Research Sounds a Contrarian Note on Micropayments

New processing technologies for so-called micropayments–transactions carrying a value under $5–have received a lot of attention in recent months as the number of sellers of online digital content expands and as the market for song downloads explodes, but some observers now question how far the market can grow. Startups like Bitpass Inc. and Peppercoin Inc. have emerged just in the past 12 months with products aimed at solving the fundamental problem besetting micropayments–that the fixed component of transaction fees related to credit cards and signature debit cards online make pint-sized payments uneconomical for merchants. Just last week, Peppercoin, based in Waltham, Mass., announced a second generation of its proprietary system for micropayment processing, including a gateway and Web-based customer-service component (Digital Transactions News, June 28). Both Peppercoin and Bitpass hope to attract large and mid-size merchants of branded goods as well as small sellers of digital content. But a recent research report on the Internet transaction market throws cold water on the case for third-party micropayment processing, concluding most large Internet merchants are likely to develop their own micropayments solutions as the need arises, while small sellers lack the brand identity necessary to support a mass market. “Though it is clear that consumers are increasingly eager to purchase digital content via micropayments, whether micropayent ventures like Bitpass or Peppercoin can make a living out of that trend is less obvious,” says the report, released by Celent Communications, New York, and written by Celent analyst Gwenn Bezard. To be sure, the market opportunity is substantial. Celent predicts sales of digital goods will exceed $2.2 billion by 2005, up from $1.56 billion last year. Meanwhile, the portion of this market accounted for by sub-$5 payments will grow to $252 million in 2005 from $128 million in 2003. But Celent says most large retailers will rely on internal solutions. Indeed, it points to Apple Computer Inc.'s iTunes music service, which is credited for making much of the case for micropayments, since each download costs 99 cents, but which doesn't use any third-party micropayments processor. “We anticipate that most of the transactions will be processed by traditional merchant processors and by PayPal among mid-size to large merchants,” the report notes. At the same time, many digital-content merchants will continue to rely on subscription models, the report predicts, resorting to micropayments only when needed to retain or attract business. Small, mom-and-pop peddlers present a better opportunity for the micropayments specialists, but they're unlikely to generate significant volumes since they lack national and regional brand awareness, Bezard argues. The report concludes the limited potential in micropayments processing means the business is likely to generate no more than 1% of all transaction revenue derived from online transactions by processors in so-called alternative or innovative payment channels, including e-mail payments (such as those offered by PayPal Inc.), credit-based invoicing (I4 Commerce Inc.'s Bill Me Later), and phone-bill charges (PaymentOne Corp.). That percentage, the report predicts, will change little over the next two years. Such cautionary considerations have already given pause to PayPal, which in May told Digital Transactions News it had serious reservations about moving into micropayments processing beyond song downloads (Digital Transactions News, May 20).