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Micropayments discovered: Micro power in fintech

Jacob Dunn

Micropayments are opening up new models of how we inform and entertain ourselves. Subscription fatigue is setting in and content creators are looking for new ways to attract consumers. Micropayments, through pay-per-click or pay-per-view models, can serve end-users more efficiently, expanding the market and bringing more people into the fold.

A 2019 survey by The Harris Poll found that the average US consumer subscribes to three subscription services — up from 2.4 five years ago. While this may seem like bad news for micropayments, consumers also stated that they did not plan to increase the number of subscriptions in the next five years. Instead of signing up and paying for more and more subscriptions, consumers are more likely to maintain that same number canceling one before signing up for something new.

Of course, paying for goods and services online presents unique challenges for payments providers and consumers alike. The cost to process transactions can sometimes outweigh the benefits of making small payments. Payments giants such as Visa and PayPal can offset the cost to process small transactions, but smaller payments systems have struggled to allow micropayments.

To understand micropayment is to understand the technology connected to it. Technology is constantly improving, affecting every aspect of our lives. One of the biggest challenges in life is simplifying our finances and the best way to do this is via fintech — a developing area that brings together the best financial products worldwide at the lowest possible price. A crucial part of this is the processing of very small fees that cannot be handled by traditional credit card companies.

 

Micropayments in the loop

Among the most important characteristics of such transactions are small sums of money being used online. There are various sizes defined as a maximum for the transaction to be considered a micropayment. Different payments providers define it differently. Some consider a micropayment below $1 while others place it below $10. Such small sums are too small for consumers to justify flat transaction fees and are also too small for payments providers to profit from a percentage fee. Here’s where innovative payment technology comes in.

Theodor Nelson developed the idea in the 1960s, already well before widespread internet use. One of the most problematic obstacles was the cost of transactions. Nelson proposed that in order to be profitable, these small payments should have the transaction fees of maximum 10 cents. Such transactions were not efficient for payments providers. Cryptocurrency, however, reawakened interest in micropayments and drove them out of that niche. In this report, we’ll dive into how micropayments work, key drivers and we illustrate its future. We share one of our client’s success story to emphasize the possibility that micropayments hold also for smaller companies. “Micropayments are going to be more and more popular, especially when selling online content and in-game purchases. Blockchain technology can enable wider adoption of micropayments because it reduces transaction costs and allows for instant settlements.”

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Key technology development drivers

Cryptocurrencies allowed to significantly lower the transaction provision fees. In some cases even twofold. A remarkable example in the discussion about lowering costs is Bitcoin Cash and Ripple which keeps transaction fees below one cent. Another advantage of digital wallets with decentralized cryptocurrency is the protection of private data and anonymity in comparison to traditional credit cards. Blockchains, the underlying mechanisms of cryptocurrencies, have made microtransactions efficient for both sellers and buyers ensuring also its security, high speed and availability. Blockchain technology is based on the transactions database spread across different computers. Customers instead of having multiple accounts in different services can use an online crypto wallet.

To make the system more efficient, and lower processing fees, companies started to use micropayment channels technology. It was proposed as an alternative to the bitcoin protocol’s capacity. Lightning Network mechanism, which made transactions almost instant and reduced costs, relied on the creation of the second layer on top of the cryptocurrency while keeping the peer-to-peer character of the transactions. A payment channel is basically the agreement between sender and receiver of a micropayment.

The blockchain technology has energized micropayment systems and the whole infrastructure connected with it. While earlier sending small amounts of money was seen as costly, because you still had to pay transaction fees, there were some indicators that micropayments could work

 

Mobility as micropayments key trigger

Access to financial services was limited by a lack of technology and the appropriate devices. As a result, many transactions were completed on a cash-only basis when they occurred outside of the normal banking system. However, the huge popularity of mobile services created an opportunity to provide financial services over its wireless network. Research showed a significant and growing market demand that was particularly important for all GSM (Eng. Global System for Mobile Communications) players.

This demand intimated that it was technically feasible and profitable to deploy financial services over mobile networks. The big picture showed that mCommerce might fill a major service gap in developing countries which is critical to their social and economic evolution. Practice shows that the range of features accessible in particular environments can be applied elsewhere if the target markets are similar. With only minor variations from the mainstream, the features of all systems need to include:

• Over-the-air prepaid top-ups using cash already in an account, such as blik
• The ability to transfer any amount of money between users’ accounts
• Provision for cash deposits and withdrawals
• The ability for an employer or family memeber to deposit funds into a customer account
• The ability to charge for bill payments

Since all the above points are now achievable, micropayment has recently been reconsidered as a viable technology, largely due to the development of cellular networks. The main reason for this is not technological but more down to simple economics. Independent online service providers receive much revenue from mobile users. Mobile networks often charge users for admission to low-cost services on a fixed network. Alongside this, many applications require a solution for the commissions placed on small transactions containing mass data storage and message exchange. Insomuch as micropayment systems are designed to purchase exceptionally low-cost items, it is crucial that the value of each individual process remains very small.

