Perhaps due in part to its infancy -- or maybe an impediment to its maturation -- transaction systems for e-commerce are as yet rudimentary and ad hoc. While the SSL (Secure Socket Layer) protocol currently is the technology platform of choice for most retail e-commerce transactions, it offers neither the security nor the consumer convenience needed to fully exploit the potential of e-commerce. Most importantly, current e-commerce transaction systems are not amenable to the purchase of information goods. The selling of information goods -- or any products that can be distributed electronically -- is one area of e-commerce that truly exploits the radical properties of this new commerce media. Whether multi-media, software, or text, information goods promise the possibility of seamlessly electronic commerce from advertising to shopping to transaction to delivery.
A number of complementary forces and developments will be required before
information goods make their bona fide debut in e-commerce. In this report,
we analyze the payment transaction systems -- in particular, micropayment
systems -- that will enable the buying and selling of information goods
over the Internet.
Consumer convenience requires both effortless set-up and ease-of-use. Ideally, consumers should be free from any set-up or system/application configuration. At the very least (whether involving software, hardware or both) installation and registration should be simple and straightforward. The failure of early attempts to implement micropayment systems was due in part to the necessity that specialized client-side software be downloaded and installed by the consumer[3]. Generally the average consumer is unlikely to go out of her way install specialized software, as demonstrated by the high price of desktop display real estate. Beyond the set-up process, consumers will also demand ease-of-use of any new transaction system. Because one of the compelling reasons for micropayment systems is the potentially seamless integration into the point-and-click dynamics of web-based browsers, any candidate systems should place a high premium on user convenience.
Along with issues of convenience, it is reasonable to assume that consumers will be highly sensitive to price. With the vast majority of all web browsers and plug-in applications freely available, it is unlikely that client-side consumer software can be sold profit. A potential twist to this scenario might be the installation of broader purpose hardware or software (e.g., smart card readers) with a perceived value beyond the micropayment application.
Consumer-side security requirements are something of a gray area for electronic transaction systems. If anything, the wide acceptance of SSL -- which is a relatively insecure system for conducting electronic transactions -- suggests that releasing credit card numbers onto the Internet is not a strong disincentive for e-commerce consumers. This acceptance has been driven in part by strong marketing campaigns by Visa and MasterCard, as well as low limits for credit card liability in fraudulent transactions[4]. Another security issue is the information about consumers' demographics and purchasing habits that can be collected by various Internet organizations. As privacy on the Internet becomes a more important consumer concern, protecting personal information could be the dominant requirement from the consumers' perspective.
Ultimately, the successful consumer adoption of any micropayment systems
will depend on the availability of products. Previous attempts at micropayment
systems have made clear that a large, attractive array of goods which are
suited for (or better yet require) micropayment transaction systems will
be a prerequisite for the success of these systems. We can foresee network
effects playing a prominent role.
The establishment of an on-line micropayment system will dramatically increase on-line revenues by enabling e-commerce sites to more effectively sell their existing products, allowing for the creation of whole new business models based on small value transactions (see section 3.C), and by making on-line transactions simpler and more ubiquitous.
By providing retailers with the flexibility to sell existing products under a variety of pricing structures, micropayments will enable e-commerce sites to broaden the reach of their existing product lines. While it currently possible to purchase a wide variety of information goods over the Internet, consumers are typically forced to do so by purchasing subscriptions or establishing bulk purchase accounts. This often limits such on-line purchases to institutional or heavy users. For example, the Wall Street Journal (WSJ) Interactive Edition currently provides access to its news, research reports, market updates and investing resources for an annual subscription fee of $59 per year. While such a fee might be acceptable to financial professionals, many other potential customers will forgo this service. However, under the micropayment system that the WSJ has joined with Qpass, users will be able to purchase individuals items without the annual subscription. In this manner, micropayment systems will allow e-commerce sites to access entire new market segments with their existing product lines.
A micropayment system will also enable on-line retailers to sell a wide variety of information goods such as news articles, software, research reports, government publications, MP3 music files, digital books and papers, high-resolution images, video clips, movie rentals, etc. Similarly, a whole new range of on-line services, including phone and fax service, video conferencing, financial management, and voicemail will become more feasible under micropayment systems. The creation of these new markets will dramatically increase on-line revenues while providing tremendous value to consumers. Similarly, micropayment systems would provide government agencies, non-profit organizations and possibly individuals with an efficient means of recovering the small costs associated with distributing information goods and services over the Internet.
