Internet Micropayments Essay, Research Paper
Internet Micropayments TABLE OF CONTENTS Example . 3Introduction .. 4Micropayments Overview . 4Why Micropayments Exist 5Industry Overview .. 6Who Makes Money . 8How a Transaction Works 8Micropayments Reality: Where the Industry is Today . 10Future of Micropayments . 11Government Regulation 12Issues for Micropayments 14Pros & Cons of Micropayments .. 15Summary 16Bibliography .. 17 For Example Image that you are at your computer and are surfing the web in search of information on the 1964 Super Bowl. Was it the Cowboys against the Redskins? Or the San Francisco 49′ers vs. the Vikings? You find a site that allows you to view 10 minutes of the game for only $0.64. You click to accept the charge, and the $0.64 is directly withdrawn from your cyberwallet. You watch 3 minutes of the game before remember that your team losses. Since the clip only cost you a fraction of a dollar, you don’t feel bad about switching over to a stock quote site to check the recent growth of your portfolio. The information provider’s site indicates that ten stock quotes cost $0.05, you only have four stocks within your portfolio, but you decide to pay the $0.05 charge anyway. After seeing that your portfolio has gained 10% from last week’s value, a warning message pops-up on your computer screen notifying you that your cyberwallet is down to $0.25. You select the opinion which connects you to your broker’s web site so you can download more e-currency onto your cyberwallet. Your broker gives you three choices to download: 1) $20, 2) $30, or 3) $40. Since you are a heavy users of micropayments, you chose the $40 opinion. This amount is automatically charged to your credit card that you initially set-up during your first contact with your micropayment broker – almost four years ago.IntroductionAs the Internet becomes more intertwined with daily life, it is not hard for the hardiest skeptic to image that an increasing amount of commerce will be transacted over the Internet. Just as technology allows for elevated and new forms of business activity (such as checking stock quotes), the technology also sanctions improved mechanisms to settle an increased volume of infinitesimally small purchases. To address this need, a new payment form – labeled micropayments – will become “the” form of Internet payment within near future. This paper will cover what micropayments are, who is involved in the industry, and how government regulation of the payment system is affected.Micropayments Overview Internet micropayments are a form of electronic currency that is used to purchase web-based information. Micropayment currency (also known as e-currency) is stored in a cyberwallet, or an electronic wallet, that resides in the Internet user’s PC. This Internet currency differs from other forms of electronic currency, such as Smart Cards, because its value is stored in a PC, not on a plastic card that can be easily lost or stolen. In addition, micropayments are only designed to supplement cash by providing an easier payment form to settle small Internet purchases – not replace it. Information purchased with via micropayments can either be downloaded or viewed immediately. These micropayments can cost up to $10 per transaction, but are usually less than $0.10. There are a myriad of ways that micropayments can be used to purchase information. Some examples of information that can be bought are newspaper articles; live broadcasts, such as concerts or sporting events; stock quotes; cookbook recipes; movies; or dictionary definitions. The costs for accessing these different types of information vary greatly: a live broadcast can cost anywhere from $2.00 to $10.00, while a definition in the Oxford English Dictionary currently costs 1/100 of a cent. (This is a wonderful bargain, considering that the definition includes translations of the word in numerous languages!)Why Micropayments ExistThe main reason why micropayment technology has developed is that it allows Internet-based businesses to capture revenue from Internet users where it was not previously feasible due to the unrealistically high transaction costs. These costs can be separated into two categories: shipping and handling and credit card processing. In addition to the relatively small value associated with each transaction, no shipping or handling fees are charged with information purchased using micropayments. Studies have shown that approximately 60% of the cost of information distributed for resale results directly from the shipping and handling charges. In addition to the high handling charges, an increasing number of purchases are made with a credit card. These costs can almost eliminate the profit that an vendor would receive from providing small bits of information, like a single cookbook recipe, using traditional delivery and payment mechanisms. The following example illustrates the effects of these costs. Suppose that Harvard Business Review charges $3.00 for an article. Approximately $1.80, however, must be deducted for shipping and handling fees. In addition, $0.80 will be removed to pay for the credit card processing fee. This leaves Harvard Business Review with a miniscule $0.40 gross profit, a far cry from the original $3.00 charge. By reducing these high transactions costs, Internet businesses are able to capture larger chunks of revenue through elimination many of the related expenses. Table A illustrates the effects of shipping and handling charges as well as credit card transaction charges on gross profit contrasted against limited distribution expenses.Table ABefore Micropayments After MicropaymentsOriginal Article Price $3.00 Original Article Price $3.00- less Shipping and Handling Fees ($1.80) – less Transaction Fee ($0.06)- less Credit Card Processing Fees ($0.80) Gross Profit $0.40 Gross Profit $2.94 Industry OverviewThere are currently three types of businesses involved in the emerging micropayments industry: 1) software developers, 2) distribution brokers, and 3) the information providers. Software DevelopersSoftware developers are setting the protocol for a payment system to be based on small, incremental purchases. Companies, such as Digital Equipment Corporation’s Millicent division, have developed the “cyberwallet” – Internet-based payment system software. This cyberwallet allows Internet explorers to make small purchases (between $5 and $.0001) over the Internet. These cyberwallets diverge greatly from traditional leather wallets in the sense that the developer is involved in every transaction that is made. To make purchases, the user must first download a cyberwallet onto the user’s computer. After the wallet is downloaded and primed with cash, the user is free to spend at will.Distribution BrokerThe transfer of e-currency from the user’s cyberwallet to the information provider is governed by a distribution broker. Brokers allow you to place value on your computer. After the cyberwallet has been downloaded, the user must fill it with e-currency. There are two ways to fill cyberwallets with e-currency: 1) by use of a credit card and 2) through promotional activity, such as responding to advertisement surveys. Most software developers are not banks or finance companies (although the Mondex partnership is an exception). Since these developers’ competencies lie in software development and not money management, third party brokers manage the cash that has been converted to e-currency until the information provider redeems the e-currency. Currently, there are not a lot of brokers (Millicent’s site does not have a for-profit broker – Digital is currently giving away e-currency to increase site activity.) In the future, these brokers could be banks or finance companies, as well as credit card companies, or small mom & pop money management organizations. Furthermore, the software developers could decide to forward integrate and take on the brokers’ role.Information Providers Information providers (or content distributors) are the final industry-group player within the micropayments industry. Information providers operate web sites with valued information, such as stock quotes, newspaper articles, or sports scores. Some examples of these sites could be large web sites, like the Harvard Business Review web site (with cases and articles for purchase) or a personal web site (with unique Java applets for purchase).Who Makes Money?All three industry-group players make money on this new payment form. The software developers make money on every transaction. Typically the transaction charge is 2% of the purchase. This amount is deducted from the information provider’s retail or list price. Brokers make interest on the float. Brokers have the ability to invest cash between the time that the cash is deposited in the cyberwallet, until users purchases the information and the vendor requests payment. After the Internet user exchanges cash for e-currency, the broker is free to invest the money in interest-baring accounts. (This will be further elaborated on in the Government Regulation section.)In many cases, content was given away before there was a mechanism, such as micropayments, to economically capture small payments. Now, the information provider may be the recipient of revenue collected via micropayments. In essence, the information providers will go from zero, or barely marginal revenue, to positive revenue through micropayment acceptance.How a Transaction WorksSimplistic ModelFrom a user’s point-of-view, the model is pretty easy to understand. First an cyberwallet must be downloaded onto the user’s computer. This process can take up to 45 minutes because of the intense security provisions associated with the cyberwallet.After an cyberwallet has been loaded on to the PC, the broker must be contacted electronically to download e-currency into the wallet. After an account has been established with a broker, the cyberwallet can be set to automatically replenish the account when it falls below a certain level.Now, it is easy. All one has to do is go to the information providers’ sites, and select the information for purchase – and the wallet will take care of the rest. The cyberwallet can also act as a personal “valet,” settling all transactions. Conversely, the wallet can notify the owner if the selected item is more costly than a typical purchase.
