The micropayment software vendor Peppercoin Inc. says it is not threatened by a recently announced rate structure from PayPal Inc. that seems to take aim at Peppercoin's most important market segment - online merchants.
In fact, Peppercoin announced a key customer win last week, Loudeye Corp., which sells and hosts software used to run digital music Web sites.
Linda Young, a senior vice president for sales, business development, and marketing at Loudeye, said Peppercoin's software is "critical for the business in the U.S. in helping keep transaction costs low."
Online merchants have long struggled to justify the cost of accepting credit cards for low-priced products because the fees they must pay to process those transactions can eat up a substantial chunk of the entire sale. These fees typically include both a flat base fee and a percentage of the total sale.
Peppercoin's software solves this problem by aggregating many sales into a single transaction that incurs a single processing fee. It is especially useful for merchants like online music stores where the same customers may make several low-ticket purchases.
However, the need for Peppercoin's software is strongly connected to card companies' and merchant acquirers' refusal to lower their fees for micropayments.
But on Aug. 31, PayPal implemented new rates for online purchases under $2, such as songs. Instead of its standard 30-cent base fee, PayPal now has a micropayment base fee of 5 cents. That is even lower than the 9-cent fee it had offered earlier for Internet music vendors that sold more than 3,000 songs a month, a price that helped the eBay Inc. subsidiary land Apple Computer Inc. and Napster Inc. as customers.
Sara Bettencourt, a PayPal spokeswoman, said Friday that "what we rolled out with our new pricing was supposed to be a true micropayment rate."
She would not say whether PayPal views Peppercoin as a rival but remarked that "micropayments are hard, so we certainly respect what they're trying to do."
Mark Friedman, Peppercoin's president and chief executive, was more direct. "We don't see PayPal as a threat at all," he said. PayPal's effort to capture micropayment transactions "just further validates that the market opportunity is here," he said.
Peppercoin, of Waltham, Mass., announced last week that Loudeye would use its software to process payments on Web sites it plans to operate in the United States. Loudeye, of Seattle, already hosts Coca-Cola Co.'s U.K. music site, mycokemusic.com, and provides the 30-second clips Amazon.com Inc.'s customers can hear before buying albums.
Ms. Young would not say whether Loudeye considered any other micropayment options, such as PayPal. "Peppercoin met the requirements that we have," she said.
Beth Robertson, a senior analyst at MasterCard International's TowerGroup Inc. research unit in Needham, Mass., disagrees with Mr. Friedman's assessment of PayPal. "Certainly they're a threat to Peppercoin," she said, "largely because of their very large market presence with existing account holders. People are familiar with PayPal."
But Peppercoin is a competitive force in its own right because it has more payment options, Ms. Robertson said. Its software lets merchants choose from among four payment formats: prepay, post-pay, pay-as-you-go, and subscription. "The model that Peppercoin offers is a little bit more flexible than what PayPal offers," she said.
Indeed, Ms. Bettencourt said merchants that want to take advantage of PayPal's micropayment rate while also aggregating transactions must either build their own aggregation software or use software from another merchant. "The merchant actually set up their own rules in their system. It's not something that's set up in our own product," she said.
Dan Schatt, a senior analyst for the Boston market research firm Celent Communications LLC, said that merchants that only need to accept card payments might choose PayPal because "Peppercoin isn't really a brand. At the end of the day, what PayPal brings to the online merchants are millions and millions of online users."
But the Loudeye deal is based on "a somewhat different value proposition" that might appeal to other merchants seeking to do more than just accept card payments, Mr. Schatt said. "There's definitely a role for a payment services provider here if they're able to integrate their services tightly with a content services provider," he said.
Mr. Friedman said Peppercoin is also pursuing brick-and-mortar-type customers. In September it announced it was aggregating payments for Rowe International Corp. of Grand Rapids, which makes jukeboxes, and in August it announced a similar deal involving Reino Parking Systems Inc. parking meters in Las Vegas, Oklahoma City, and Yonkers, N.Y. Reino is based in Alameda, Calif.
Ms. Bettencourt said PayPal is not courting offline merchant customers at the moment.
Mr. Friedman said convenience stores and fast-food companies have been receptive to his software, especially ones that are evaluating contactless payment cards. Many merchants adopting contactless payment technology "have a focus on small payments."