Perhaps more importantly, a standardized micropayment system (or a system of compatible micropayment systems) would make on-line shopping much easier for consumers of all backgrounds. This increased ease-of-use will not only encourage repeat business for those sites that are part of the system, but will greatly expand the overall size of on-line shopping as consumers find the Internet to be a more convenient place to shop. Thus, through better access to existing consumers, creation of new business models, and an increase in the ease and convenience of Internet shopping, micropayments systems stand to tremendously increase on-line revenues and profits.
b) Lower costs
Along with an increased opportunity for revenue, low cost will be an important factor for e-commerce retailers looking to implement micropayment systems. Retailers face three categories of costs: the cost of implementation, the cost of transaction, and the cost due to inadequate security measures.
In assessing the cost of implementation, we note that a number of large e-commerce players -- including both well funded, publicly held firms and e-commerce divisions of traditional firms -- are not extremely price sensitive. Nonetheless, it will be important to keep the cost of implementing a micropayment system (hardware and software) on par or below with current e-commerce systems. In addition, cost of transaction should be considerably lower than those incurred by current systems, particularly due to the small value of individual micropayment transactions. Any extraordinary costs will have to be justified by promises of accompanying increases in revenues due to micropayment goods.
The importance of establishing a critical mass of micropayment e-commerce sites will make the entry costs for smaller Internet companies an important factor. For this reason, it will be highly advantageous if micropayment systems can be offered to smaller firms as an outsourced service. In this way, smaller firms would enjoy the benefits of selling micropayment goods without undertaking the startup costs associated with installing an in-house system and support staff. Currently, companies like Cybersource and Open Market provide a full range of e-commerce services for smaller web companies. Micropayment systems would do well to facilitate this type of outsourcing option.
c) Security/performance tradeoff
Current state-of-the-art secure transaction technology involves some form of key-based encryption technology. These technologies are computationally demanding, resulting in a strong negative correlation between real-time transaction speed and security (see Section 2.B.1). Furthermore, more sophisticated techniques of consumer and merchant verification will require multiple levels of authentication. This impacts both the complexity of software (on both the client and server sides) as well as the performance requirements of the server-side hardware. In general, these tradeoffs between security, performance, and complexity (cost) will be an important consideration for any micropayment system.
The SET (Secure Electronic Transaction) protocol being pushed by MasterCard and Visa is a good example of the impact of these tradeoffs and their effect on adoption by both financial institutions and merchants. While the SET protocol offers inherent benefits as far as security is concerned, this has resulted in a system that is inferior to the existing SSL protocol in terms of complexity and performance. These factors are being blamed for the lethargic adoption by both banks and electronic merchants[5].
d) Open Standards and Multiple Sourcing
In attempting to manage lock-in, savvy e-commerce merchants will be sensitive to developing a dependency on any one vendor for a mission-critical system. Accordingly, from the merchant's perspective, an open standard for micropayment systems and components will likely be an important factor in promoting multiple vendors. Having multiple sources for key software and hardware components should lower a key switching cost of buying into a complex system. MasterCard and Visa have attempted to follow this strategy in promoting the SET standard by establishing an explicit set of interface standards and formally approving an extensive list of vendors for various components of the SET system[6].
Conversely, vendors will find it to their advantage to encourage lock-in.
Strategically, the balance between controlling a standard to encourage
lock-in and participating in a open standard system to foster network effects
will be important for vendors of micropayment systems and components. Please
refer to Section 3.B for a more detailed
discussion regarding standards and lock-in.
Security for these technologies is a key issue and will have a large bearing on whether micropayment technology will reach widespread adoption. Users are concerned that personal information or account numbers or both may be stolen and misused. There are several main points of concern with respect to security. Companies have no way of knowing whether individuals or other companies are authentic, the transmission and receipt of account number details may not be secure, also a customer's order may be corrupted by interceptors and a customer may be charged for goods not received or may receive charges for and goods that the customer did not order.
To authenticate a user or company, digital certificates (DCs) can be used. A digital certificate is the electronic analog to an identification badge or a driver's license. DCs are implemented in software and prove the identity of an individual or computer; they can be stored on smart cards or on hard drives of computers or laptops. DCs are issued by a Certificate Authority which guarantees the authenticity of both parties. Certificate Authorities can be banks, government agencies or credit card issuers. The authority verifies the certificate's authenticity and approves a secure transaction by inspecting the user's entered password. Advantages to the use of DCs include greater security than with passwords alone and the potential reduction in maintenance and support costs associated with security layers. A main disadvantage with the use of DCs is that different software programs, such as Navigator and Explorer, require different certificates. Thus, a user's certificate may not be accepted and/or verified by a particular certificate authority. Current work is being done to standardize certificates. Two competitors, who largely work as complementors in other areas, in this standardization war, are Microsoft who is proposing an Internet Security Framework , and Intel, who is proposing its Common Data Security Architecture. Secure Electronic Transaction (SET), which is being promoted by major credit card companies, is probably the most well-known protocol for identifying users by incorporating DCs. The financial institution that issues the card holds a DC validated by the card brand, the merchant holds a DC validated by its bank and the consumer holds a DC validated by its credit card issuer. A disadvantage to DCs is that digital signatures may be acquired by an unauthorized person due to the fact that the signatures are held in software or on the user's hard drive. One solution is the smart card which increases security since access to a user's signature is held on the smartcard, which the user owns and can move from computer to computer.