 

Areas of micropayments

Importantly, micropayments and microtransactions, sometimes get used interchangeably, in practice these are different things.

Microtransactions are often for defining low-value transactions in games, generally with virtual currency. In contrast, there are no strictly defined areas of applications for micropayments.

Microtransactions appeared as a response to the drawbacks of pay-to-play and subscription business models, helping to reduce the barrier of the high prices for games. Market shifts and saturation in the 2000s caused many major game creators to reassess their sector. This led to the free-to-play business model in which customers could play a basic version of a game for free, or pay for the full version.

Some of the biggest adopters of the microtransaction model are mobile app creators. Interestingly, according to PricewaterhouseCoopers, the allocation of the revenues of video games publishers in microtransactions has grown from $1.2 billion in 2010 to $2.5 billion in 2014. Game development studio Ubisoft is one company successfully implementing this model. According to Business Insider, their revenue from the micropayments surpassed the physical selling in 2017. Moreover, the company’s revenue from the micropayments was almost 83% higher in 2017 compared to 2016.

Any small-value e-commerce transaction performed in such areas as gaming, applications, online publishing, music and video or even charity and crowdfunding can be called a micropayment. Moreover, such transactions are widely used by content creators, consultants and other experts working online.

The widespread use of micropayment systems indicates that customers are ready to pay small fees in order to access products and services. Among companies which adapted micropayments are technology giants such as Apple, which used this model to charge customers for music downloads. The iTunes’ model, which proved to be successful, attracted followers in other sectors. Media agencies are increasingly letting readers access content with relatively small cost per piece, with companies profiting from increased sales. In an article by Bleyen and Van Hove, in 2007 researchers described the results of the conducted survey in newspaper agencies. The data shows that micropayments were adopted by 13% of the surveyed newspapers as early as in 2007. The example of the company which adopted this business model is a Dutch startup Blendle. The company gathered different articles and sold them to customers receiving a commission on each micropayment. Such payments became even more popular with the emergence of bloggers, with readers charged pay-per- view.

Other examples include Ivend partnering with GoByte Pay which introduced vending machine selling coffee and other goods with cryptocurrencies. The mechanism underlying this experience is a wallet with GBX currency, which enables low commission fees and fast small payment processing.

Social micropayments function as small donations for the content creators. The example of such a platform is social media service Steemit where users can earn cryptocurrency from each piece of content they share. Flattr, which is working on the basis of the subscription model, also allows patrons to support content creators.

 

Systems which exist to support

Main systems which support microtransactions include PayPal Micropayments, SatoshiPay, Skrill, Amazon Payments, CashSender, and Stripe. Companies such as PayPal and Amazon are more regulated, whereas SatoshiPay is based on the decentralized blockchain technology. There are a few types of models of Micropayments can be added to the monthly bill, taken directly from the customers’ accounts, e-wallet or prepaid cards. Customers can either prepay the particular amount of money in the form of subscription or pay afterward the total amount of the microtransaction. Other models include payments for each transaction separately. Online media agencies also use a collaborative model, selling their content for the small-value fees together.

 

How it works

Micropayment platform schemes that are dedicated for processing small transactions work in two main ways: One is that a seller or service provider establishes an account with a third-party micropayment provider who accumulates, stores and distributes the monies accrued. Both seller and user/ buyer are required to establish an account with the same micropayment provider for easier and safer implementation. The provider manages a digital wallet where all the payments are stored until they get to a larger amount and can then be sent to the recipient.

The Freelance, for example, is a market workplace for freelancers to connect with companies to develop small projects. A company hires a developer from The Freelance to make few changes
on their website for $1 per hour. If the developer works on it for eight hours, the task giver — the company — pays The Freelance. In this case, The Freelance collects all the fees. It also stores the remainder in a developers’ digital wallet. If a developer is good and garners many fees, The Freelance accumulates IOUs to the point where the wallet contains a significant sum, e.g. $500, which is then sufficient to be withdrawn. ‘The Freelance’ then pays the developer directly into his account.

The second way can be that micropayment systems can operate as a system for prepaid transactions. A user/buyer makes use of a micropayment processor account by depositing in advance a certain amount of money in it. As long as the seller (the other side of the primary transaction) uses the same account provider, everything works smoothly as the user’s account with the provider is easily debited for the amount of the purchase. The payment is simply made by using a micropayment processing account. Let’s illustrate this with the most common example: PayPal.

