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« User inexperience | Main | Is there money for payments? »

Microebb and microflows

By Dave Birch posted Jul 17 2008 at 6:28 PM

[Dave Birch] The subject of micropayments seems to ebb and flow. I've just been putting together some review comments for a European Commission report on some stuff, one part of which asks whether there is a new need for new micropayment systems or not. I've posted an edited version of my response below because I'd like your opinions too. You might want to read "The Case for Micropayments" and "The Case against Micropayments" first! If you do, you may conclude that the mobile phone model of pricing seems right: you pay a fixed subscription for a bundle of services, but if you want more you pay extra, and you pay extra for stuff like ringtones. Seems reasonable: I don't want to be bothered about paying-per-page, but on the other hand I would like a simple way to buy content, just like I do on iTunes. In fact, one of the reasons why I buy music on iTunes and nowhere else is because on iTunes it's easy. Click. Done, One euro.

If we put nanopayments (ie, payments below, let's say, a few cents) to one side, and we assume that payments over ten quid will be dealt with through other channels, there's still a ten pence to ten pounds sweet spot that really ought to be filled by pre-paid offline contactless solutions in the physical world and some sort of equivalent in the virtual world. What that equivalent will be is not clear at all. Just to illustrate with a couple of examples that relate to the two different subsectors (ie, paid content and P2P) that I refer to in my response, I had a couple of e-mails about new micropayment targeting different environments. One of these was sparechange, a Facebook application for sending small amounts P2P between friends, and Znak it!, which is "coin" scheme for the web. In Znak it!, the consumer prepays for coins of predetermined amounts (as they did for Digicash, Millicent and so on) and then spends the coins on paid content at web sites. I'll give it a try when it's up and running. In sparechange the customers load a pre-paid wallet that is then used to fund P2P transactions. Unfortunately, I couldn't try it out because when I tried to load it using PayPal, this happened:


Just when I was complaining about contactless the other day, I found it really annoying to have the transaction declined but not to be told why. Anyway, I gave up, as any normal person (such as all the people who don't read this blog!) would.

When it comes to thinking about the need for micropayments, and taking on board the basic arguments expressed in the Neilson and Shirky pieces, I think we need to examine two separate questions. One is the question of whether micropayments are needed in order to either stimulate or support various types of content based industries. The other is the question of whether interpersonal micropayments are needed for more general purposes.

The subject of micropayments for content has been much discussed since the very dawn of e-commerce and it is one area where thinking has changed greatly over the last decade. It was difficult to predict when the first websites were created that the combination of paid search and advertising would turn out to be such an enormous and widespread industry. Many people (and I was one of them) couldn't see how a rich content environment could be nurtured without some form of micropayments: I can remember, at various times, looking at Digicash, Cybercoin, Hashcash, Millicent and goodness knows how many other schemes for one client or another. Since payments mean trade, I assumed that creating new micropayment schemes would lead to more, and new kinds of, e-commerce. I was wrong: None of the micropayment players were able to get a toehold (on the Internet: Premium SMS worked very well for mobile), and the physical world e-purses never established a bridgehead in the virtual world either. So nothing much happened.

Meanwhile, the world of advertising moved forward to deliver new services for the web, services that were enabled by the web itself. The result of these paths has been that many new content businesses have simply abandoned the idea of using payments at all, let alone inventing their own micropayment mechanisms, instead focusing on various advertising-supported and advertising-related business models. While these are clearly dominant at present, it is not transparently obvious to me that this necessarily means that these business models will continue to be dominant in the future. I am certainly no expert on either advertising or the relationship between advertising and monetised content, but it does strike me that advertising-supported models may be a little inflexible. They suit certain kinds of content, but not others. They may not, in the long run, support a wide enough variety of content to continue the process of innovation and experimentation that has formed the online environment that we know today. Therefore, while it is true to say that there is little demand for new micropayment mechanisms to support paid content at this time, I would not rule out a resurgence of interest in more sophisticated micropayment schemes in the future.

The issue of interpersonal low value payments, perhaps visualised as an order of magnitude larger than the micropayments envisaged in the paid content world, is rather different. Here, there are a variety of very successful new payment systems that began life as interpersonal low value schemes, but grew as they began to support new businesses in a very flexible way. Around the world, these schemes have grown up in different sectors and have been spurred on by different applications, ranging from microfinance and remittances to rural trade and social payments. PayPal has grown to be a sizeable business on the Internet and in a number of developing countries (examples including Kenya and the Philippines form excellent case studies) a variety of mobile phone-based payment systems are already at scale. It seems to me that there is plenty of room for further innovation in this space, guided by the demands of different markets (some of which, such as the international remittance market, are very large indeed) and driven forward by new technology. These should be encouraged, because we do not know what kinds of new businesses may emerge in these markets once these kind of payment mechanisms are available. Payment mechanisms that can obtain traction because of the trust and familiarity gained through interpersonal use can move on to support business in ways that need not be designed into them at inception. This strikes me as being critical to keep innovation moving along: I know that it sounds a little like the "if we build it" business model that is so difficult to justify with charts and spreadsheets, but it feels correct.

