New business models are emerging as digital content providers and e-commerce merchants explore alternative ways to make money from their digital goods beyond the traditional subscription and advertising based models.
Micropayments, defined as transactions below $7, enable merchants to extract value from their digital goods without requiring consumers to enter into long-term financial commitments as is the case with the traditional subscription-based model.
Despite the tremendous potential for micropayments, there is currently no universal solution that combines the critical elements for success: low cost, high speed, an excellent user-experience, compliance with regulation and the flexibility to support multiple distribution business models of the media, technology and telecom industries. As a result, the micropayments industry is highly fragmented.
Leveraging pre-existing financial relationships and billing infrastructures, mobile and fixed-line operators and ISPs have begun to offer third-party billing services to merchants and are investing in the development of the reselling of their payment services. This is largely motivated by opportunities to exploit sunk costs and to combat margin erosion and high attrition rates through ownership of specific content or large base of consumers.
While there are considerable benefits for these players, there are key drawbacks from the merchant perspective: the merchant must surrender its financial relationship with its consumer to the billing telco operator and restrict its reachable customer base to that of the telco's. Given that merchants are traditionally reluctant to give up financial relationships and that no telco operator can provide universal reach, further development in this space is needed before significant uptake can occur.
With their broad reach, universality and well-established infrastructure, payments cards (typically Visa or MasterCard) are familiar to consumers and thus well-positioned for uptake from a consumer adoption aspect. However, the cost of payment acceptance to the merchant remains the biggest challenge to its use for payments of small value. There is a need for a viable price-competitive offering to make it a commercially viable option.
Nonetheless, the opportunity in micropayments has generated significant interest in the payment card industry: one international card scheme interviewed saw significant opportunities associated with mobile payments as a potential extension of a P2P/money transfer value proposition. A top-tier global payment processor declared it had recently invested in the micropayment processing opportunity.
E-wallets offer a quick and convenient user experience to consumers and provides a cost-effective solution for merchants. Value is stored either in real or virtual currencies in online wallets, which can be used at a number of stores. It is typically funded by a card or ACH transaction with instantaneous or deferred value loads.
Merchants benefit from prepayment and low transaction frequency (the transaction cost of one prepayment can be spread over a number of micropayments). Consumers enjoy seamless and instantaneous functionality (transaction authorization is swift and convenient) which is crucial in facilitating consumer adoption and increasing the frequency of transaction initiation. The main disadvantage of e-wallets is that merchants must surrender their financial relationship with customers to the third-party e-wallet provider and access to customer data.