Technical Model Although the software developer’s role within the settlement process is transparent to the Internet user, all transactions are finally settled through the software developer. At the end of the day, week, or month; the information provider electronically contacts the software developer and requests cash payment by electronically transmitting all stored e-currency to the software developer. In turn, the software developer electronically contacts the broker and requests cash settlement. The broker electronically deposits 2% of the total e-currency sum into the software providers account, while electronically forwarding the remaining 98% to the information provider. (Please see Table B process flow for an illustration of the settlement process.) Table B Micropayment Reality: Where the Industry is TodayAs of today, most information providers are relying on advertising as the sole source of revenue. Within the near future, users will be paying for access to Internet-distributed information. Before this will happen, micropayment software must be more widely distributed and accepted. Furthermore, software developers must sign on more brokers to make markets of e-currency. And, most importantly, a standard protocol, or cyberwallet, must be developed. Currently, many of the software developers have formed a consortium to discuss this topic. This Joint Electronic Payments Initiative, or JEPI, includes: CyberCash, Microsoft, IBM, Verifone, Bellcore, Citibank, Deloitte & Touche, Netscape, Nokia, Novell, Oracle, and Tandem.Future of MicropaymentsMicropayments will likely become much more common within the next two years. Currently, one pays for access to the Internet through an Internet provider, like CompuServe, Cyberramp, or AOL. In the future, customers will also have to pay for the content that they wish to view; like stock quotes, weather reports and news.As the Internet industry matures, there will be an increasing number of sites requiring a subscription to view the site. As an example, one needs to become an on-line member before viewing sports scores that were previously free. In addition, personal-investing sites, like MS Investor, require that the user own a membership before viewing more detailed information, such as analyst estimates.The subscription versus micropayments dilemma can be best illustrated by a learning curve model. Along the x-axis is the maturity of the industry and along the y-axis is demand. As the Internet industry begins to mature, the costing structure will move from free access to subscription-based access and later to micropayment access. In most cases, subscriptions do not maximize revenue for the information provider. Since a subscription is required to view information, most Internet user’s will feel that this monthly commitment is too high and will go to another site for the information. This phenomenon can be seen in the development of both the telephone industry and the electric industry. Currently, most telephone customers pay a monthly “subscription” for local access, while paying micropayments for long distance service. There have been many indicators that the local telephone system is moving toward a per-use payment system. Sprint’s ION telephone system is such an example. Furthermore, society is already familiar with micropayments through electrical use. Electricity is paid for on a metered system (per-unit usage) versus just a lump-sum fee or subscription. (Please see Table C for an illustration of the life-cycle of payment mechanisms.)Table C Government RegulationCurrently, there is virtually no government control over the micropayment industry. Since there are only a few Internet users using micropayments, regulation is not a large issue today. But in the future, information providers will demand that users pay for content. This will create a more widespread use of e-currency, which will shift the supply of money used for micropayments from M1 and M2 into M3. This money will most likely come from checking or savings accounts and be deposited in a cyberwallet. The brokers have the use of the money between the time in which the Internet user deposits it and when the user purchases information items. While the money is within the float, brokers will most likely invest it within low-cost institutional mutual funds, which are part of M3. This will shift money away from more traditional cash measures, such as M1 and M2, into M3 – which the Fed does not currently targeted for specific growth.In addition to the movement of cash-type money, there are the issues of creating money without cash settlement and the decreased settlement time due to the increased velocity of transactions. Both of these issues are not large concerns currently. Since information providers cannot pay operating expenses (such as wages and rent) in e-currency, and probably will not be able to in the foreseeable future, all e-currency transactions must be eventually settled in cash. This mitigates the concern over who controls the supply of c-currency because cash settlement is eventually required. Although, as information providers can reduce the settlement time from up to months down to hours, many other payment mechanisms are beginning to allow vendors