Digital Payments

When the iPhone first hit the market, the pundits started touting the huge benefits that would come from carrying around a computer in our hands. Some of those benefits have been transformational. There used to be a rack with maps inside every gas station and convenience store to help travelers figure out directions. The map industry has been completely displaced by online GPS and driving instructions that have brought huge efficiency and a lot fewer lost travelers wandering rural roads.

We were also told that the Rolodex was dead and that you would be carrying everybody’s contact information with you – something that quickly became true. When was the last time that you called information to get somebody’s telephone number?

At the top of the claimed benefits was the promise that we’d quickly be paying for everything seamlessly with our smartphone. We’d be able to buy from a vending machine or shop at a store by just waving our phone.

There has been some movement in recent years to make this easier. You can load credit or debit cards into your phone and use Apple Pay, Google Pay, or Samsung Pay at places that accept the payments. There is a more recent movement to allow people to seamlessly pay each other through direct bank debits without having to use an intermediary service.

But we are nowhere near universal acceptance of payments through a phone. There are a number of reasons why this is still the case 16 years after the promise that this was right around the corner.

  • A bank survey in 2022 showed that 38% of Americans would refuse to use such a payment system. But that is not an excuse for making it easier for everybody else.
  • For many years, financial institutions didn’t have any interest in accepting micropayments. Banks were not interested in enabling a system that would generate millions of $1 transactions at vending machines or other types of small transactions. The fees the banks wanted for the transaction were too high to make this reasonable.
  • There were always a lot of concerns about security. Somebody could steal a phone with an automatic payment system and spend it without scrutiny. That’s being solved in many cases by phones tied into biometrics.
  • All of the proposed payment solutions require sellers and retailers to foot the bill for the electronic readers that can accept payments. This is particularly challenging when there isn’t a universal reader that would accept payments for multiple payment systems. The different payment systems have been pushing unique hardware solutions. This has led to many merchants unwilling to embrace electronic payments.
  • It’s even more of a challenge to equip millions of vending machines, gas pumps, and other payment portals with readers, particularly those in an outdoor environment.
  • There are still plenty of merchants in rural areas that have problems accepting credit cards the traditional way. A credit card transaction doesn’t require the transfer of a lot of data, but it requires a stable connection to be held during the length of a transaction. A lot of rural broadband fluctuates and kills a lot of credit card transactions.

Perhaps the most important reason it’s not widespread here is that the U.S. took the high-technology approach, like we do with many things. Requiring a new set of payment readers is good business for the merchant service companies that provide the readers and the software for merchants.

To demonstrate how we might have taken the wrong path, we only need to look at India. A common payment method for outdoor street vendors is to have a QR code posted. A buyer scans the QR code, which sends them to a portal where they approve the amount of payment. When the payment is complete, a message is sent and is usually played out loud on the merchant’s cell phone. When somebody buys food from a food cart, the payment can be completed by the time the seller is ready to hand over the food. Maybe we are just making this too complicated.

Technology Promises

I was talking to one of my buddies the other day and he asked what happened to the promise made fifteen years ago that we’d be able to walk up to vending machines and buy products without having to use cash or a credit card. The promise that this technology was coming was based upon a widespread technology already in use at the time in Japan. Japan has vending machines for everything and Japanese consumers had WiFi-based HandiPhones that were tied into many vending machines.

However, this technology never made it to the US, and in fact largely disappeared in Japan. Everybody there, and here converted to smartphones and the technology that used WiFi phones faded away. As with many technologies, the ability to do something like this requires a whole ecosystem of meshing parts – in this case it requires vending machines able to communicate with the customer device, apps on the consumer device able to make purchases, and a banking system ready to accept the payments. We know that smartphones can be made to do this, and in fact there has been several attempts to do so.

But the other two parts of the ecosystem are problems. First, we’ve never equipped vending machines to be able to communicate using cellular spectrum. The holdup is not the technology, but rather the fear of hacking. In today’s world we are leery about installing unmanned edge devices that are linked to the banking system for fear that such devices can become entry points for hackers. This same fear has throttled the introduction of any new financial technology and is why the US was years behind Europe in implementing the credit card readers that accept chips.

The biggest reason we don’t have cellular vending machines is that the US banking system has never gotten behind the idea of micropayments, which means accepting small cash transactions – for example, charging a nickel every time somebody reads a news article. Much of the online world is begging for a micropayment system, but the banking fee structure is unfriendly to the idea of processing small payments – even if there will be a lot of them. The security and micropayment issues have largely been responsible for the slow rollout of ApplePay and other smartphone cash payment systems.

This is a perfect example of an unfulfilled technology. One of the most common original claims for the benefits of ubiquitous cellular was a cashless society where we could wave our phone to buy things – but the entrenched old-technology banking system effectively squashed the technology, although people still want it.

I look now at the many promises being made for 5G and I already see technology promises that are not likely to be delivered. I have read hundreds of articles that are promising that 5G is going to completely transform our world. It’s supposed tp provide gigabit cellular service that will make landline connections obsolete. It will enable fleets of autonomous vehicles sitting ready to take us anywhere at a moment’s notice. It will provide the way to communicate with hordes of sensors around us that will make us safer and our world smarter.

As somebody who understands the current telecom infrastructure I can’t help but be skeptical about most of these claims. 5G technology can be made to fulfill the many promises – but the ecosystem of all of the components needed to make these things happen will create roadblocks to that future. It would take two pages just to list all of the technological hurdles that must be overcome to deliver ubiquitous gigabit cellular service. But perhaps more importantly, as somebody who understands the money side of the telecom industry, I can’t imagine who is going to pay for these promised innovations. I’ve not seen anybody promising gigabit cellular predicting that monthly cellphone rates will double to pay for the new network. In fact, the industry is instead talking about how the long-range outlook for cellular pricing is a continued drop in prices. It’s hard to imagine a motivation for the cellular companies to invest huge dollars for faster speeds for no additional revenue.

This is not to say that 5G won’t be introduced and that it won’t bring improvements to cellular service. But I believe that a decade from now that if we pull out some of the current articles written about 5G that we’ll see that most of the promised benefits were never delivered. If I’m still writing a blog I can promise this retrospective!


p.s – I can’t ignore that sometimes the big technology promises come to pass. Some of you remember the series of AT&T ads that talked about the future. One of my favorite AT&T ads asked the question “Have you ever watched the movie you wanted to the minute you wanted to?”. This ad was from 1993 and promised a future where content would be at our finger tips. That was an amazing prediction for a time when dial-up was still a new industry. Any engineer at that time would have been skeptical about our ability to deliver large bandwidth to everybody – something that is still a work in process. Of course, that same ad also promised video phone booths, a concept that is quaint in a world full of smartphones.

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.