To help avoid data corruption in transmission of payments, the Secure Sockets Layer (SSL) is being employed over the internet. SSL is a protocol, available on most browsers, that encrypts http packets on TCP/IP routes. To date, no hackers have been discovered to have been successful in gaining access to data being transmitting between browser and web site. This protocol can thus be useful in curbing a user's fear of transmitting confidential information.
b) Scalability
Scalability refers to the ability to adapt to growth in traffic or change in business patterns. Applications or services that are scalability-cognizant might, for example, monitor its business or traffic conditions, for response time to requests, and use this information to allow the company to respond quickly to patterns in customer demand. The scalability of existing servers to handle applications of the nature of e-commerce will be a major factor in determining big winners and losers in the market. With the projected onslaught of e-commerce traffic over the next few years, there will be a need for larger regional servers. Also, with the near-random fluctuations in e-commerce traffic, servers will need to have the capability to scale to large user traffic. Currently, NT servers are not competing well against its main competitor, Unix, in the e-commerce and other financial environments. This may be a result of the reputation for being largely unscalable because it leaks memory and has an unacceptable number of bugs that lead to crashes that occur often. Unix, is known to be very scalable, however, is more expensive to maintain. Thus, we see that scalability is a requirement that must be addressed before e-commerce (and e-commerce for micropayments) can reach its peak in the market.
c) Real-time transactions
The ability for real-time transactions of funds to occur with micropayments is an important need of an e-commerce system which could mean the difference between a merchant accepting a particular payment or not and can, thus, have bearing on the general acceptance of e-commerce micropayments. In general, merchants prefer for funds to be deducted from a consumer's account in real-time to decrease the risk of a merchant not being paid. Online Resources & Communications Corporation is working with CyberCash on a real-time system that enables users to buy products online with immediate-authorized funds. The system works by authorizing real-time debits from a user's bank account before the user presents the CyberCash wallet to the merchant. After the merchant receives the payment, Online resources uses an ATM/point-of-sale network to immediately debit the user's account and CyberCash sends the funds to the merchant.
d) Compatibility with Present Back-End Server
A requirement to adoption to micropayments is system compatibility with
merchants who currently have their own back-end accounting and order-fulfillment
systems. Merchants are concerned that they will inevitably have to replace
their current systems due to incompatibility with package e-commerce micropayment
solutions. IP400 Inc. has responded with Web.Master, an application that
allows merchants to realize e-commerce solutions while still maintaining
their back-end systems. IP 400 installs a front-end which includes a merchant
interface to online customers, the HTTP server and router, and provides
a connection to the merchant's back-end server. IP 400 Inc. also provides
hardware and software solutions so that the merchant only needs to work
with one maintainer. This solution works with SSL and SET. Merchants pay
an affordable price of $170 per month plus $1.25 transaction processing
fee per transaction.
a) Encryption
As evidenced above by the need to provide security for micropayments technology, there is great potential for encryption companies to become complementors to this technology. One such company is RSA Data Security whose encryption technology is already embedded in Microsoft Windows, Netscape Navigator, Intuit's Quicken, and many other products. RSA's technology is embedded in Navigator's Secure Sockets Layer (SSL) developed by Netscape is already the leader in encrypting internet packets and, therefore has potential to complement any of the many software- or hardware-based micropayment solutions. Another company that has potential for becoming a complementor in the micropayment market is Intertrust Technologies Corporation. Intertrust currently has developed a software product called Metatrust which allows a network manager to decide what information will be revealed or contained, via encryption, across public lines. Two of the three components of Metatrust are particularly interesting. The first component of interest is called Digibox. Digibox encloses data in a security container using a 64-bit encryption key from RSA Data Security. The second component of interest is called Interrights Point which provides a graphical interface for the network manager to tailor his particular encryption policies for data that will be contained in the digibox.
