Why Tiny Payments Are a Big Deal

The role of micropayments in online commerce

Micropayments have been greatly influencing digital commerce. Their definition may vary depending on the payment system, but they can typically be defined as small transactions under a dollar.

The concept of micropayments gained popularity in the 1990s when the South Korean gaming company Nexon introduced them to enable the in-game purchase of clothes and accessories with real money. Today, micropayments have expanded beyond in-game purchases, and now enable a variety of online transactions, including in-app payments, music and news articles.

The current state of micropayments

Like digital payments, the micropayment market is experiencing rapid growth. This trend is driven by the increasing digitalization of commerce and the need for low-cost payment acceptance solutions for small transactions.

Despite their growth, micropayments have been challenging to manage on the payment acceptance side, as the traditional transaction fee-based model does not provide a good solution to such small transaction values. This led to the development of micropayment platforms, which are specialized in making these transactions more affordable.

Several companies developed solutions to process micropayments separately from normal transactions, offering cheaper ways to process low-value transactions. For example, PayPal allows businesses processing low-value payments to apply for their micropayment offer, which makes these transactions more affordable. In the US, the transaction fee offered by PayPal for domestic transactions is USD 0.09+4.99%, different from the fee that is applied to normal payments, i.e. USD 0.49 + a rate between 2.29% and 3.49%, depending on the payment method used.

Micropayment platforms usually collect prepaid microtransactions, which are based on users adding money to their accounts, and then using it to make micropayments when needed. When users authorize a micropayment, the platform transfers the money from their account to the seller’s one. This enables the aggregation of several purchases in larger transactions and help sellers get better deals. For example, Centi is a micropayment provider that enables businesses to receive payments of small amounts at competitive pricing compared to the one offered for normal transactions, by collecting the money from the user, and periodically sending it to the seller’s bank. Ripple XRP is another key player in the digital payments landscape. As Ripple’s proprietary digital currency, XRP offers low-cost transactions and fast settlement, which makes it an ideal solution for micropayments catering the needs of businesses and developers.  

Micropayments offer a flexible and cheaper alternative to the traditional full subscription model. However, micropayments proved not to be successful in all the use cases. For example, Blendle, a Dutch online news platform, allowed users to access articles for a small fee per article. Nevertheless, in August 2023, the company decided to stop offering this service, due to profitability issues, mainly due to a shift of the news industry towards Spotify-like unlimited subscription models. This highlights the fact that while micropayments can be used to create flexible and customer-centric business models, there are industries in which a subscription-based model provides a smoother customer experience and will not be replaced by micropayments.

Moreover, for any micropayment model to be successful, it needs to be seamless for the user. Users can be discouraged when required to continuously insert card details for small-value purchases. Xsolla is an example of a micropayment platform that provides a seamless payment process for online games, offering access to more than 700 payment methods and 130 currencies.

The future of micropayments, under the influence of Artificial intelligence (AI) and Open Banking

AI is reshaping several aspects of the digital world, and micropayments are no exception. Particularly in the gaming industry, AI is emerging as a transformative trend. AI algorithms are integrated into games, transforming them into more personalized, adaptive and immersive experiences for players. AI can be leveraged to analyze a player’s behaviour and preferences, tailor the gaming experience to the player, and offer in-game micro-purchases.

The main challenges faced by micropayments, i.e. the urge for a seamless payment process for the consumer and the ones faced by sellers for the small-value transaction costs are an inefficiency that can be addressed by new technologies like open banking. Open banking is the process by which customers can enable third-party providers to access their financial information, through Application Programming Interface (APIs). This information can be used by businesses to initiate payments. In the context of micropayments, this means that sellers can receive payments without having to face transaction fees and consumers do not need to insert their data every time they want to make a small-value purchase. As open banking continues to evolve, it promises to solve many inefficiencies in the traditional payment landscape, and micropayment platforms might see a significant shift towards this newer technology as its adoption increases.

In conclusion, despite the challenges they face, micropayments have been transforming digital commerce by enabling low-cost and flexible transactions. New technologies like AI and open banking are promising improvements to this business model and will likely make it more efficient and user-friendly.

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