Micro Economy

Colin White, UK Chief Executive of Oxygen8 Communications, examines the market potential for micropayments

Colin Whitedigitalopportunity Demand for micropayments is increasing fast, as social networking and dating sites wake up to the benefits of taking small subscriptions via secure SMS or voice billing services. Added to this, and as part of the Digital Britain report, the Governments body for business innovation in technology, the Technology Strategy Board, has announced a 10 million investment to work, at least in part, with industry partners to create and trial new models, including micropayments for online content and video on demand.
But with the organisations receiving only 66 pence in every 1 for micropayments due to network charges, compared with 96 pence for credit card transactions, there is a very real danger that the market for micropayments for a range of online goods and services could be severely constrained.
Given the lack of credit card penetration in many countries, including China, and within the younger demographic that still dominates the online customer base, the need for robust and commercially viable micropayments is pressing.
With the arrival of proven technology that can be delivered globally and rapidly integrated into core systems, online vendors now have seamless access to a whole new revenue stream but just how many organisations will be deterred by the excessive network charges?

Payment flexibility
While providers of online goods and services continue to buck the economic downturn, it is clear that a significant proportion of potential online revenue is being lost due to the near-total reliance on credit cards for payment. While a number of micropayment solutions have been introduced in recent years, a lack of global integration and the complexity of attempting to manage different mechanisms across different countries and networks have deterred the vast majority of organisations from supporting any payment option other than credit cards.
But as a growing number of organisations are now discovering, the arrival of viable, global micropayments technology is opening up a whole new revenue stream. The micropayment model works perfectly for sites operating a model of small, regular subscription, such as dating or social networking sites, especially in areas such as China, where credit card penetration is very low.
But the potential for micropayments is not limited simply to subscription services. A global micropayment service using SMS or voice billing, as available across each continent, provides organisations with a fantastic opportunity to achieve new revenue streams, and not just with products aimed at the younger demographic unlikely to hold a credit card. While music downloads and gaming sites will obviously benefit from a flexible, robust and convenient payment method, there are very real opportunities to offer micropayment facilities for additional services. In hotels, for example, micriopayments would reduce the need for late night reception staff to process payments.

Grossing up
Evidence is growing that the adoption of micropayments opens up a massive untapped market with no upfront investment. One of the key concerns for many organisations assessing the pros and cons of micropayments, however, is the network tariff. And for good reason: whilst organisations receive 96% of credit card-based transactions, high network charges mean that only 66% of the payment is received from a micropayment.
For any organisation with a low margin product or service offering, this approach could theoretically make micropayments unfeasible. Indeed, low levels of micropayment adoption to date point to the fact that organisations are concerned about margin erosion created by these high network charges, despite the proven access to new customers. Early adopters of this payment method have demonstrated that consumers are actually happy to pay more to leverage the flexibility and ease of use of micropayments for the time being.
By offering the customer the option of making a micropayment, but charging a little more (grossing up), the organisation can maintain its margin, without cannibalising the existing customer base. With the right integration into the core product/service software, it is a simple process to offer two prices one for credit card transactions and one for micropayments enabling the customer to make the choice.

Secure, simple
Key to user adoption of micropayments is the delivery of a completely seamless, flexible service, irrespective of country or network. Micropayments must also be easy to use, secure, and support a wide range of payment values from the 1 ringtone download upwards. 
Delivering this consistent service globally is a major challenge for many providers of micropayment solutions. The payment market is highly regulated, for obvious reasons. Organisations must comply not only with local, state and national regulations, but also meet the demands of each network supplier in each country. Furthermore, payment technologies need to be integrated with back-end customer service and web content management systems to deliver a complete, auditable solution.
To achieve this successfully and rapidly requires significant expertise, and experience of different global markets. It demands strong integration skills, and the ability to rapidly respond to organisational requirements to roll out into new markets to address customer opportunities. With the right technology, infrastructure and experience, micropayment technology can be deployed within days, with little or no upfront investment, allowing organisations to trial the technology in specific markets to assess its potential.

Global opportunity
Those organisations that have opted to trial micropayments have all opted to extend the service across new geographies as a result of a significant increase in revenue. Customer feedback reveals that the process is simple to understand and extremely transparent. There is also strong anecdotal evidence that organisations are achieving higher conversion rates via micropayments than credit card payments.
As a result, growing numbers of social networking sites are now offering micropayments although, to date, this has been limited to sites in the UK, the US and Australia. With the arrival of proven global solutions, organisations are looking to leverage the new market opportunities in China, Africa, the Caribbean and South America.
Furthermore, given the strong consumer response, the networks are showing increasing interest in introducing new micropayment tariffs to enable organisations to move beyond existing services, towards a true m-commerce model. Indeed, as consumer awareness of the additional costs associated with micropayments grows, there will be growing pressure on networks to offer far more competitive rates.
A major shift is on the way: micropayments not only offer unprecedented ease of use for the consumer, overcoming the resistance to buy online via credit card, but also provide the opportunity to leverage the billions of mobile-owning individuals globally, in order to increase revenue consistently and easily for a range of online goods and services.
But the mobile networks also needto play their part. By agreeing to operate on smaller margins, it is likely that the networks could precipitate a massive adoption of micropayments that would generate significant additional revenue. Without that change in policy, the real micropayment opportunity could remain untapped.