b) Broadband Connectivity
Another complementary technology is broadband connectivity. Broadband access can facilitate the transmission of many types of information goods which usually are in the form of high-bandwidth traffic types over internet networks. Users can rent a movie online. Previously, users would have had to buy the movie and wait until it was shipped to them. However, with broadband connectivity complementing micropayments, a user can purchase the viewing of a movie for a micropayment-representative cost, and, thanks to broadband connectivity, the movie can be delivered to the user online with a setting that only allows the user to view the movie once. This leads to the possibility for the creators of DIVX to potentially be a complementor to the micropayments market. Broadband access companies can also be complementors to the micropayment market because the companies can facilitate the transfer of audio such as a single song, paid for with a micropayment, online.
c) Shareware Developers
A final complementor to the micropayment technology could be companies
that provide shareware. As the prices for starting up a site can be too
great for small businesses, there is opportunity for shareware developers
to create packages that can be shared between several businesses or groups
of businesses. This would help to reduce the initial start up costs for
merchants. Perhaps legislation could exist such that shareware would only
benefit smaller companies so as to not decrease significantly the profits
from other companies that might make packages for sale at full retail price.
These full price packages could be sold to larger companies since most
smaller companies have problems with the exorbitant prices of many current
packages.
a) Software Approaches
IBM (Mini-Pay) and Compaq's Digital Division (Millicent) as well as many other companies are releasing software approaches to micropayments in the near future. Most software implementations for micropayments are developed in the form of digital wallets. Digital wallets allow access to a user's money by being a digital repository for credit card numbers, ATM cards, and digital certificates; they are typically embedded in browsers. These wallets also store private information, as would a physical wallet. Users can decide what information will be stored in the wallet and to what parties the information can be released. Digital wallets have several advantages to users as well as merchants including ease of payment for customers and consistency of payment types for merchants. Disadvantages of the wallets include the security leak from trail of account numbers that users leave at any particular site, with the use of certain wallets, as well as the release the personal information. Other companies are also gearing up to release digital wallets.
We turn our attention to obstacles faced by merchants and banks, in the adoption of micropayment technology. Since 1995, there has been exponential growth in the number of software houses offering Internet-based e-commerce solutions. These solutions, commonly called Virtual Shopfronts, present an online catalog of products to consumers as well as provide features such as shopping carts in which a consumer can hold all of its goods and make one purchase for all goods after shopping is completed. The website can then be divided and sold to several different merchants who desire space to sell their products. Transact, developed by Open Market and Time Warner, is one such software package that provides ISPs (Internet service providers) with space for merchant shopfronts. Transact includes a virtual shopping basket that users can fill as they browse and back-office functions for the merchant which include functions that handle inventory and billing details.
Billing Reliability
One obstacle to adoption with Transact, in particular, is reliability in the billing within the package. Transact works by billing customers at regular time intervals. Thus, customers may make several different purchases before being billed. Apparently, one problem is that not all transactions are appearing on a statement. Merchants are finding that the listing of transactions on the bill are incomplete and, are often not receiving all of the requests that consumers send for products. This means a waste of time for the customer and a waste of money for the merchant as merchants have to direct customer requeries to customer service personnel who attempt to identify the product ordered and ascertain whether or not it was received. If it is found that the product was not received, the merchant may be liable for legal suits if, say, another company (the customer) was caused to lose money due to a fault in the merchants system. Presently, the merchant takes responsibility for the errors caused by software that they use and this has many merchants worried.
b) Hardware Approaches
Smart cards are the primary hardware-based technology for facilitating
micropayments. Smart cards are debit cards with embedded microchips that
record transaction values and available funds. One key advantage to smart
cards is that they allow direct transfer of electronic cash between private
users. A disadvantage to this technology, however, is that any user desiring
to conduct smart card transactions must purchase a card reader for their
computer. The cost of the reader is $20-$30 plus the cost of installation.
In addition, as noted above, the widespread adoption of smart card technology
and a user's ability to use his smart card for a transaction, depends on
the installment of the necessary infrastructure. Mondex
International, Europe's top smart card vendor, is making many alliances
with financial institutions in the US. Wells Fargo has begun a trial of
supporting purchases over the internet using the Mondex smart card. AT&T
and several international banks have announced plans to further introduce
Mondex into internet commerce. Finally, MasterCard International has purchased
a controlling interest in Mondex. From the alliances that Mondex has made,
it seems that the lack of infrastructure for smart cards may be temporary
due to the popularity that the technology has obtained.
The powerful network effects inherent in a micropayment system enhance the potential dangers of lock-in and stranded investments both for merchants and consumers. As a result, expectations management and industry alliances are crucial for providing the credibility needed to convince vendors and consumers to adopt a new system. Indeed, the virtual landscape is littered with the bodies of failed systems (see case studies). In light of the difficulties involved with acquiring the critical mass of users needed for success, it will most likely be necessary for new systems to focus on highly specific, niche markets. For example, Qpass is employing a strategy of focusing exclusively (at least for now) on financial services. Its four primary vendors are The Wall Street Journal Interactive Edition, Morningstar Mutual Funds, STAT-USA, and The Industry Standard. If Qpass can become the system of choice among financial professionals, it may be able to expand its base to other related markets such as news services.
