- You’re wandering through the endless corridors of the Internet, and you find an interesting article. But they want 10 bucks to read it – outrageous!
- You write science fiction stories, and you want to get paid. Nobody has heard of you yet, so you only want to charge a few cents to read a story. But the credit card companies take much more than that for every transaction, and you end up losing money.
- Your band wants to release an Internet single for only 25 cents, but you don’t want to sign any paperwork with iTunes or any other record company.
Why isn’t there a way to pay very small amounts of money over the Internet? Why are we still using credit cards or other similar billing solutions? The concept of micro-payments has been around for a very long time, attempting to address the very same needs listed above, which have existed since the dawn of the Internet itself. However, credit card payments (either directly between the end-user and the product source, or through a service such as PayPal or Amazon) still capture most of the market. Let’s see why:
Who will replace Paypal?
- Credit card transactions are fairly secure. Credit card anti-fraud is nearly an exact science, and many people feel very comfortable with using their credit card to purchase services and items, even over the Internet.
- Credit cards are ubiquitous. Nearly everyone has a credit card, no matter what country they live in. If a person has access to the Internet, it is even more certain that they have a credit card available to them.
- It’s easy to make automatic future charges to a credit card. This way it is easy to keep a subscription to a service on the Internet: if the credit card fails to make the monthly charge, the subscription can be canceled.
- A credit card represents one person or entity, and the paper-trail is relatively reliable and easy to track. This helps companies and service-providers feel better about using credit cards over other systems of payment – the credit card company guarantees payment, and the service-provider doesn’t have to worry about money laundering and other risks taken when dealing with money.
And one of the disadvantages of using credit cards is the high price per transaction. The service-provider needs to give a sum off the top of every single charge he or she makes on a credit card. That means that small payments are going to cost more than large payments. Many schemes have arisen to combat this, using available credit card payments. For example:
- Internal “tokens” from a service-provider: you pay $10 with your credit card, and you get tokens for use with that one company. This scheme works very well, in that the tokens can be arbitrarily small, and can be used for whatever the customer wants. For example, Skype uses this method to sell Skype Credits, which the customer can use for whatever phone calls he or she wants. The down side, of course, is that these credits can only be used in that one company. Furthermore, the customer is asked to put down a relatively large sum of money to begin with, and now there is unpleasant pressure on the customer to use up his credits.
- “All you can eat”, or “wait for the end of the month” systems: certain companies (like emusic) sell music in an all-you-can-eat scheme, for a fixed price per month. Alternatively, iTunes allows you to buy on a per-track basis, but they hope you buy enough to justify the cost of the credit transaction, which they perform once per month. These schemes also address the problem, but still demand a certain commitment on behalf of the customer.
Obviously, we need a standard, worldwide provider for paying and receiving very small payments. Some systems already attempt to do this (Peppercoin, for example), but their reach is limited at the moment. It becomes clear that the benefits enjoyed by credit cards (listed above) become realistic only when a full-blown infrastructure is raised. That means that in order for micro-payments to be accepted as easily and readily as credit cards are today, they must be supported by large, international organizations – like banks.
So what can we do?
Now we have a dilemma: why should banks endorse a new method of payment if nobody uses it? Even if such an infrastructure existed today, people would not use it immediately. And banks make enormous amounts of money off of credit card transactions. Conversely, as we have seen, a small company cannot provide a reliable, standard, worldwide system for micro-payments for only a few users, and then grow the system. We cannot wait for an evolutionary response, because it simply has no reason to come into existence. And no large bank-like company is willing to commit to the revolution. And thus we are in a kind of Catch-22 situation, where it seems like we will be using credit cards and credit-card-like systems for many years to come.
Eli.
The CEO Game.
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