PayPal is a very popular micropayment provider who has its own requirements for micropayments regarding the maximum amount of the transaction. According to PayPal, a micropayment transaction is less than $10. So let’s imagine that a PayPal user decides to pay $200 into his or her account. From that point, the user can become a buyer by purchasing an item for $5 from an online store. The purchase price is debited from the PayPal account and used to cover the payment. On completion, the balance in the buyers’ PayPal account will be $195 minus PayPal’s fees for micropayment transactions, the online store’s balance account is plus $5, and PayPal gains the provision fee.

In all these scenarios, commercial organizations have much more to gain by addressing the problem of fiscal cash transactions by micropayments. Cash is not only more difficult to use, but you waste a lot of time moving it outside the banking sector. In the 21st century, no country exists beyond the scope of the banking sector and so for their own economic progress, they should be encouraged to move away from cash. The extra motivation here is that the resulting low-cost solutions and mechanisms that work in these environments can then be efficiently applied in all types of developed economies.

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Technicalities

The main issue with low-value transactions has been that processing and transaction fees diminish the final settlement amount.

Payment processors place additional costs for a multiplicity of reasons including infrastructure costs, administrative costs, and paid mechanisms for fraud prevention and dispute resolution. In the past two decades, a lot of research has been undertaken on using digital communications and cryptography to reduce or erase these costs. For banking facilities, these fees ideally need to be down to the fraction-of-a-cent range.

It can be expected that content servers for the global information infrastructure will soon operate billions of these small transactions that are computationally complex. While costly cryptographic protocols are now impractical and obsolete the micropayment process can be bootstrapped with already well-known payment protocols for larger amounts, but does not depend on them for each microtransaction.

Special attention is given to its integration into IBM’s Internet Keyed Payment Systems at its most basic level. The product itself allows for the possibility of a payment protocol in wireless networks. The protocol usually assumes two techniques of transaction execution:
• In on-line mode with the participation of a trusted website — for macropayments,
• In off-line mode using electronic money, mainly for small value transactions — for micropayments.

The main purpose is to predict scenarios of various events and transactions in the protocol — and to be able to analyze any part of it. Paramount within this are the aspects of payment security such as asymmetric cryptography techniques, public key infrastructures and many more. Needless to say that for the evaluation of any protocol, performance must perfectly blend with the criteria specific to the wireless environment.

 

Espeo’s client success story: PressDoor

PressDoor is a service directed at the media publishers market. The aim is to monetize published content also with other readers than only with the full subscribers. Thanks to the adoption of micropayments, readers will be able to pay for access to a single article or a package of articles. The publishers decide what content bundles to offer and at what price.

PressDoor wanted to create an easy-to-use web platform that allows its end-users to buy digital content and the publishers to experiment with different offerings. To achieve this, PressDoor inserts a purchase window on the publisher’s own web page but connects to marketing services advertising the content elsewhere on the internet. A purchase is possible both with teleoperator invoicing and credit cards and on all reading devices, covering 99% of digital readers. The technological challenge was creating a browsing app for mobile and other devices that operates the complicated flow of micropayments. This app also had to guarantee user authentication while displaying the content according to the access rules defined by the publisher at the backend of the PressDoor platform. The reader is able to reread his purchased content with the same or also on other devices.

The project started in February 2018. Most of the time, Espeo provided a team of four developers, a tester, a UX/UI designer, and a project manager. There were a few major releases. Our team also traveled to Helsinki and spent one week in June 2018 working intensively with the PressDoor team. The beta testing started in September. In January 2019, the project finished with the platform ready to be offered to big and small media clients in the news media and magazine businesses. More future work is planned as new feature requests arise.

Espeo was responsible for full stack development including the integration of Amazon Web Services. We developed the backend using Node.js with extensive use of ES6 and Sequelize. It is fully integrated with AWS and Auth0 authentication. We created the frontend using React. An interesting feature was the implementation of extensive micropayment services, which became an integral part of the final product.

 

Conclusion — The future of micropayments

Some experts predict that in the future, credit card companies will engage in the competition for customer attention in the sector of micropayments to a larger extent. Pay-per-click models may become an even more popular alternative for the subscription model or advertisement. The potential of microtransactions for social media platforms, e-commerce, online gaming and the press have yet to be explored. The important role of microtransactions for the internet of the future will be in ensuring user privacy, at the same time being fast, cost-efficient, and flexible.

Our expert and consultant Dominik Zyskowski says that “micropayments are going to be more and more popular, especially when selling online content and in-game purchases. Blockchain technology can enable wider adoption of micropayments because it reduces transaction costs and allows for instant settlements.”

Fintech is changing the payment landscape

“Fintech has had a more pronounced impact in the payments market, where firms have expanded their presence in non-capital intensive business such as cross-border transfers, micropayments, and card payments because those are the areas where the incumbents have accumulated the most glaring shortcomings, often resulting in inefficient and overpriced products. This is affecting the payments landscape. In a European Banking Authority survey, a majority of incumbent banks indicated that payments is the business area most affected by fintech competition, eroding fees and commission income.

 

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