In one of the most recent signs of the spread of so-called micropayments, U.S.-based start-up Boku Inc. late last year began enabling consumers in Estonia and Venezuela to pay for digital goods using mobile-phone accounts. A consumer who wants to buy virtual currency to acquire extra “lives” or goods useful in online video games, for example, would, after registering, make the purchase through the game provider’s Web site. The consumer would confirm the purchase through a text message, and the charge would appear on the consumer’s mobile phone bill, eliminating the need to use a payment card.
Boku, which formed early last year, operates in nearly 60 countries, serves more than 1,000 merchants and processes payments for three of the top five game applications offered on social networking site Facebook, Ron Hirson, the firm’s co-founder and senior vice president of product, tells PaymentsSource.
The company’s rapid growth illustrates the promise of micropayments, generally described as transactions worth less than $10. Some companies bill directly to consumers’ mobile phone bills, erasing the need for payment cards, while other strategies involve persuading more consumers and merchants to use and accept cards for relatively tiny transactions.
Indeed, MasterCard Worldwide, Visa Inc. and other payments companies view contactless cards, or even the exchange of loyalty points, as key methods usable by the card industry to capture small payments. “For 2010, [micropayments] is a really big growth area,” says Beth Robertson, director of payments research for Pleasanton, Calif.-based Javelin Strategy & Research.
Various factors have hampered faster growth in micropayments, according to Robertson and other observers. First, merchant cost to accept debit and credit cards for payments led businesses to discourage customers from using cards for small transactions, often by imposing minimum transaction amounts despite card-network rules that bar such practices.
Despite the merchant resistance, the card networks are heavily promoting use of their products–whether magnetic stripe or chip-enabled contactless cards–for small transactions, and merchants are finding it more difficult to resist the pressure.
Another factor has been consumer reluctance or inability to use mobile phones for payments. But the near ubiquity of mobile phones, along with the increasing popularity of smartphones that provide Web access, has led various companies, whether start-ups such as Boku or established players such as transaction processor Total System Services Inc., to invest in initiatives that enable consumers to use mobile devices for small payments. And the ongoing drive to put Near Field Communication-enabled handsets into the hands of consumers for contactless transactions likely will lead to more micropayments via mobile phones.
More Options
Moreover, consumers have more low-priced goods and services to buy, especially from online merchants, Robertson notes. A prime example is Apple Inc.’s iTunes Store, where consumers can use preregistered payment cards to buy individual songs that often cost less than a dollar. Since 2003, consumers have bought more than 6 billion songs from iTunes, a service Apple says accounts for approximately 70% of online digital music sales. The iTunes service has “started to familiarize many consumers” with the concept of card-enabled micropayments, Robertson says.
The rise of online, multiplayer video games similarly represents a “very hot area” for micropayments, Robertson says. Media, dating-site and other online subscriptions offer additional opportunities for micropayments.
Vending machines also seem a natural place for the card industry to capture micropayments, and perhaps eventually NFC-enabled mobile phones will help propel that market. But as is the case in other parts of the world, the high cost to accept cards has kept the number of European vending machines that accept noncash payments low, Jüergen Göbel, chairman of European Vending Association’s cashless committee, tells PaymentsSource.
The trade group represents 63 vending-machine companies and 20 national vending associations in Europe. The continent has at least 3.8 million vending machines that in 2008 produced revenues of 13 billion euros (US$18.6 billion), the trade group says.
“Most vending machines accept cash only today,” says Göbel, who also is director, global product marketing unattended, for United States-based payment-terminal vendor Hypercom Corp.
Vending machines deployed in such public places as train stations and airports, however, sometimes can accept chip-enabled “electronic purse” cards, such as Germany’s GeldKarte. The card essentially is a debit card with a chip that stores preloaded funds. Transactions from such cards typically carry low processing fees.
“We estimate that there are about 1,000 to 2,000 vending machines” in Europe that accept such cards, Göbel says, though “usage is quite low … because [consumers] either don’t want to or don’t understand why they should top-up their cards in advance.”