As for how to support either the content or interpersonal micropayment scheme developments, I strongly believe (in the absence of any conclusive evidence to the contrary) that we should look to competition rather than regulation or intervention to assist that evolutionary process. I wonder if regulatory roadmaps have not supported competition in the micropayment space because they have been constrained by a focus on the law-enforcement agenda? This is an absolutely legitimate agenda, of course, and no one would seriously suggest that payment systems should escape regulation. We know that good regulation has helped to develop the payments market to where it is today, and I have personal experience of payments organisations outside of Europe looking enviously at the European regulatory environment -- no regulation at all is not useful in the payments world. Markets appreciate certainty. It could be that the payments roadmap has focused on a law-enforcement agenda to an inappropriate degree, though. This is quite understandable, given world events, but a correction might be the best way forward.

What I mean by this is that there is a tension between anti-money laundering (AML) and "know your customer" (KYC) regulation and the more inclusive agenda that we need to follow in the payments mass market. Perhaps a rebalancing to allow "light touch" regulation with exemption from more stringent KYC regulation would mean that limited value electronic purse and micropayment schemes could be provided to a wider market had a lower price. This allows the payment system to address to address subsectors that it cannot at present: Largely in the pre-paid area, where it is difficult to deliver cheap, simple, effective products to the less well-off segments of society because KYC and AML form both barriers to entry and raise transaction costs. A suggestion might be to raise the current limit of 150 euros maximum balance and 2,500 euro annual turnover for a light touch pre-paid account to 500 euros maximum balance and 20,000 euros annual turnover: My hope is that this would make it profitable to provide inexpensive pre-paid accounts to the general public with zero transaction costs. If this could be delivered in a simple implementation (almost certainly involving mobile phones) then it might make a "one euro, one click" low-end transaction viable over the Internet and mobile channels. The goal would be to have one pre-paid account that I could use to send my brother the 50 euros I owe him by using a menu on my phone or an SMS or something, but also to be able to send the person who wrote the great blog I am reading a euro by clicking on a button or something.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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Glad to see you still believe in micropayments, Dave. As for Mr. Szabo, anybody who calls their own misguided arguments "classic" doesn't need to be read. There is a micropayments system that has been in place for decades and that practically every American home uses: it's called metered billing for electricity. Most people don't bother agonizing over every flip of a light switch because of this, they just use it and adjust once a month when they get their bill. Metered electricity is a bit different than online micropayments in that online content will have a range of prices while electricity usually only has 2 or 3 prices per kWh, depending on how much you use in a month. But most people will not care and those that do will have help from good UIs that let you comparison shop as much as you want. There are only two reasons micropayments have failed so far. One is that the technologists who have attempted implementing them have not made them easy to use. The second is that morons like Shirky and Szabo have convinced the rest that they will never work. Someday when micropayments are ubiquitous, I hope that these idiots own up to the great damage they've caused by convincing people that something so fundamental will not work. Of course, it is also the fault of all the dimwits who listened to them and were not able to reason for themselves. Regardless, it will happen, it's only a matter of time and the right implementors.

"If we put nanopayments (ie, payments below, let's say, a few cents) to one side..."

Talk about inflation, the term "micropayments" has sure undergone it. It originally meant, as the prefix suggests, payments below 1/1,000 of a dollar (or event, for some, 1/1,000 of a penny). In terms of computer and network transaction costs there is no reason why such payments should not be viable. Most forward-thinking people in the early and mid-1990s thought they would be viable, and indeed revolutionary. When I wrote my classic critiques of micropayments (see http://szabo.best.vwh.net/micropayments.html and http://citeseer.ist.psu.edu/483486.html), the term had inflated to mean payments below one cent. Most digital payments folks back then were uncritical boosters of micropayments and few understood why they weren't working. More recently, since such micropayments (without good smart agents and user interfaces which have yet to be discovered) have as I predicted failed, micropayments boosters started to call all these "nanopayments", so as to rescue micropayment boosterism. They started to call traditionally granulated payments in the narrow sweet spot (i.e. denominated in pennies but too small for credit cards) "micropayments."

I'll grant that, especially for poorer customers and at its upper end, many transactions in the sweet spot can overcome mental transaction costs. But the flexibility with which the sweet spot can be used, as well as the lower end of the sweet spot, is still limited by mental transaction costs, as the predominance of flat rates suggests. The viability of some transactions, especially flat rate transactions and transactions with poorer customers, in the sweet spot does not at all conflict with my explanation of why micropayments (in the sense I and others used the term at the time) don't work, and indeed mental transaction costs still as much as ever limit useful price granularity at the lower end.