It is thus likely that we will initially see a proliferation of independent proprietary micropayment systems, each targeting a specific niche market. However, to capture network benefits, these systems will need to come together under an umbrella of common standards. This transition will most likely be effected by a wave of acquisitions and mergers among competing systems. Those systems that do not grow and and merge, will shrivel and die as network effects become a dominant force in the market for micropayment systems. An alternative scenario is that a current large player (e.g., IBM or Microsoft) will gain early adoption, capture the network benefits and thereby preempt the adoption of competing systems.
Indirect network effects will also play an important role in building
a successful micropayment system. As consumers become accustomed to using
micropayment systems (even if only at a few E-commerce sites originally),
they will begin to feel more comfortable making such transactions. This
increase in consumer confidence will benefit all on-line services. Similarly,
consumers will increasingly look to the Internet for this new class of
goods and services. Finally, there will be a positive feedback effect:
as firms market new information goods, new consumers will come on-line
to purchase those goods, more sites will market products to these new consumers,
and so on.
Payment systems demand a system-wide approach: a single bank, retailer, customer just won't work, because a payment system must include multiple parties: buyer and seller, or buyer, intermediary(ies), and seller. In the best case, all steps in all value chains could use the same payment system - like gold coins. In the worst case, all steps in every chain use different ones, like in an all-barter economy where every exchange could be unique.
If you can't make a payment system alone, you must collaborate. How do you choose the best partners in implementing a new payment system. Horizontal collaboration is one approach. Horizontal partners might be multiple competing banks in New York City. They realize they can all benefit from creating a single electronic payments system because it's cheaper and would accelerate seller and buyer adoption. Vertical partner, on the other hand, might be appropriate if a bank wants to make such a payment system a differentiated offering or has some special advantage due to market structures. For example, the University of Michigan's on-campus payments system includes local retailers and restaurants as partners, not other financial/lending firms.
Payments systems tend to be regulated by governments or quasi-governmental corporate consortiums. Therefore, they tend to have extremely long gestation periods that are challenging to map to the short term planning horizons common among technology companies. This market structure - imposed by governments worldwide to thwart systemic financial fraud against their citizens - is a considerable impediment to new payment standards.
Value of perceived momentum
Expectations carry considerable weight in this contest. Modern payment
systems tend to be evolutionary, not revolutionary technologies preserving
reverse compatibility with legacy systems. For example, debit cards were
introduced to the marker without causing any changes to the credit card
payment system. The debit system was an evolutionary output of the successful
Visa and MasterCard consortiums. It was long expected and the thousands
of member-banks who own Visa and MasterCard never expected anything but
a success - in spite of taking years to design and implement.
Sustaining a Payment Standard
Banking is all about trust, and customers are resistant to switching
financial services firms from a long-trusted one to an upstart merely because
of a newfangled feature or minor conflict. Therefore, keeping a standard
in payment systems tends to be easy. Visa is a master of such incremental
standard propagation. When they design a new feature, it is first "sold"
internally to member-banks. Then, the banks agree to a common standard
to support, say, a common method for activating new credit cards via 1-800
numbers to reduce postal fraud. Then, the multiple sources of payments
clearing software systems must update their software to screen out a new
class of payments attempted with "valid" but "inactive" cards that haven't
been initialized. Visa established the standard by defining it and then
getting the banks - which buy the payments management software to agree
to support it in advance. The captive software vendors must follow. They
aren't in as good a position to develop new features of their own and propose
them as standards because they deal in a fractured, multi-party market.
Only Visa has relationships with the whole consortium and is best positioned
to maintain control by developing payment standards for banks.
Standards in micropayments face all of these issues and more. Smaller payments mean smaller fees to pay for the system itself. It must be massively efficient to cover costs. But is there are minimum efficient scale necessary to achieve this low transaction cost threshold?
Reaching such a scale means having a broad set of customers, which implies a broad set of offered products or services to attract them (a narrow market like kid's toys probably won't be the place to start).
Most current micropayment systems still require an ex-post or ex-ante
"macro-payment" using another payment system, most commonly a credit card.
This adds another fee on top of the micropayments fees. Care must be exercised
that end-user customers aren't victims of double marginalization that could
price the service too high for the target customers.