However, “there are a number of trials currently being tested with vending machines that accept debit or credit card payments,” including efforts in Austria, Belgium and Switzerland, Göbel adds. Still, “the current merchant or transaction costs for debit and credit cards are too high for [vending machine] operators,” he says. “Vending is a low-value payment; typical transaction values are below 1 or 2 euros.”
The card networks, meanwhile, seem in no hurry to create a lower interchange classification for micropayments. Joshua Peirez, MasterCard group executive, innovative platforms, says the “more and more merchants beginning to take” cards for small payments “tells you they see the value” in accepting plastic for these transactions. Visa executives declined to comment.
MasterCard is in the “first phase” of a pilot of a service based around mobile-phone micropayments, Peirez says. The MoneySend service works with any mobile phone, but MasterCard hopes to release an application designed for iPhones, he adds.
“The product enables anyone with a U.S. phone number and mobile phone” to send funds from one MasterCard account to another, he says. Consumers can use the service for a variety of payments, such as paying a nanny or a piano teacher or to initiate a purchase on Craigslist, Peirez says. Craigslist is a localized online service supporting commerce and other activities.
Fees to use the service range from 29 cents for funds transfers of up to $50 to $2.95 for funds transfers of between $200 and $500. After registering, consumers, who must know the mobile-phone number of the recipient, use a three-line text message to initiate payment, Peirez says. Consumers register for the service by visiting a MasterCard Web site. Consumers who take part in the service must have a real or “virtual” prepaid card, in which an account number is issued but no card.
“Our goal is to get [the process] under two minutes,” Peirez says. “Now it is nine minutes.”
TSYS also plans to use mobile phones to gain a larger foothold in micropayments, Ashim Banerjee, the U.S.-based transaction processor’s chief information officer for TSYS Acquiring Solutions, tells PaymentsSource. The processor handles some 5 billion transactions per year, about 20% of which are micropayments of no more than $10. The average transaction is about $80, he says. “We want to wade deeper into [the micropayments] space,” Banerjee says.
To do so, TSYS late in the first quarter plans to introduce a service that enables micropayments through smartphones containing a downloaded payment application. The TSYS service, however, would enable users to transfer noncash currency such as card loyalty points “or other unconventional sources of funding” yet to be announced to other consumers or to merchants who agree to accept them, Banerjee says.
“Issuers of points are very keen that you use your points,” he says. “They are not interested in letting points last.”
In introducing the service, TSYS will focus “on smaller cities, primarily college towns [with] a few thousand merchants,” Banerjee says. Ideally, the service would enroll 80% of the merchants in a given location, he adds. Merchants would need to upgrade their payment terminals with new software but would not need to buy new readers, eliminating an additional cost that could slow efforts to bring more noncash payments to vending machines.
Social Networks
Testing what works for micropayments also has involved Facebook Inc. Facebook last year began testing a virtual-currency payment system for customized online greeting cards and prepaid gift cards in what the products’ developers say is the first such test within the social-networking Web site.
Facebook users may purchase products from GroupCard, a unit of U.S.-based Interactive Gift Corp., by selecting the “Pay with Facebook” option within Facebook’s site. Users can buy a GroupCard product using Facebook credits, worth 10 cents each, with a credit card in Facebook’s online gift shop. Facebook declined repeated requests to comment for this story.
With Boku, the average transaction the firm processes ranges between $8 and $9, Hirson says. Most Boku customers use the service to buy virtual currency for online video games.
For every transaction, a portion the purchase amount, usually 40%, goes to the mobile operator, while 10% of the remaining amount goes to Boku.
Boku, which began operations in the first quarter of 2009, has experienced “double-digit [transaction] growth every month since,” Hirson says, declining to disclose specific data. The company would like to move into payments for physical goods such as books, but Hirson acknowledges many details still must be worked out regarding fees and delivery.
Another potential challenge is whether government and financial authorities in various countries would have to grant the company and those like it financial-services licenses as expansion continues. So far, they have not made such a demand, but company executives say financial authorities did not write existing payment rules for micropayment firms.
For now, the focus is on getting more consumers to use cards and mobile phones for small purchases, and determining how to earn and split revenues with the various players involved.
