consumer. Credit card companies also charge merchants a fee, taking around 4% of the price of the goods for handling the transaction. This transaction costs the credit card companies, so they mark the transaction up over their costs.

Note that the cost of the goods is different from the price – the cost is how much it took the manufacturer to create the object and then for the merchant to get (select, buy, ship, etc.) and stock (personnel) the goods. The store price is usually marked up from there to a number that covers the merchant’s costs, including the credit card company’s charges, plus a bit so that the store can cover emergencies and make a profit.

Since transactions also cost the credit card companies money, the amount that credit card companies charge the consumer and the vendor is, on average, greater than the cost to them per transaction so that they too can make a profit.

Because each transaction costs money, it is not in the best interests of most institutions to allow a significant number of transactions that are so small that they actually lose money in handling them.

This is another important aspect of a micropayment – micropayments are the class of transactions so small that it costs the financial institution more to handle them than the companies that can make money make off of it. In other words, the cost of doing the transaction is more than the cost of the goods themselves, so there’s no percentage.

We’re not using real numbers here because those "small amounts" change over time. But for the sake of context, people normally express micropayments in terms of pennies, fractions of pennies, or "less than N" where N is currently somewhere around three to five dollars.

There are other aspects of micropayments – a micropayment must be really cheap to process, but it still must be secure, and easy to use. This normally comes down to cheap and easy versus secure. A really cheap and easy system tends to be insecure. A really secure system tends to be complex and expensive.

So let’s tackle cheap and easy first. First, if it’s not easy, people just won’t use it. Second, in order for micropayments to be feasible, there must be some way in which overhead is reduced. In a brick-and-mortar transaction, there are personnel involved. They make everything expensive. This is the main reason why a micropayment must be an electronic payment, but it’s also the reason why it must be easy. Support personnel answering phones for confused users are a huge expense.

Another aspect of making micropayments cheap is how to get around the relatively fixed costs of transactions in the current economy. This is actually a huge sticking point, from a technical point of view. On the plus side, because micropayments are between an individual and a creator, the passed-along costs of middlemen are reduced. But this only reduces costs so far. Various schemes have been floated, from aggregating charges until they are made as one big charge to probability games, but none have caught the imagination of the average individual.

As for secure, people don’t want to be ripped off. If it’s easy to subvert the system in such a way that people lose a lot of money, or have to deal with fraudulent charges, the system will not get used and it will fail. Security is neither easy nor cheap and has many elements, more than we can go into in this article, but there are other excellent resources that detail the issues.

Most of the battles and debates on the technical side of making micropayments work stem from the attempts to balance cheap/easy and secure.

In the more social sphere of user debate, the big argument centers around whether the entire idea of micropayments is sound.

On one side of this argument is the idea that people want to be paid for their work. Even if they don’t make a profit, or are not compensated for the time to creation involved, they would appreciate at least breaking even in terms of the cost of maintaining their net presence (bandwidth bills, hosting bills, connectivity bills).

Many argue that using micropayments requires a shift in thinking from "everything on the web is free" to "paying for content." This argument continues that in order for micropayments to be feasible, they must be widely accepted, and to be widely accepted requires a fundamental change in the way users consider content.

Historically, the concept of micropayments actually predates the web. Ted Nelson’s Xanadu project includes the idea of users paying fractions of a penny for content. Nelson was thinking about these concepts in the late 1960s and publishing them in works like his book Dream Machines in the early 1970s. Although he continues to work on this material, many have accused him of dealing in vaporware.

Scott McCloud talked about micropayments in Reinventing Comics which was published in 2000. On page 184, McCloud said that he’d been watching the micropayments industry since the mid-1990’s – this follows logically the invention of the web in 1991 and the invention of the first browser, Mosaic, in 1993 (closely followed by Netscape).

Since the invention of the Internet, people have been trying to figure out ways to make money off of it. Initially, when the Internet was still officially used for research, money-making was mainly the purview of companies selling products that supported the servers and network equipment required to make the Internet work. During that time, the bulk of the Internet was managed by the U.S. Government and various academic institutions, who went so far as to isolate commercial traffic (which was changed in 1991 with the establishment of CIX – the Commercial Internet Exchange – after the National Science Foundation lifted the restriction against commercial traffic on the Internet).

Later it was individuals with shaky ethics and illegal or at least immoral scams like the first "MAKE MONEY FAST" pyramid scheme and the Cantor and Siegel spamming lawyer team.

But it’s really been with the development of the World Wide Web, something that people could SEE that went beyond the text interactions we’d all been used to for years and years before 1993, that the idea of making money online has really taken off. Now a clothing manufacturer can show her wares online and people can see pictures just as they might in a physical catalog. Artists can show samples of their work. Authors can make their text pretty. And the power of the click far and way dominates any other mode of navigation.

The fantastic sense of newness, of connectedness, convinced a lot of people that there was money to be made on the Internet. But with the boom in the late 1990’s and the bust shortly thereafter, people are a lot more skeptical. The Internet is a tool, a means by which the brick-and-mortar world can be streamlined and assisted. That does not make it into a money-generating machine. And yet, there persists the idea that it’s done so much to streamline commercial interactions – maybe there could be a little more?

Maybe, without all the bells and whistles and craziness of the boom, there are still ways in which creators might be compensated for providing their content?

It’s with that hope that Scott McCloud launched his new webcomic The Right Number. At the same time McCloud launched his comic, BitPass launched their micropayment system. It is through this company that you buy the ability to view McCloud’s comic for six months or thirty-two viewings for twenty-five cents. BitPass offers its "prepaid cards" in the amount of $3, $5, $10, $20, and $40, which you purchase through either PayPal or a credit card.

When asked "why BitPass?" McCloud responded:

Over the last few years I’ve looked at about a dozen would-be micropayment systems. All of them had something wrong with them. Some could only go down to a quarter (BitPass can go all the way down to a penny), some charged a set up fee or a flat monthly charge, some were just flaky. I had a list of about ten requirements for successful micropayments, and BitPass met them all. I especially liked the speed and simplicity of the system.

Signing up for a BitPass card was easy. I started at Scott McCloud’s The Right Number page, used my pre-existing PayPal account, and was instructed to generate a password which created my BitPass account. Everything was neatly done with cookies and logins, although I used Interent Explorer and so have no idea how it interacts with other browsers.

Anything that you could potentially purchase with BitPass is marked with the BitPass symbol – a square divided in four with one panel blacked out and the other three panels all in blue or in red or in yellow or in green. In various colors. Click on the symbol and you’ll see your Control Panel, showing your balance and your current Threshold. It allows you to Add to your BitPass card, Set your Threshold, Logout, or click on the question mark to see what the color codes mean.

Blue means "Premium content indicator. Not logged in." Red means "Not cheap. Above your threshold price." Yellow means "Cheap. At or below your threshold price." And green means "Free. Already purchased content."

Two other sites are offering content through BitPass – a band called The Big Friendly Corporation and a musician named Joshua Ellis. Just to see if I could do it, I bought Ellis’ song "Succubus" for fifty cents. I was successful. A creepy little tune with interesting lyrics, the whole transaction was actually kind of fun.

Every human being on this planet has a fundamental urge to do what they want. We are thwarted in this by the structure of a society that requires us to do things like work in order to earn money to buy food and therefore be able to sustain ourselves. The best case scenario is to work at doing something you like and prosper. The worst case is to be forced to do things you hate in order to survive.

If micropayments enjoy even a modest success, allowing creators to receive some compensation for their work, that’s a big step toward that best-case scenario world.

Kelly J. Cooper is the Executive Editor for Features.

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