Unfortunately, such business models are currently infeasible due to the high transaction costs associated with paying for these information goods using conventional credit cards. For example, Credit Card Network USA (http://www.creditnet.com/info/info-rates.html) charges Internet merchants an additional fee (on top of the transaction fees the merchant pays to their merchant bank) of ten cents per transaction plus 1% of the transaction value. With merchant bank fees for credit cards on the order of $1 per transaction, this renders a business model based on transactions below the $5 range uneconomical.
In contrast, micropayment systems such as Qpass charge transaction costs in a range of 5% to 10% on marginal purchases. This small transaction cost makes it highly feasible to offer low-priced information goods. Because those goods have almost no marginal reproduction and distribution costs, firms can still maintain high profit margins on these low-priced goods. The key to profitability thus becomes maintaining high volumes of sales (which is aided by low prices). The micropayment business model is thus one based on low prices, high volume, negligible reproduction and distribution costs, and low transaction costs. This is a business model that is clearly beneficial to both consumers and retailers.
Many previous technologies that seemed promising in 1995 and 1996 (such as Digicash, First Virtual, and CyberCash) suffered from standards battles and poor marketing. No single system gained widespread market traction. In general, however, these first efforts at the electronic cash concept were plagued by their attempt to establish themselves as substitutes for SSL-based credit card transactions. Instead of focusing on the types products (i.e., information products) best suiited for micropayments, their broader attempt to capture the full market for Internet based transactions backfired when consumers proved less hesitant about using their credit cards over the then novel medium of the Internet[10]. In addition, early micropayment pioneers like Digicash -- which filed for bankruptcy in November 1998 -- promoted technologically sophisticated solutions requiring specialized software on buyer, selling, and banking systems. While the technology was highly touted by the press, convincing banks and merchants to adopt such a complex system proved to be the final deathblow. In fact, despite being the leading innovator in this first wave of micropayment systems providers, Digicash was only successful in convincing one bank to pilot test their system[11]. Hardly the ideal conditions in which to ignite network effects.
Today, market analysts still see end-user customer demand for additional
services. For example, "One point of contention for users online is that
they are constantly having to reenter [payment] information into [e-commerce]
sites," said Scott Stirton, a Boston Consulting Group analyst. In addition,
a number of firms are focusing on market niches with micropayment technologies.
Whether this is a starting strategy to establish a user base to expand
from or whether this is simply the extent of the market is not yet clear.
However, the past history of startups entering the micropayment space is
grim.
A customer's total purchases at sites like the Wall Street Journal and Morningstar are charged to the customer's credit care on a monthly basis or after reaching a certain threshold (such as $40). Qpass is designed for unobtrusive ease-of-use. It's easy for consumers to buy - just like signing into HotMail or Yahoo. Customers can assess all Qpass-enabled websites using the same UserID and password.
For the website, Qpass claims to offer a "one stop shop" for a content supplier to outsource micropayment collection. Working with strategic partner and investor Andersen Consulting, Qpass claims to deliver sales and presumably Andersen Consulting can't afford to let such installations fail because of long-term customer relationships. The system is attractive to websites because there are no large upfront of ongoing charges to play. Qpass maintains its own network and servers to conduct the service, so there is no risk of technological obsolescence to the web site.
Lastly, Qpass offers the web site/content providers deep flexibility in how they want to implement micropayments. For example, WSJ can offer users a $3 "day pass" to the Journal or a $50 three-month subscription to the online service. For Morningstar, Qpass might offer different tiers of service enabling differing levels of access to mutual fund data. All these offerings are consistent with content providers efforts to "version" their content to maximize their revenues.
The following are web sites currently using Qpass: Wall Street Journal Interactive Edition, Bloomberg Business News, PR Newswire, US Dept. of Commerce/STAT-USA, Industry Standard magazine, and Morningstar.
Qpass is paid for by the web sites. Qpass simply withholds a portion
of the money it has collected on the content provider's behalf according
to the following schedule . For purchases less than $15, Qpass gets 30
percent of the purchase price. For purchases over $15, Qpass gets $3 plus
five percent of the amount over $15.
InstaBuy doesn't seem to have the tight focus that Qpass has. InstaBuy can be used only at merchants like Egghead.com and a host of minor online firms (like "911gifts.com" and "GreatFlowers.com"). This suggests that its adoption hasn't yet taken off yet.
We don't believe this concept is as promising as Qpass, mainly because of the broad market approach. We feel a targeted approach, like Qpass's at online financial news, has the best chance of igniting network effects.
eWallet is free to consumers, and claims partnerships with Amazon.com, eToys, Beyond.com, and Music Boulevard. eWallet is compatible with hundreds of others sites. It's not publicly disclosed exactly how eWallet collects revenues for its service. eWallet is one of the dozens of firms created by entrepreneur Bill Gross's LA-based idealab!.
