The Year for Micropayments?

Numismatics_and_Notaphily_iconI love end of year predictions and the Internet is full of them now. I just read one prediction from Walter Isaacson, the CEO of the Aspen Institute who predicts that 2015 is finally the year for micropayments. Micropayments are just what they sound like, and it’s the idea of being able to pay tiny amounts, maybe a few cents or even fractions of a penny for access to content on the Internet.

I have a friend Danny who has been predicting micropayments for at least ten years. He sees all of the benefits, and there are many. Micropayments don’t have to be really tiny and, for example, they could finally enable every vending machine to be accessible by cellphone. But there have always been reasons why micropayments haven’t taken off.

A more likely use for micropayments is as an easy for to pay for original content. For instance, with micropayments musicians could sell music directly to the public and cut out the middleman services like Spotify or iTunes. If people are willing to pay something like 5 cents per song then artists can make a lot more money with micropayments than they are getting today as royalties. It’s also a way for authors to sell short stories, essays and even novels.

But perhaps the use that most have in mind for micropayments is as a way to make money from written online content. I know that I read a lot of articles online about tech, politics and sports. But there are articles on pay services that I can’t get today because I am not willing to pay for a premium service like the $9.95 that the Washington Post or New York times charges for total access to their papers each month. They will give out a few free reads monthly and then you are done for the month when you hit the limit. Most of the article I read are free, but I could see paying a few cents per article everywhere if that would stop me from being blocked at more and more sites that want me to pay a bit subscription price. I don’t read enough articles as any one site today to justify becoming a premium customer, but I would gladly spend a dollar or two at each of these sites each month.

But there are reasons that micropayments haven’t been used. Isaacson sees micropayments being realized through bitcoins and there are already some bitcoin payment systems such as ChangeTip, BitWall, BitPay and CoinBase. But I can’t see the general public ready yet to accept bitcoins. In 2014 bitcoins lost 52% of their value during the year and I don’t see people willing to put money into something that might change in value overnight. I know that if I sat aside $30 per month to pay for online content that I would be really annoyed to see that a few dollars of that value had evaporated before I used it. Further, I read every month about Bitcoin exchanges getting robbed and it doesn’t feel secure enough to me yet to feel like a currency substitute.

But there are other payment methods and micropayments could be transacted through PayPal, credit cards or bank accounts. However, until now all of these institutions have wanted significant transaction fees that are higher than the micropayment, and so this is not going to happen through the old money system. In a way this is a shame because there is a lot of money to be made with micropayments. Today credit card companies make roughly 3% for every transaction they process and there is no reason they couldn’t do the same with micropayments. But I am sure that they are intimidated by the work of tracking and reporting these payments to customers as well as the hassle of having customers disputing payments of a penny on their credit cards, so they have not been willing to enter the micropayment arena.

There is also the issue of fraud and security. Somebody could get really rich by billing everybody in a micropayment environment a nickel per month and almost nobody would notice. But let hundreds of people do the same thing and customers would quickly lose faith in the security of the system. I am guessing that it is going to be a lot more tempting to felons to bill tiny amounts than it is to undertake large credit card fraud, and so micropayment fraud could become rampant if there is not some way up front to stop it. That means having some ironclad validation process in place such as biometrics at the point of purchase.

But the biggest barrier to micropayments is human behavior. Numerous polls have shown that the vast majority of Americans are not willing to pay anything for content. Younger generations are more willing than older, and higher income people are more willing than lower income people. But even in those groups there is a lot of mental resistance to micropayments. In economic terms this is called the relevant cost and people seem to have a mental barrier against making that click on-line that authorizes a payment, no matter how small. The issue seems to be one of relative value and people have a natural fear of being disappointed and paying for something that doesn’t meet their expectations.

This was first documented a decade ago in a paper I read from Nick Szabo titled “Micropayments and Mental Transaction Costs”. His primary point was that the mental cost – that decision to make that click to purchase often exceeds and even dwarfs the computational cost of the item being purchased, which equals the value it provides less the transaction cost. He says that people hesitate and agonize over spending tiny amounts of money just as much as they do over spending larger ones.

I know that I discard two or three articles for every one that I read. I will be attracted to an article based on its title, but often within a few words I will see that it is just spitting back something that was widely reported elsewhere, or that it is poorly written, or that it is short and a waste of time. I know that if I was paying for content, then paying for such worthless content would become annoying and might make me slow down on my reading. And that is counter to what micropayments are hoping to stimulate.