Amazon's App Experiment Augurs the Decline of Digital Payments

Amazon.com has been one of the most active companies working to remove friction from payments. This summer, it reached the finish line, removing payments entirely from a portion of its catalog.

Android handsets loaded with the subversively named "Amazon Underground" app have access to a set of apps that would normally cost real money to buy from Google or Apple's official app stores. Apps offered this way are labeled "Actually Free," perhaps to distinguish them from the abundant "Free to Play" apps that are free to download but charge for full access to their features.

In the massive world of global payments, in-app revenue is minuscule, barely projected to top $14 billion this year. But if Amazon has its way, that figure may drop further, as the planet's largest e-tailer is questioning whether in-app payments make much sense at all anymore.

Payment friction is a common problem throughout online and offline retail. At SourceMedia's Card Forum event this year, Walmart's director of payment services, Kara Kazazean, lamented that "the most seamless experience for a consumer is to not pay at all – and some people do that – but we want those payments."

And Amazon has already taken another stab at this issue, at least in patent form. The patent, filed in April, described a process for letting shoppers walk into a store, grab an item and then walk out while using a mix of RFID and cameras to identify the shopper and charge the shopper's account.

But in the Underground app store, the payment disappears entirely, at least from the consumer's perspective. Amazon pays developers based on the amount of time the app is used after the consumer downloads it.

This model applies only to a subset of Amazon's digital content, and only to apps that the developer has offered to the program and, in many cases, modified to remove the incentive to make small in-app purchases.

Overall, the payment model most threatened by Amazon's approach is the micropayment, which has had a rough transition to the digital world. People who thought nothing of dropping quarters into an arcade or vending machine are far less motivated to find a way to spend such a small amount of money online, and merchants are typically put off by the need to pay full credit card fees for such small sales.

"A mechanism for micropayments hasn't evolved and may not evolve, given this model," said Tim Sloane, the vice president for payments innovation at the Mercator Advisory Group. "Maybe this is the answer to micropayments."

There is also a customer service benefit to eliminating the in-app purchasing model. Though these purchases are advertised as micropayments, typically starting at 99 cents for some form of in-game currency, developers rarely set a limit on the amount of money they accept.

This has led to situations such as the FTC's $32.5 million settlement with Apple over the company's billing practices for in-app purchases. In the App Store's early ears, Apple did not require a password for every purchase made within a short window of time, making it possible for parents to download a game for their kid only to find out later that the kid was able to make in-app purchases of digital items that cost up to $99.99 each.

Amazon's offer to pay developers based on the level of use consumers get out of their apps is similar to the e-tailer's approach to its Kindle e-book content in that it "pays the author based on how long people spend reading that particular author," Sloan said.  

When considering in-app payments, it's best to split all purchases into commerce operations where the customers fully expect to pay—anything from Uber or Airbnb to direct e-commerce mobile payments—as opposed to informational or entertainment apps, where many consumers expect the experience to be free. Sloane stresses that his definition of in-app payment would exclude efforts such as Apple Pay, where a proprietary API must be embedded.

But when exploring unexpected in-app payments, Sloane said, Amazon's approach may be the best alternative. It may also build on Amazon's Prime model, which gives consumers access to a selection of streaming movies, TV shows and music as a perk of the annual fee users already pay for two-day shipping.

"This would be good from a consumer perspective," Sloane said. "They pick and choose the apps they like"

But there may be a catch for consumers who sign up, warns Richard Crone, president of Crone Consulting. Though consumers don't pay with their wallets, their usage data goes to Amazon and they are locked into using Amazon's app to get these apps.

"This is a 'prime the pump' move by Amazon to build an enrolled base of active users," Crone said. "But there no such thing as a free lunch."

Amazon already sets rules for how Actually Free apps must behave, though so far these rules appear designed to improve the consumer experience by ensuring the app remains appealing when the incentive to spend money is removed. But Amazon could set other conditions.

"Expect monetization steps to follow with in-app buttons for deep links for product and content purchases to follow," Crone predicted.