Sunday, December 6, 2020

Can Micropayments Even Work? (2007)

Editor's Note: this is a post from my old Serendipity weblog, "Pawprints of the Mind," which was originally posted over 13 years ago, on 2007-05-13. The text below is reproduced verbatim from the original post.

(This is not entirely academic, as a current goal of my day job essentially amounts to implementing a micropayment system.)

I am beginning to believe that the fundamental problem behind micropayments as a viable option for widespread payment is that credit cards are effectively already micropayments. We're just spoiled by cash. Physical currency is limited by reality. There's not a limitless supply to steal, nor can it be readily created. Undetectable counterfeits cannot be manufactured by poking a few bits inside a computer. Rather, it's difficult to produce high-enough quality counterfeits, which is why good counterfeits only come in $100 notes. The run-of-the-mill counterfeiters are stuck trying to figure out how to make a passable $20 out of card stock or ordinary paper, because anything bigger is subject to too much scrutiny for their materials. (Even then, a local supermarket tests all those, pushing the bar down to $10.)

In essence, I suspect the cost of doing business with a credit card company is mostly the cost of implementing imaginary money securely. The more credit processing costs, the fewer shops join in, and the less of the currency marketshare the creditor ends up with. On the other hand, the services can't be priced so low as to be unprofitable. Not to mention, the more that people use their cards, the more interest the creditor can collect at little extra cost, as all the billing and accounting framework was already in place for that cardholder anyway. Charging less makes economic sense for them, even if they were a monopoly.

A credit card company ends up shaving a few percent off transactions made through them. Micropayments want to be the same thing, only smaller: shave a few percent off penny-sized transactions and make up for it by volume. But the micropayment competes with the credit gateways, if one of the main ways of getting money into the system is to purchase microcurrency on a credit card. Inside the system, the shaving has to be high enough to make up for the transaction cost of the microcurrency being bought and sold, as well as the real costs of doing the transaction and turning a profit.

And if micropayments are essentially equivalent to real currency, then they're also equivalently desirable for fraud, stealing, and counterfeiting: something the large creditors are spending plenty of money on for the best and brightest to counteract. This brings up another point: micropayments probably won't have the same amount of consumer trust as credit cards, because personal liability is legally limited to $50 on the cards. This is not the case for micropayments, which is going to make people not want to have too many of them at one time. That in turn limits the total amount of microcurrency that can be circulated, and restricts the market for higher-priced microsales.

Is it possible to best Visa and MasterCard at their own game?

No comments: