Micropayments are transactions that involve a few dollars or less. They can be for digital, physical, or service products. E-commerce businesses such as media sites, application downloads, music downloads, content creators, and sports sites commonly use micropayments. Micropayment solutions providers use AI, data analysis, and automation to improve their financial risk-management, operational costs (including communication, processing, storage), and set-up costs.
Technology and finance underwent significant advancements to become more accessible to the masses. The most significant benefit is that it created markets for people who want to trade and buy items from each other. Delivery costs have also come down thanks to innovations and mass adoptions in the logistics industry.
A New Era of Payments
The internet created new business paths that need new strategies for payment. A good example is the content creators who have to watch their content spread on multiple platforms without compensation. Sponsorship and advertisement opportunities are available to content creators, but that raises issues around engagement, data, and targeting.
In the end, content creators bring entertainment and knowledge to the masses, but they don’t get fair compensation. The platform can underpay the creators for clicks, but it will make money from advertisements across the entire platform.
Traditional finance institutions like banks or credit card providers don’t have a business model to support micropayments. Their business model relies on taking fixed charges and a percentage of the sales value for every transaction; that makes selling low-value items unfeasible. Not only are they not in a position to take a rate from low-value transactions, but the charges on each transaction will become prohibitive to the seller, rendering the service moot.
Types of Micropayment
There are several ways that you can request micropayments from customers. These include:
- Pay as you go– Allows the customer to pay according to their use. An example is a startup paying for cloud services per period and as it scales. It will pay no more and no less than what it uses.
- Prepay– Requires the customer to pay before they receive the product or service. This is a model that Coil, Patreon, and others support. You can find it on media sites, online games, and niche social media platforms.
- Postpay– The user samples the product then decides whether or not they pay. An industry that uses this model is the music industry; you get to listen to a few songs or snippets then buy the album. Laterpay is a service provider that enables e-commerce sites to offer postpay services or products.
- Freemium– A model that app developers, particularly of games, use frequently. The customer gets a working free version of the app, and if they want extra features or services, they will make an in-app purchase.
- Paymium– The customer pays to access the product or service, but there will be micropayments for incremental value unlocking.
The Challenges of Micropayments for E-Commerce
Despite the growing number of options, e-commerce stores still have some issues with micropayments. Current paywalls and shopping carts involve multiple steps that are too onerous if a user makes a micropayment. When you buy shoes or make a yearly subscription and go through login, invoice, check out, and T&Cs, it makes sense because you will be making a purchase of a few hundred dollars. But nobody will want to go through the same process for something worth a dollar or less.
The above scenarios lead content creators and e-commerce companies to try and bundle a service or product to make it more worthwhile. The tactic may not work all the time as customers may only want a single low-value product or service. Why should I buy t-shirts and other merchandise when I only want a single song?
As sellers try to accommodate all users, they will experience problems with interoperability. One micropayment service usually doesn’t serve others. So the seller will have to balance managing multiple accounts and providing multiple options to customers.
Micropayment strategies only work if there is a mass market. If the seller can’t attract high volume sales, the feasibility of the entire enterprise, including the micropayment service fees, is severely affected.
Data privacy and security are becoming primary concerns for consumers and regulators. To be compliant and preserve trust, they have to keep accurate records. That means extra administrative work and costs for a business already operating on slim margins.
On top of finding a micropayment strategy that works, e-commerce businesses also have to choose sales channels, design a website, and figure out their logistics plan by choosing between e-commerce fulfillment solutions.
Go Big with Micropayments
If you can find an audience or market for your work, there is no reason why you can’t make a business of it. The right service provider can even accommodate small payments of less than a dollar. Choose a strategy that will work for your business, and you will be on the way to success.