Main features of the IBM micropayment solution include:
1. Scalability and interoperability - allows widespread availability
across the Internet, including multi-currency and multi-lingual support.
2. Low operational costs - easily supports transactions as low as 1
cent.
3. Real `click and buy` user interface - provides a simple to use,
natural extension of regular browsing.
4. Negligible delay for transactions - feels like regular surfing.
5. Security against forgery and overspending - incorporates the use
of RSA signatures and enables specification of credit limits.
6. No special hardware required.
7. Powerful application programming interfaces and database support
- makes it easy to connect to existing merchant and billing systems.
One of the key strategic moves being made by IBM to encourage e-commerce sites to use its MiniPay system is to bundle the micropayment software (free of charge) with its standard e-commerce software systems, encouraging both merchants and retailers to try out the system with undertaking any risk.
While the MiniPay system is a powerful, highly flexible micropayment system, a number of obstacles might impede its widespread use. MiniPay adoption is based on establishing itself as a de facto standard; the large number of players in the network server software industry will make this difficult. In addition, a relatively large plug-in is required on the client machine (about 1.5MB). While the benefits for buyers installing this software are real, to get true penetration might require an alliance with browser software companies.
As our discussion of the technology requirements has shown, micropayment systems are complex software systems requiring specialized applications on buyer, seller, and banking side. By comparison, SSL is a relatively simple system. Because of this complexity, establishing an installed base will be a major challenge for micropayment systems. The obstacle of an installed base is particularly critical given the strong network effects. Establishing an open standard could be a key factor in promoting the adoption of any micropayment system by mitigating the dangers of lock-in and encouraging network effects. We discuss the issue standardization in the next section (5.B.1)
b) Shopfront Setup Costs
Another such obstacle for merchants is the cost for space on these software packages. ISPs can minimize its financial risk by charging what some are calling excessive fees to merchants. Currently, Transact costs the ISP $250,000 the support costs; ISPs minimize their risks by recruiting a number of merchants to cover the $250,000 cost by charging an annual fee of $5000 per year, a setup fee that is often as high as $1000, and taking about 15% of revenue that is generated at the merchants site. These fees often serve for a very real obstacle to adoption for merchants with small- to medium-sized businesses. Quza in Europe is a little more flexible, charging each merchant an annual fee of $5000 per year, plus 2% of revenue (about $1000 per day) for merchants that generate large revenues and charging the other businesses about 0.04% of their total revenue.
c) Loss of Revenue for Banks
One obstacle to micropayment adoption for banks is the potential loss of revenue from micropayment technologies that remove validation from third party sources, such as banks. With some micropayment technologies, merchants have direct access to customer accounts and no bank authorization of funds is required. Consequently, the bank loses transaction processing fees. One solution has been developed by Intertrust. The Intertrust Commerce Architecture enables banks to become processors for micropayments on the internet; banks would essentially guarantee that payment will be received in much the same manner that banks process checks. The bank would pay parties after a 15-day float and collect a fee for its services, similar to the fees charged when a consumer uses an ATM machine that does not belong to its bank. Thus, banks can move from being authorization sources to being payment processors, and thrive with micropayment technology.
The newer attempts to crack the micropayment market are applying more highly focused market introduction strategies. Consider Qpass again. For the first six months of their market introduction, they have partnered exclusively with online financial information providers appropriate for retail investors. Qpass's long-term vision is to be the micropayment solution for all online content, but they are trying to get network effects going with a focused, staged strategy. It's too early to determine whether Qpass will succeed in creating network effects. But even if they don't, their new technology has ratcheted down the bar again so that even if they fail, another firm can make a similar attempt with a system even easier for customers to use than what we know today.
Interestingly, multiple standard will likely benefit Commerce Service Providers (CSPs) providing outsourced micropayment solutions to small merchants. Because multiple payment systems will prove unattractively complex to manage in-house, smaller merchants will seek to off-load these capabilities to external companies specializing in payment systems.
Based on the above arguments for standardization, it seems unlikely that any single company will be a dominant force in establishing a micropayment system. Companies like Qpass could succeed initially in small niche market, but as demand for information goods increases, an industry standard will likely emerge. Standards might be achieved in one of two ways: through an industry consortium or by way of a formal standards committee.
IBM's early introduction of a micropayment software solution gives them a strong first-mover advantage, particularly where understanding merchant and banking needs are concerned. In addition, the bundling of MiniPay with their standard e-commerce software suites seems to be a smart strategy. However, while IBM is a leading player in providing network solution services, its lack of presence in the desktop computer and consumer electronics market (and the associated ability to deploy client-side micropayment software) could prove to be a liability.
