Peppercoin Aims at the POS As Well As Digital Content with Version 2.0

In an ambitious effort to capture a share of the rapidly expanding markets for both digital content and goods at the point of sale, micropayments processor Peppercoin Inc. today is announcing a second generation of the payments model it introduced commercially only last December. Considerably revised, the Waltham, Mass.-based company's new version is set for roll out in the third quarter and relies on the same mathematical model to aggregate and process transactions as before. But it functions more like a traditional payments gateway, running in the background and “behind the buy button,” says Perry S. Solomon, vice president of strategy at Peppercoin. “It integrates with the merchant's payment system.” Incorporating a gateway, payments-processing service, and customer-service system, Peppercoin 2.0 does not require buyers to create accounts or download software to make payments, as the original version does. It supports online, automated customer service at a dedicated Web site where consumers can get transaction detail. And it is intended as much for the physical point of sale as for the Internet. Peppercoin's first POS client, Incredible Technologies Inc., will use the system to process credit card and signature-debit transactions for its network of 27,000 electronic game arcades, which charge users anywhere from $1 to $3 to play virtual rounds of golf. The Arlington Heights, Ill.-based company is the largest operator of coin-based video-game machines in the country. Peppercoin is aiming its new system at Web and physical merchants as well as merchant processors looking for ways to support micropayments for digital content, typically $5 and under, as well as small payments, or $5 to $20 in value. The company will host the gateway or license it, with pricing determined by transaction volume. Solomon refuses to disclose the licensing fees, but says transaction pricing on the hosted service will run in the 7% to 10% range, about the same as before, with larger-volume merchants paying closer to 7%. Merchants will set a value threshold under which all transactions will be routed automatically to Peppercoin's gateway, after which processing will occur as it does now. Peppercoin's proprietary model, which was developed by noted cryptographers Ronald Rivest and Silvio Micali, relies on the mathematics of probability to select micropayment transactions, step them up in value, and route them for processing through the credit card networks. In this way, credit card fees are reduced as a percentage of the ticket. All the while, the model relies on what Peppercoin calls “universal aggregation” to keep track of which payments from which consumers get credited to which merchants. With the introduction of Peppercoin 2.0, Peppercoin is instructing merchants to attribute all transactions routed to Peppercoin to a Web site it has set up, smalltab.com, so that this descriptor plus a transaction identifier will be what appears on consumers' statements. To get details, consumers can go to the site and log in with the transaction ID and the amount from their statements. The site only gives information and cannot support any further transactions, though through it consumers can process inquiries and disputes. It is intended to lower the cost of customer service, which the company says can run $5 to $10 per incident in so-called live support. “One important challenge we're addressing is cost-effective customer support,” says Solomon. “The cost of customer support can be very high and make micropayment costs prohibitive.” Merchants can go to the same site to check on settlement details and reconcile with internal accounting systems. And, in a further twist, Solomon says both issuing and acquiring banks could label smalltab.com with their own brands. Peppercoin hopes to tap in to burgeoning markets for both online content and small-value sales in the physical world, including the quick-service, video-arcade, and gasoline segments. It cites Forrester Research studies predicting the volume of digital content sales?everything from song downloads to games and ring tones–will balloon from $2.3 billion last year to $15.1 billion in 2008. Although Peppercoin's system is mainly targeted at pay-as-you-go, sub-$5 transactions, Solomon says it can support transactions of any size and supports subscription models as well. “Merchants could choose to send all transactions to the gateway,” says Solomon, who gave Digital Transactions News a preview of version 2.0 two months ago (Digital Transactions News, April 30). Founded two years ago, Peppercoin went live with a commercial product late last year. It signed two merchants, Musicrebellion Inc. and the Folkways Recordings unit of the Smithsonian Institution, for music downloads.