Why don’t we still have a universal micropayment system?
Micropayment technology provides a means of performing a small monetary value (less than $1) transaction and could serve as an alternative solution for payment.
In the digital world, the credit/debit card payment is still the most widely accepted form of payment but due to high processing fees and increasing online frauds, innovators are kept looking for new payment systems. In the last couple of years, micropayment systems (MPS) have been developed and tested but failed to create an impression in the market as an alternative solution against traditional systems.
There are various issues and challenges that affect micropayment systems and need to address in creating a successful universal solution. These challenges can be divided into three main sub-categories:
Micropayments are processed and stored digitally (in the form of simple byte arrays or sequences of bits) which automatically hosts new technological challenges and limitations to build a system such as:
1. Security: Security is a layer that protects the micropayment system from fraud attacks and failing the system while building trust among its users. The definition of security could be different for different users as in from the “Consumer” point it means that their money is safe and gets the product whenever they pay and from the “Merchant” point it could mean that they receive their money on time against their sold product.
The security of the micropayment system usually relays on the hardware (where the payment is being processed) and the software (the payment network which processes the transaction). Current underlying systems are susceptible to eavesdropping and therefore easy to tempered so they cannot be trusted to provide adequate security services.
Going in more deep, the security concern can be divided into subcategories: authentication and authorization, non-repudiation, data integrity, and confidentiality. Authentication and authorization are the ability to confirm the identity of the user as he claims and origination of the transaction. Data integrity could mean the protection of the transported and stored data from the other parties, in parallel to the protection of the identity.
2. Scalability: Scalability is the major requirement of the micropayment system to avoid any bottleneck that may arise in responding to the requirements set by the potentially rapid increase of the transaction traffic through it.
The current micropayment system depends on a centralized and trusted broker which leads to the heavy loads on them. The centralized system needs to handle the accounts, process the transactions and handle security tasks. Generally, these systems are token-based where all the issued or incoming tokens are administered centrally so the load on these brokers is always high. In this system generally, the number of issued and receiving tokens are more than the number account administered.
3. Reliability: The micropayment system must be designed to serve customers 24 hours a day and 7 days a week without any failures. Currently, the underlying technology for processing micropayments relays on a cryptographic mechanism to control the credit transfer. These cryptographic mechanisms are not that reliable as they should be due to increasing attacks such as satellite TV decoders or automatic teller machines.
Various Fintech startups are attempting to design their own mechanism from scratch and eventually failed. There is a perceived need for design and operational secrecy. But in the race of being unique, each individual has created large holes in the robustness of cryptography of their systems, inherently reducing the reliability of current micropayment systems.
4. Latency: This is a very important requirement for an online oriented micropayment system that the response times must be low even at peak times. Identification and authentification information from the users before any payments can be made should not be required all the time, since the amount of transaction volume is high and the latency requirements, especially for micropayment mechanisms, are very hard. The user buying using a micropayment system will want to process in one or two seconds, not in 10 or 30 seconds a credit card transaction may require.
The technology of digital payments is evolving: the networks and servers are getting faster and the micropayment implementations are probably optimized better in the future, which may solve the latency problems.
5. Anonymity: Anonymity in micropayment systems could be related to how much each party knows about others. It’s an especially interesting requirement in respect of both the user and the implementation of the micropayment systems.
The contemporary systems like credit/debit card and cheque based payment systems have usually compromised the security by giving full anonymity only to the merchants, while the user has been offered only partial anonymity. The anonymity also directly relates to the traceability of the transactions, which has often been envisioned as useful from the viewpoint of the customers. It enables customers to check what has been bought using their account and report to authorities in case of suspicious activities.
Partial anonymity usually implicates the collecting of transaction data of the micropayments of the user which could yield significant information such as purchase patterns of single users which can be misused sometimes by banks (targeting) or merchants (price hike). In the future, it is very likely that micropayment systems with mixed levels of anonymity and traceability will be developed.
