Credit Card Micropayments About to Surge

Online and mobile commerce is about to get a shot in the arm. Online payment service PayPal is opening the door to widespread use of credit and debit cards for so-called micropayments -- as small as half a buck and up to about $12. Instead of charging retailers for each separate card transaction they handle, the company plans to aggregate a merchandiser’s micropayments and levy a single fee for the bundle.

Cheap processing of micropayments is hailed as the answer to many sellers’ prayers. Publishers, for example, have long bemoaned the inability to cost-effectively sell newspaper or magazine articles or other content online “by the drink.” Until now, print media haven’t been able to find a business model to sell their content online, says George Peabody, director of the Emerging Technologies Advisory Service at the Mercator Advisory Group, a payments and banking consulting firm. Jason Pavona, executive vice president of sales and marketing for Litle & Co., which provides payment management services, agrees, noting that efforts such as PayPal’s could help media companies develop a whole new business. Other purveyors of print could benefit, too -- independent authors could sell chapters of their books as one-offs, for example.

Cheaper processing is also likely to pay off for industries that already use micropayments, such as online gaming companies, ringtone merchants and smart phone application marketplaces. Social media and gaming firms are among those exploring their own ways to process micropayments more cheaply to support their industries. Others set to benefit: The thousands of craftspeople and other individual entrepreneurs who sell low value goods -- on Etsy or other electronic marketplaces.

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“The absence of a simple, secure low cost payment solution has been suppressing new business models, particularly in e-commerce and the nascent m-commerce market,” says Conrad Sheehan, founder and chief executive of mPayy a payments provider. By routing mobile transactions through automated clearinghouses instead of requiring credit and debit cards, mPayy is able to process mobile transactions at very low cost to merchants.

The cheaper processing fees may even foster the development of a “microservice” industry. Businesses may begin to charge for services that were previously free, once there’s a feasible and cost-effective way to charge for them, says Brian Shniderman, a director with Deloitte Consulting’s banking team. Restaurant patrons may be willing to pay a dollar or two, using their cell phones, to head to the front of the queue at a popular eatery, for example -- a high-tech way of greasing the palm of the maître d’. Or at a bricks-and-mortar retailer, customers may be able to skip long lines the same way. In-a-hurry shoppers might be directed to a designated register or a line-free self-check-out kiosk or even be able to complete the transaction on their phones.

Right now, the high cost of processing low value online transactions keeps some merchants from offering low priced options. PayPal’s current fee to process payments under $12 is 5% plus 5¢ per micropayment transaction. For bigger transactions, it’s between 1.9% and 2.9% of the sale amount plus 30¢, depending on the merchant’s volume of business. Even if the fee structure remains the same, aggregating the transactions would mean paying a fee based on a lower percentage, albeit on a higher total.

Of course, the effort isn’t new. It has been tried -- and failed to take off -- before, notably in the mid-2000s. But this time, it’s different, say the experts: Consumers are far more comfortable with buying online -- even ordering groceries online. Mobile commerce is booming. And a trusted name in the payments business -- PayPal -- is leading the way.