Hello Dave and thank you for mentioning Znak it! as an example of several new (possible) solutions to the old dilemma of free vs. paid content.

Taking advantage of the opportunity, I would also like to point out to several important developments or at least differences between the “old” micropayment schemes such as Digicash or Millicent (or American BitPass, for that matter) and the new ones, such as Znak it!

Here at Znak it!, we accept the basic notion that -- as Clay Shirky once wrote to me -- “web users hate being nickel-and-dimed,” and that “free” sounds better than “for-fee,” even if the fee is proverbial peanuts. The question is for whom it is better. The web users are increasingly also the content providers and, as such, they are obviously less willing to give their contributions for free.

Besides, the free-is-better logic applies mostly to situations where we compare generic or popular content that can be easily copied and distributed to millions of web users by many different providers. Advocates of this model seem to forget that a free (that is ad-sponsored) weather forecast or a picture of someone’s favorite pet is one thing -- it can or even should cost nothing -- pictures of Angelina and Brat’s newborn twins, is a completely different one. (I wish Mr. Shirky owned those pictures, then I would challenge him to publish them on the Internet for free or, via Znak it! naturally, where he could generate about $200,000 per million views per day, assuming each view cost the user only a quarter! I wonder what he would choose.)

The same is true with other types of high-quality or, as we call it, premium content such as copyrighted art, exclusive interviews, research reports, individualized advice, reviews and online testing, Same with the news portals or popular weblogs or political or non-profit organization that would rather not use advertising and for whom paid subscription and login requirements do not work. Same with lots of entertainment or interactive game portals; even some of the social networks could use micropayments to better manage their content and their membership as well.

Because the type of content matters; price and value are inseparable also in the virtual world.

Web users, just like any other consumers, do not ask “how much is it?” before they know what it is; and, “for free” does not answer such important questions as “how good the content is” or “how reliable it is” or even “who else can see it.” In our humble view, quality, reliability and exclusivity are values for which people are willing to pay and will pay, if they only have an easy-to-use and dependable system (such as Znak it!, for example).

The way in which the content is being offered is equally important. Advocates of free content often cite the case of The New York Times news archives as an argument that their model wins. It is a false argument. It refers to a subscription-based model that requires a web user to create an ID and a password and pay a substantial one-time or monthly fee using a credit card or APM (which all require more ids and passwords etc) No wonder, the NYT did not have many takers. But paid subscription is not the same as micropayment-based content management, and of course, it does not work for someone who needs only one or two articles from the NYT archives in a year – but Znak it! would.

In addition, using our Znak it! model, the user would not have to register with the NYT nor repeatedly disclose his/her credit card info, nor any personal info, for that matter. Two clicks with the mouse and s/he can view the pre-paid premium content. More importantly, Znak it! can be configure in a way that the user could be completely anonymous to the content providers, free to navigate from one site to another without being traced and profiled – a very important benefit.

The search-engine-meets-advertising model assumes that people are willing to trade off their personal info, their habits and preferences for payless access. The recent cases of YouTube and Viacom show something else. Perhaps, the average user has simply had no idea so far how much personal information is being saved, processed and sold behind those seemingly free web pages. And, that is just the beginning. Good contextual ads require even more personal information. Will web users tolerate even more exposure to save a few bucks?

We claim that privacy is important; it is a value, and at least some users will prefer to pay for (nearly) anonymous, secure and exclusive access to premium content. Micropayment-based content management solutions as Znak it! can be a great alternative here.

Znak it! can also be an alternative and a solution to those who would rather pay for access than be exposed to countless pup-ups and banner ads. We are not against online advertising, but according to one recent study (gemius.pl), some 15% of web users prefer ad-free options. Paid content can and should be a valid choice for those customers.

Naturally, there are other arguments, economic, psychological etc. that make us convinced that paid content and micropayments will find its loyal users, just like advertisement-based content did. Your readers probably already know them, so let me finish by posting a link to an excellent article by Nicolas Carr in the recent issue of the Atlantic Monthly, titled “Is Google making us stupid?”


I hope not. Still, Znak it! and other agents and promoters of high-quality content may be options for those who worry that Nicolas Carr and his scientific references might be on to something.

Greg Golebiewski
Znak, Inc

Great post Dave. Lots of insight. The info on the "light touch" regulation is just what I was looking for...many thanks.


There are a number of ways to buy content quickly and easily. PayPal is accepted far and wide for content, and PLR articles are quick and easy to buy as well as being inexpensive.

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