6. Interoperability: Interoperability in the technological dimension means that the digital currencies applied in different micropayment systems are fully interchangeable between the systems and protocols. Currently, each micropayment system creates its own currencies — e-cash, scripts, and tokens. Due to no exchange rules, the fund from one system can’t be interchangeable or transferred to other currencies or systems.
One of the biggest examples is cryptocurrency based micropayment systems as each system has its own rules, scripts, and tokens. There are few third-party extensions and tools by which you can covert your fund in a different currency and transfer to other systems.
7. Hardware Dependency: Traditional payment system — credit card mainly depend on hardware protection to prevent double-spending which add extra costs to merchant. Ideally, the micropayment system should not depend on additional hardware or underlying lower network level.
Some existing micropayment systems depend on the user’s browser to authenticate the identity and generate the payment request which makes them vulnerable to hackers.
Economical challenges represent the non-technical questions that can directly impact the micropayment systems. Economical dimension relates to the monetary part of the system mainly from the merchant and bank’s perspective. Some major economical challenges with micropayment system are:
1. Transaction Cost: The cost of processing a transaction is the biggest and most questionable part of any payment system. Traditional payment system like credit card system has very high transaction processing cost up to 3% whereas, in the micropayment system which could potentially generate up to millions of transactions in a day, the transaction cost plays an important role in its market acceptance.
The micropayment system has complex technologies and infrastructure, high-end banking servers and high maintenance costs which make it very hard to press the transaction costs to the level that is tolerable without any external (financial) support.
2. Customer Base: The feasibility of the micropayments systems relies heavily on the size of the customer base. With no customers and no previous experience in the electronic payment business, the merchants may have significant startup problems.
For better market penetration, the micropayment system needs to invest heavy cost in initial marketing and general awareness among users.
3. Currency Convertibility: Currencies used by different micropayments should be inter-exchangeable and also with currency the bank uses - thus the currency applied in micropayment systems must have a monetary value.
In the future, several payment mechanisms will emerge, with different tradeoffs in the implemented features which is one reason why it is important that the currencies are convertible with each other.
Another non-technical issue — the social dimension represents the “soft” issues mainly a concern of the customer. These challenges include:
1. Acceptability: One of the major requirements from the merchant using a micropayment system is the acceptability of the system by its existing and new customers. The adequate anonymity offered by the micropayment system could be an interesting feature. From the viewpoint of acceptability, also the trust model applied may have influence, since the users want to know who to trust (if anyone).
Additionally the “ease of use” also increases the acceptability of the new micropayment system. It should not force users to perform additional tasks- create a new account, pay a fee that could irritate them. For example: In 2003, comic strip writer McCloud began charging readers 25 cents to view his work. This fee irritated some discussion board posters who think all web content should be free.
2. User Controllability: Users should able to control their payments and limit their losses, which may be a very hard task to be managed in micropayment systems with badly-designed user control. This leads to another problem, the authorization: what is the value level, below which the customers can be automatically billed, who sets it and how can it be controlled?
Since individual micropayments maybe just a fraction of a cent, this constitutes another hard problem for the implementation of low-value payment systems: the payment services must be carried out efficiently and in a user-friendly way at the same time, still allowing the users to have control of their purchases.
3. Cost Assessment: Whereas micropayment systems restore the buying power back to users but at the same time it also forces them to asses the value every time to determine if it is worth the cost. This thought places a mental transaction cost, or the energy required to make a buying decision, on the user every time a purchase is considered.
In some cases, it might be a straightforward and easy decision, for example — Apple iTunes where the user wants to purchase a song and know what to expect whereas, with paid website or article, it can be a little unclear what you will be seeing or reading.
The above discussion mainly deals with underlying technical, economical and social challenges of an ideal micropayment system. The development of universal micropayment systems would still require new innovation in technology and business-wise. Step by step we can test them thoroughly in a controlled environment but the problem in this approach is the requirement of substantial financial resources and a lot of work.
It’s possible that no universal micropayment system can be constructed in the near future. But possibly several micropayment systems may coexist, fighting for market shares and trying to acquire customer bases, merchants and large financial companies to back them. We will see.