Consumers use credit and debit cards for all online transactions. Such payments, irrespective of the security debate, are not profitable for low values ("micropayments"). We have a similar problem in offline payment, where low-value transactions are discouraged.

Credit and debit card payment incurs per-transaction overhead costs related to authorization, processing, reporting, and data communications. Such fixed costs are independent of the amount of the transaction, and are normally covered by the fees collected from merchants and/or cardholders.

These fees, however, are usually proportional, calculated as a percentage of the transaction's amount. The profit realized by the banks for a card transaction is thus the difference between the proportional fee and the fixed cost. This factor makes the smaller transactions economically unattractive, while it increases larger transactions' profitability.

Stored value technology was developed to make small card transactions cost-effective. By incurring overhead costs only on infrequent "loading" operations of relatively large amounts by cardholders, and "unloading" operations of substantial amounts by merchants, a stored value system can economically handle even the smallest payments - provided that the individual micropayments are aggregated at the merchant's terminal and are not processed centrally.

With the continued cost reduction in data communications and processing, per-transaction costs have been reduced from several dimes to less than a dime. Such costs vary by operation and by the way they are calculated, and are rarely publicized. This has led many bankers to question the business case for stored value. After all, if overhead costs are falling so dramatically, why not simply rely on debit charge and forget about stored value? What is often overlooked, however, are these two critical factors: The question is not simply whether the smaller transactions are becoming profitable, but more important how profitable they are.

The following analysis and example compares the profitability of micropayments in a stored-value system - where processing costs are distributed over $25 "loads" - against the same transactions paid for with a regular debit card.

The example is based on a cost of 10 cents per transaction and a 2.5% fee collected by the bank.

For a payment of $1, the fee is 2.5 cents (2.5% of $1.00), but the regular debit transaction cost is 10 cents, yielding a loss of 7.5 cents. That is, such a payment amount is economically prohibitive. The cost of a stored-value transaction, however, is 4 cents (the relative part of the $1 transaction within the $25 "load," which bears the 10-cent cost), yielding a profit of 2.1 cents.

This example shows improved profitability on low value transactions and an argument for revisiting the case for stored value as a payment instrument for micropayments. I think it makes a good argument for stored value - even if per-transaction costs fall below 5 cents, provided that the fees tend to fall as well.

This model shows bank card professionals who question the business case for stored value vs. debit, and those who favor fully accounted stored-value systems (such as the non-aggregated version of CEPS) arguing that "per-transaction processing costs have become so low…" that there is a strong case for giving stored value another serious review.


Mr. Townend is the president and chief executive officer of Cardis Enterprises International, a smart card technology firm in the Netherlands. Mr. Teicher is head of Cardis' research and development, which is based in Israel.

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