to receive cash payment faster. It is possible that micropayments will drive other payment forms to hasten the settlement process. This will have an overall velocity effect on the entire payment system. Due to this factor, it is likely that the Fed will take some action to regulate this new form of money being created. The micropayments industry is still in its early stages, and therefore the regulatory issues regarding the Fed controlling the micropayments business is not in full bloom. As micropayment technology progresses, however, the issues as to whether or not (and how) the Fed should regulate this industry becomes more critical.Issues For Micropayments In addition to regulation issues, four other major issues exist surrounding the wide spread use of micropayments. The first issue is how many protocols can co-exist successfully. It is the old “chicken and egg” dilemma. Providers do not want to invest in a payment system that customers will not use and vice-versa. Another potential issue is privacy. This issue is minimized by the lack of complete information on both sides of the transaction. The information vendor knows what content was accessed, but not who accessed. The software developer knows who accessed information, but not what information was accessed. This leads to anonymous transactions, similar to cash settlements.The third issue is the potential lack of public confidence in the payment system. Internet users may be worried about the solvency of their broker and/or software developer. Although this is a concern, it is somewhat mitigated by the fact that only a small amount of value (usually less than $40) is stored on a user’s PC cyberwallet at anytime.The final issue concerns losing e-currency through theft. Since the e-currency is stored on a PC and each transaction is uniquely coded with both a code and a time stamp, lost e-currency value will most likely occur from lost PCs. Therefore, the last concern will be the small value stored on an cyberwallet when a $4,500 laptop is stolen. Security actually becomes an advantage of using micropayments versus credit cards. The risk of inputting credit card numbers on the Internet deters many potential customers, as they are afraid that their credit card number and other personal information may be exposed and accessed by others, such as computer hackers. The use of micropayments eliminates this fear because one does not have to give a credit card number to a small and previously unknown information provider’s web site to view content.Pros & Cons of MicropaymentsThe use of micropayments has several advantages as well as disadvantages. The first advantage is that information can be accessed quickly. The Internet user can almost immediately view purchased information. In addition, accounts are settled immediately. Secondly, since paying with micropayments is similar to paying in cash, credit card fraud risk is reduced because only the broker has the Internet user’s credit card number – not each of the information providers. Thirdly, as micropayments become more common, better content will be available because information providers will be more inclined to produce superior content since value is captured for view content.There are several disadvantages, however, that micropayments bear. First, since the cyberwallet resides on a single computer, The Internet users must be at their own computer to access their cyberwallet. Secondly, subscription based services favor heavy users. in some cases higher gross charges may be incurred through micropayment payment methods, compared to the amount incurred through a monthly subscription to an information provider’s site. In addition, due to the fragmentation of the industry, an Internet user may need numerous e-currency accounts to access multiple information sites. Finally, there is the issue of government regulation is an unknown factor, which may hinder the growth of the micropayments industry. Summary In short, Internet micropayments are not yet a common household item, but likely will be within the next few years. There are numerous players in the industry who will play important roles in the future of the micropayments industry. The extent to which the micropayments industry becomes profitable, however, will be largely determined by the role that government plays in regulating this new industry. Bibliography Amlot, Robin. Personal Finance: Internet Investor: Fill your wallet with e-cash. The Independent (London). Features, pg. 3. Ravensbergen, Jan. Digital cooks up micropayment scheme for Internet. The Gazette (Montreal). Business, pg. E3. Jackson, Time. Dawn of micro-payments era. Financial Times (London). Marketing / Advertising / Media, pg. 17. Kramer, Art. To test pay-and-read concept. The Atlanta Journal and Constitution. Features, pg. 04D. Kehoe, Louise. Boost of Internet commerce. Financial Times (London). News: US and Canada, pg. 07. Killen, Michael. Micropayments and Smart Cards. Electronic Commerce News. Wednesday Feature. White Papers. The Millicent Micropayments System: Defining a New Internet Business Model. Ives, Blake and Michael Earl. Mondex International: Reengineering Money. London Business School Press.