MicroPayment: How it’s changing online payments?
Updated: Apr 16, 2020
Personalization and frictionless payment have become a new standard in all types of industries. Users are especially looking for services and products that suit their needs and pay for them as they utilize.
Currently, many of the digital businesses are trying to provide personal offering and more flexibility as much as possible but I am still waiting for the day when I can just pay as I use their product without long term commitment or providing my personal information.
In the recent few years, a potential new alternative has come up to put the customer in the driver seat, allowing them to pay at a more micro-level (pay as use) for what they actually consume. For example, on an online digital content website, the consumer would pay a small fee for each article or for the time interval he wants to read. This alternative provides end consumers the ability to support premium content without having to subscribe to a long-term and expensive subscriptions.
Although this sound very appealing for both consumers and companies, a number of restrictions currently burden this new alternative:
The small payments are costly to process hence users have to pay extra or company consumes the processing fee applied by banks or payment gateways.
It would be expensive for the company to manage and process a higher number of invoices.
These small value payments will eventually put the extra load as transaction volumes on the payment network and given current technology limitations banks or payment networks can’t process them. For example, Visa or Master card network only processes 2000 transactions per second but on a large scale, these transactions can go up to multi-thousands.
This is where the new type of payment system called digital micropayments comes in the picture as their aim is to provide a better and modern technology system to process these small value transactions.
What is Digital Micropayments?
Digital micropayment means a small value transaction between two parties (Peer to Peer or Peer to Merchant). Typically, micropayments have the following characteristics:
Small value transactions (less than $15–$20)
Online payments with higher volume (millions of transactions per day)
Instant processing (In most cases within the seconds)
Very less to none processing fees
To process million of small instant transactions amid giving above-listed challenges, we need:
Highly scalable and reliable system (To process a larger volume with higher reliability)
Anonymous and secure system (To enable privacy while putting security as a top priority)
Ease of integration and usability (System should be easy to integrate within the business and easy to use for end customers)
How to set up a digital micropayment system?
Amid the above limitations, there are certain ways by which we can successfully integrate micropayments:
Integration of digital wallet in the browser: The user would set up a link to connect his bank account with his digital wallet. Once the digital wallet is ready, the user can connect his wallet to different websites where he wants to pay. By creating cryptographic payment token, the user would get a popup to pay for service and through one click the payment will be done and the user can access the content or product.
Another possible way to develop and integrate a system that would create the instant QR code and the popup will appear on the user screen for payment by scanning using digital payment applications powered by banks.
Nonetheless, even if the above restrictions are overcome, businesses still need to understand their customers on a more personal level and provide better options and customers need to get comfortable and feel confident to use these new payment systems. Furthermore, most studies also show that consumers dislike repetitive micropayments, as sometimes it can get too irritative and also make users spend more time thinking and they result in tracking every action of the user.
There is no doubt that we still need much more development in this new payment system and come up with innovative ways (For example, automatic payment by authenticating through user’s device signature) to enable users and businesses to get the full benefits.
However, micropayments can add immense value to the following use cases:
1. Pay for Digital Content Access: Online magazines, blogs, and newspapers can allow their users to pay as they read. This model can be implemented in various ways such as users can pay for each article they want to read or alternatively these websites can also charge users for their reading time as they are already tracking their activity (online, article access) on the site.
2. Incentives and Reward Program: Online survey performing companies can incentivize their users whenever they participle and complete the survey.
Similarly, FinTech companies can also reward their users to perform some financial activity through their application. For example, Google Pay provides a smaller reward for each P2P transactions performed through their application. Recently, Paytm a well known digital payment bank started a new incentive program to provide cashback a portion of their donation during the COVID-19 crisis.
3. Granular metering: Public internet providers can charge their customers based on their internet use.
Currently, studies show that various clinical trials get delayed or incomplete due to the back down of participants for various reasons and one of them is payment delay. Clinical Research Organisations can pay in smaller amounts to their clinical trial participants for clearing each test or phase of the experiment.
4. Fraud and Security: Many public directories and digital content libraries are constantly targeted by bot scrappers and hackers to bypass the authenticate level and access premium content by putting millions of requests per second. Adding an additional payment layer can block these attempts and add security levels.
5. Crowdfunding and Tipping: Online crowdfunding for projects, a public donation to create a fund for a larger cause such as COVID-19.
Restaurants, hotels can use micropayments to allow their customers to pay the tip for the services. Some of the restaurants in the USA are using such systems to ease the tipping process for their customers.
6. Paying someone for their time can also be a good use case of micropayments. Online freelancing platforms such as Upwork and Freelancer are using micropayments to allow clients to pay their freelancers for smaller projects or tasks. I personally like this use case as it removes the huge barrier of overseas money transfer and provides instant and secure payments.
7. IAP (In-App purchases): Various large scale games such as Counter Stike Global Offensive, Dota-2 allow their players to buy in-game accessories like weapon skins, game pass to engage their players and provide a better experience.
8. Peer to Peer Transactions: Various fintech companies Paytm, Google Pay, Paypal has built applications for peer to peer transactions. Although these platforms allow both kinds (micropayment to macro payment) but it’s interesting to see that more than 80% of all the transactions are still micropayments.
To conclude, every new technology comes with many promises and challenges. Micropayments are still a new technology and need innovation in terms of technology advancement (processing large volume transactions per second), scalability, and security (KYC and AML). Global banks, Fintech companies, Financial Institutes, and authorities should come together to build a secure payment infrastructure that can cope with the exponential rise of payments.