Aggregation and Aggravation – Micropayments 2013 — Payments Views from Glenbrook Partners
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`Aggregation and Aggravation – Micropayments 2013
`by RUSS JONES on AUGUST 16, 2013
`in MICROPAYMENTS, RUSS JONES
`
`Micropayments is a problem that has never been solved in the
`payments industry. While there are various merchant-specific
`solutions for selling low-cost goods, the broader opportunity –– to
`pervasively enable micropayments –– continues to intrigue the
`payments industry.
`
`Why do micropayments endure as such a challenge in payments?
`The problem has been the same for many years – the challenge of
`absorbing fixed payments costs on a small value item. In
`interchange terms (1.9% plus $0.10), it’s not the 1.9% that’s the problem, its the $0.10.
`
`What’s Different in 2013?
`
`For starters, the scope of the problem is larger today than it was 15 years ago. What was
`viewed as an online problem for those selling low-cost digital goods, has today spread to
`merchants selling low-cost items in the everyday “cash replacement” market.
`Micropayments used to only be about apps and avatars; today it’s also about Coke
`machines and coffee shops.
`
`The landscape is also more problematic because of the changes brought on by the
`Regulation II “Durbin” rate caps. Unlike large ticket retailers, merchants selling low-cost
`goods in the United States saw a significant interchange increase in late 2011 when the
`card companies eliminated small-ticket interchange on “regulated” debit cards –
`effectively raising the debit interchange fees on small ticket purchases up to the Durbin
`rate caps.
`
`Against this backdrop, merchants have also become more sophisticated in their use of
`aggregation to minimize the number of actual transactions when consumers are
`purchasing multiple small-ticket items. Starbucks, for example, does one real-world
`funding transaction (on the front end) to load a prepaid Starbucks card and then plays
`down the available balance as the consumer makes $2.00 and $3.00 purchases over
`time. Apple, on the other hand, does one real-world funding transaction (on the back
`end) to bill for two or three days worth of iTunes purchases. Both approaches reduce
`their costs for what would otherwise be several small transactions (each having a fixed
`cost plus an ad valorem cost) to a single transaction (with the same ad valorem cost,
`but just one fixed cost component).
`
`The Apple back-end aggregation approach is enabled by card company “aggregation”
`rules that permit merchants to aggregate small purchases over a number of days up to
`fixed amount. These same rules are now available to some physical world merchants, but
`not all. They allow a transit operator, for example, to aggregate small ticket purchases
`over the course of the week.
`
`We also see a whole segment of the online market (digital goods and services) shifting to
`the use of virtual currencies. The rationale for this, from the seller’s perspective, is
`
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`March 21, 2014
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`Aggregation and Aggravation – Micropayments 2013 — Payments Views from Glenbrook Partners
`
`multifaceted. It’s the ability to control the branded-usage of payments inside an app or a
`platform — but it is also the micropayments rationale for reducing payments acceptance
`costs. These sellers are very aware that they are lowering their payments acceptance cost
`by replacing a number of smaller fixed cost transactions with a larger funding
`transaction (with just one fixed cost component) when the virtual currency is purchased.
`It’s hard to assess the true trends in virtual currencies, however, as Facebook is now
`exiting the market (moving away from Facebook Credits) just as Amazon is entering the
`market (via the introduction of Amazon Coins).
`
`From the perspective of a payment provider, there are also now transaction pricing
`alternatives that are optimized for micropayments. PayPal, for example, lets sellers
`decide whether they want to shift from its standard pricing model (2.9% plus $0.30) to a
`micropayments pricing model (5.0% plus $0.05). Sellers dealing in low-cost goods are
`happy to pay a higher variable component in exchange for a lower fixed component.
`PayPal positions this as part of their strategy for the digital goods market, but we note
`that it’s available to any PayPal merchant and should be the preferred model on any
`given purchase under $8.00.
`
`Google, on the other hand, provides a seller solution called “Google Wallet for Digital
`Goods” that gives merchants a simple one-click way to sell low-cost digital goods and
`services. Google will automatically optimize the fees to the lower of 5% or 1.9% plus
`$0.30 on each transaction. Google also appears to be experimenting with major
`publishers with a Google Paywall product that combines one-click purchases,
`micropayment pricing, and limited free access to sample the digital goods.
`
`Twenty years into the Internet revolution, the micropayment challenge remains very real
`for sellers that are dealing in low-cost goods and services. The challenge (or perhaps the
`opportunity?) will likely increase as more and more of the economy shifts from physical
`goods to digital goods.
`
`Give us a call if you are interesting in developing a prepaid or postpaid aggregation
`scheme for your business. There are many payment service providers that are active in
`the space and it might be possible to bring some of these micropayment techniques to
`your business.
`
`UPDATE: This post was corrected to reflect that card company rules do not allow
`transaction aggregation in the card present retail category.
`
`Tagged as: apple, Google, paypal
`
`{ 3 comments… read them below or add one }
`
`Ketharaman Swaminathan (GTM360 Marketing Solutions)
`August 19, 2013 at 8:32 am
`
`By bypassing the banking rails altogether and levying no interchange fees on the
`merchant, isn’t Bitcoin just “what the doctor ordered” for micropayments?
`
`REPLY
`
`Russ Jones August 19, 2013 at 11:17 am
`
`Ketharaman,
`
`http://paymentsviews.com/2013/08/16/aggregation-and-aggravation-micropayments-2013/[3/21/2014 5:50:30 PM]
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`Aggregation and Aggravation – Micropayments 2013 — Payments Views from Glenbrook Partners
`
`Yes, the economics in the Bitcoin model are well suited for micropayments. I should
`have mentioned Bitcoin as a potential long-term solution.
`
`Thanks,
`
`- Russ
`
`REPLY
`
`Richard G Brown August 23, 2013 at 5:07 am
`
`Bitcoin is certainly of relevance to the micropayment debate but we need to be
`careful. The transaction fees are non-trivial and it’s not obvious that passing true
`micropayments across the blockchain is a particularly clever idea.
`
`So any discussion of Bitcoin in the context of micropayments should probably discuss
`approaches such as the Mike Hearn / bitcoinj micropayment channel idea: e.g.
`http://www.coindesk.com/bitcoin-client-bitcoinj-implements-bitcoin-micropayments/
`
`Richard
`
`REPLY
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