What is micropayment?

Micropayment refers to an online financial transaction that involves a very small amount of money. In general, the sum is less than $ 1 and in certain cases, it may represent even a fraction of a cent. However, the understanding of micropayment differs from business to business; while certain companies may refer to payments below $ 1 as micropayments, others may classify them as transactions below $ 5, $ 10 (like PayPal) or below $ 20. Micropayments are mainly used in Business-to-Consumer (B2C) businesses.

Micropayments were initially developed for sale of online content

Micropayments were initially devised to allow small payments for sale of online content, links or downloads to consumers. It was thought as a supplement to advertisement revenues. From the very start in the 90s, several companies like IBM and Compaq showed interest in this payment model and in 1999, they even started developing their own micropayment platform, foreseeing an extensive use of micropayments for Internet transactions. At that time, there was even a wave urging to create microtransaction standards and the World Wide Web Consortium (W3C) went as far as developing a system to incorporate micropayments into HTML.

In the late 90s, IBM's Micro Payments was set up with the aim to allow vendors and merchants to sell content, information as well as services over the Internet for minimal amounts as low as one cent. Another attempt to make this model work was translated into the inception of iPin, a venture-capital-funded startup allowing purchasers to include incremental micropayment charges to their existing bill for Internet services. However, its services were not widely adopted.

Another micropayment system created was Millicent. It supported transactions as low as a tenth of a cent up to $ 5. It was later associated with Compaq. The NetBill e-commerce project at Carnegie Mellon University was yet another research on distributed transaction processing systems and development of protocols and software to enable payment for products and services over the Internet. One of its features was pre-paid accounts from which micropayment charges could be drawn. In 1997, it was absorbed by CyberCash and ultimately by PayPal.

The need for micropayments with e-commerce

The rapid development of e-commerce, online marketplaces, online gaming and auction sites, the need for inexpensive and simple payment methods has emerged more than before. Micropayments can be used for paid content such as online papers, archives, music, videos, virtual games, software downloads, tickets and stamps amongst others.

Micropayment models are divided into four categories

There are currently four major models of micropayment systems.

Prepaid model

The prepaid micropayment model is offered in the form of a subscription. Users are allowed access for a definite period of time or amount of usage. This model is commonly used for advance payment of newspapers, online games and social media sites and is the largest micropayment model used.

Postpaid model

Under this system, several microtransactions are summed up and charged after they take place. One example of such a postpaid model is charges for online music sales once multiple individual songs are bought.

Collaborative model

The collaborative model works well for online publishers. It involves a business collaboration approach connecting different sites together as in most cases, each online publisher does not have enough readership volume on his own to support a profitable a micropayment system.

Pay-as-you-go model

The pay-as-you-go model involves paying as each transaction takes place. This model is not really practical for businesses as in reality, transaction costs could exceed the price of the product or service itself. Businesses may easily fall into an overall loss. However, this model is in favor of consumers who pay only for what they want.

Micropayment options that are available today

Call2pay: Payment by telephone whereby the customer has to call a toll number.

Handypay: Payment via mobile phone bill whereby the customer receives an SMS with a TAN to confirm payment.

Ebank2pay: Payment via online banking whereby the customer transfers the amount of his online banking and a TAN.

Credit card: Payment via credit card whereby the customer has to enter his credit card data to confirm the transaction.

Direct debit: Payment by direct debit whereby the customer has to enter his bank details to confirm direct debit authorization. 

Major providers currently offering micropayment services

PayPal

PayPal MicroPayments is a micropayment system that charges payments to the user's PayPal account. It allows transactions of less than $ 12 and as from 2013, it is available only in selected currencies.

Flattr

Flattr is more of a microdonation system than a micropayment system launched in 2010. Bank transactions and overhead costs are involved only when funds are withdrawn from the recipient's accounts.

SatoshiPay

SatoshiPay is a micropayment platform designed for online media. It enables websites to monetize content through a single click or automatic payments. Transaction amounts down to $0.01 or even less. These "nanopayments" are enabled by smart contracts and blockchain technology.

Swish

Swish is a micropayment system operating between bank accounts in Sweden. Since the use of cash has dropped drastically in the country since 2010, it is used for small transactions between people and small businesses that do not want to incur credit card reader's costs. Half of the Swedish population are registered users.

Understanding the advantages and disadvantages of micropayment systems

As with any payment system, micropayment system presents an array of advantages and disadvantages.

Advantages

• Financial transactions are conducted online with a degree of anonymity.
• Real as well as virtual products and services are purchased quickly and conveniently.
• Micropayment systems can be expanded rather easily to accommodate new products and services.
• Fewer online transfers of actual payment reduce the opportunities for theft or abuse.

Disadvantages

• The account holder is left vulnerable if sensitive account information is compromised.
• Account holders may lose their investment in case of micropayment vendor/processor dishonesty.
• Single purchases may cost more than a combined larger purchase.
• Auditing may become really expensive with the expansion of the number of micropayments