Browser plug-ins offer a very attractive interface for client-side micropayment software because they preserve the ability to easily modify the "click-and-see" into a "click-buy-and-see" action. Both Microsoft and Netscape, due to the dominance of their browsers, are poised to control this critical interface. In addition, Microsoft's dominance of the OEM desktop operating system market affords them the key opportunity easily deploy client-side software, mitigating the consumers' hurdle of downloading and installing software.
3. Portals (Yahoo, Excite, Infoseek, et. al.)
As more and more internet traffic passes through portals, companies like Yahoo and Excite are quickly becoming consolidators of Internet information resources. This places them in a position to do what Qpass has done with the niche market of financial and business news services on a much larger scale. However, as mentioned, the Qpass micropayment model is not ideal for large-scale implementation, and lack of any true locus of control (either software or hardware) will be a disadvantage for portal companies.
4. MasterCard and Visa
As far as smart card systems are concerned, MasterCard and Visa are clearly poised to influence the development of micropayment systems. While smart cards have been slow to take off in the U.S., its success in Europe and strong interest from the banking industry makes its eventual adoption here likely. Combined with strong relationships with the baking industry and standards experience with SET (albeit troubled), MasterCard and Visa could be very influential here. Impediments include the difficulty of establishing the physical infrastructure, and the issue of whether credit card companies will even be interested in a transaction system with such small margins.
In this section we briefly review some of the information product categories which will benefit from a micropayment system.
1. Niche-interest text
Niche-interest text includes online news and information that is of interest to specific niche markets. Qpass' collaboration with content providers like Wall Street Journal Interactive Edition, Bloomberg Business News and PR Newswire is an example of micropayment systems applied to niche-interest text. Low bandwidth requirements and tightly specialized market segments make niche-interest text attractive early opportunities for micropayment goods.
2. Images
A number of internet sites (PhotoDisc, Corbis) currently sell digital images. Due to the lack of a micropayment system, image vendors typically give away low-resolution images and sell (via credit card transactions) high quality images at relatively high prices ($9 to $100 depending on resolution). The availability of a micropayment system offers vast opportunities to exploit a myriad of versioning/pricing strategies to maximize the value of these images. The modest bandwidth requirement and relatively specialized market make images a good early opportunity for micropayment goods.
3. General interest text
While consumers are not inclined to pay for general text due to the inconvenience (readability and portability) of using the desktop computer as a library, the advent of the electronic book might change this. Products like the Rocketbook and the Softbook have the potential to make general interest text a viable micropayment good. While electronic versions of current bestsellers are being offered at "macropayment" prices, the availability of micropayment transactions could vastly broaden the range of general interest text sellable by micropayments.
4. Music audio
With the proliferation of the MP3 format, audio as an information good has recently drawn a good deal of attention, particularly from recording studios who see the Internet based distribution of music as a grave danger to their revenue streams. Opportunities for selling music by Internet will be greatly enhanced by the ability to sell and charge on a per-track basis. Bandwidth (a typical 4 minute track requires about 3MB) and digital copyright technology remain the major obstacles.
5. Pay-per-use software applications
A pay-per-use pricing model for software applications is based on the concept of charging consumers for time spent using an application versus the flat fee model on which current software sales are based. Applications range from office suite applications to games. Sun Microsystems's attempt to promote the network computer was based in large part on this model. Micropayment systems overcome one of the main obstacles to implementing pay-per-use pricing: the difficulty in incrementally charging small amounts for incremental usage. As with other content-rich information goods, transmission of software onto client computers will require the availability of
6. Video (movies, TV)
Internet single-cast of high fidelity video entertainment promises to be one of the most exciting future applications of widely available broadband networks. A few of the many applications here include on-demand video content, direct advertising, and high-fidelity video telephony. Again, micropayment systems will provide the maximum flexibility for both service providers and consumers alike.
Promoting the adoption of a new transaction system is certainly a risky and difficult task, especially when success hinges on standardization. As our study of the first wave of micropayment systems demonstrates, without the cooperation of all stakeholder parties, trying to establish such a complex system can be disasterous.
While it is not clear whether the new attempts to implement micropayment systems will be successful, the industry landscape has certainly benefited from mistakes of the past. The strategy of establishing a presence in niche markets to aid in network effects is being pursued by companies like Qpass. This time, larger companies like IBM -- with the influence to drive the standards process -- are also anteing their bets with fully integrated and highly functional software solutions. Finally, the rapid development of complementary technologies like broadband access and information appliances continues to broaden the market for the information goods so well suited for micropayment transactions.
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