Monday, 3 May 2010

Micropayments (not quite dead yet)

Every so often someone suggests the saviour of the Internet will be micropayments. Well, I wasn't really aware the internet was dying, but assuming that it is, and I'm just not being very observant, I notice that none of the micropayment systems actually seem to work particularly well.

Lets assume that no-one cares about privacy here. But we do care that people can get started using the system with essentially no financial risk. And we only care about very small transactions - sub 10 UK pence.

Now, sub-10p prices don't make much sense from the perspective of credit card transactions - the transaction costs are to high. But we are not talking about the credit card world - we are talking about a world where the game is simpler, and the issues of protecting transactions are smaller.

Now, several people could set themselves up as micropayment agencies. Lets assume 3 companies do this, google, amazon and paypal.

They all choose to follow the same system - when a user goes to a micropayment site, the site displays a form following a particular microformat. The user enters their username and the address of their chosen server - this is transmitted back to the host, who we then are redirected to in order to complete the transaction. Finally we are sent back to the host, along with a special token signed by the issuing agency promising to pay some quantity of money.

So far so good. Buts its quite cumbersome. I assume each of these companies might provide a browser addon to recognise the payment microformat, and do all the work automatically - at least on approved sites.

But even this isn't enough. I don't want to pay any money up front, because I don't know if anyone will actually accept micropayments. But neither google, amazon or paypal know me... so they come up with different approaches to get me paying.

Paypal say: You already have a paypal account, stick some money in there, and we'll pass it on. You can always withdraw it if you want.

Google say: Since you haven't given us any money upfront, when we redirect you back to the site, we will embed it in a frame and show you some adverts. We will try to recoup the cash from the ads.

Amazon say: We're going to trust you. We'll sub you a bit of money, and then overcharge you later to try to make up our loss - and our rep.

So paypal will just work - the website returns its tokens and paypal hands over the cash (the token is signed to identify the owner and paypal, so there is no question of duplication)

But amazon and google are risky. Google hand over the money made by the adverts (up to 150% the amount the site was actually charging... google keep the rest). This means sometimes you get paid less than you asked by google, sometimes you get paid more. Amazon will pay some percentage of their weeks total income - which may mean they pay more or less again than the site requested... because amazon generally charge people 11p to enter a 10p site, they can make up for the fact that they earn nothing from people when they first start to use the service. In the amazon case, they may split their money between sites, as some sites may be frequented by people who pay a lot, while others may be frequented by freeloaders... this would encourage site owners to encourage their users to pay their dues.

In the end, site owners can look at the payment authority and make a guess as to what each penny you request from them is actually worth - with paypal it will be a penny - but with amazon, maybe it will be 1.1p and google it might be .8p... you then might decide to charge a google user more - and an amazon user less. Google might decide it is worth having a second signature for people who have put money into a wallet in order to avoid adverts - because those people are known for being good for micropayments.

So - is the transaction cost low enough? Probably. Everyone is going to find a bit of money dropping on the floor- the question is do you make enough in total, while being able to weed out enough of the freeloaders.

Will it change the world? I'm not sure micropayments are the answer... but if they are, this might be the best way to approach them.

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