Micropayments Going Mainstream? Not Yet.

DotEdu writes "Today's NY Times has an interesting article on two new micropayment companies, BitPass and Peppercoin, and the venerable PayPal. More interesting than the companies are the critique: Micropayments are not the silver bullet. You still need to actually have a viable product that you can sell."

Comments

Nothing like a link

[3lb4rt0]

which requires you to sign up to ensure no one RTFA! :D

Re:Nothing like a link

[soapbox]

Loosening Visa/MC/AmEx's grip on e-commerce is a Good Thing, and this might represent a way to yet again improve the flow of services (more likely than goods, since shipping costs remain).

But, anyway, here's the article:

The early days of Internet commerce offered many promises, none of them brighter than the chance for people to set up Web sites and sell inexpensive digital goods like songs, articles and photos.

But most of the pioneering companies that devised transaction systems for low-cost online purchases faded away, dogged not only by the giveaway ethos of the Internet but also by cumbersome technology and fees that ate up the profit on items that often sold for less than a dollar.

Times have changed, though, and electronic micropayment systems may yet be born again. In the past few months, several new companies dedicated to processing small cash transactions on the Web have introduced commercial services, and some older companies, including one inspired by Apple's huge success in selling 99-cent songs at its online music service, have modified their offerings to accommodate some lower-priced sales.

This time around, innovative technology may make the difference for the micropayments market. For example, two highly regarded scientists at the Massachusetts Institute of Technology have founded a company that they say has the technical expertise to let people sell digital content profitably on the Web for prices as low as pennies.

Ronald L. Rivest, the R in the public key encryption system RSA, which he helped invent, and Silvio Micali, whose honors include the 1993 Godel Prize in theoretical computer science, founded Peppercoin (www.peppercoin.com) and introduced it commercially in December. Peppercoin hopes to reduce online merchants' transaction costs substantially, particularly the number of credit card charges they pay. These are typically about 25 cents per sale, said Robert W. Carney, vice president for marketing at Peppercoin.

The company's software uses advanced encryption and mathematical models to avoid charging a seller a fee each time an item is sold. Instead, the system statistically selects a representative sample of the transactions for billing.

For example, the software might randomly select one sale of a $1 song from among 20. It multiplies this one sale by 20 to represent the other 19 sales, and passes along $20 to the seller. But by lumping the sales together, only one transaction fee, not 20, is charged.

"Would you prefer to be paid $1 minus a 25 cent transaction fee each time you make a sale," Dr. Micali asked, "or zero dollars 19 times and $20 minus a 25-cent transaction fee once?"

Algorithms that were developed and refined over the past 20 years are used for the process, Dr. Rivest said. With a large volume of transactions, the errors that derive from the sampling are negligible.

One of the companies Peppercoin has signed up is Smithsonian Folkways Recordings of Washington, which is about to begin offering individual tracks from 33,000 folk recordings for sale electronically. Richard Burgess, director of marketing, said that the organization was comfortable with Peppercoin's complex algorithms. "Probability cuts down on the number of transaction fees," he said, but "there's no probability attached to the purchases - we know who bought what."

Thomas Frey, executive director of the DaVinci Institute, a research organization in Louisville, Colo., recently sponsored a seminar on micropayment systems. While such systems failed in the past, he said, their future now seems brighter. "Having people like Ron Rivest solving problems opens the door for interesting things to happen," he said.

Dr. Frey predicts that one day people might buy low-cost items ranging from ring tones for their cellphones to weapons upgrades for their video games. "They could even buy cool sunglasses and new hairdos for their avatars," he said.

BitPass, another new micropayment company, st

PayPal venerable?

[corebreech]

Nice try, but not even close.

My dictionary defines venerable as meaning:

Commanding respect by virtue of age, dignity, character, or position.

PayPal may be old, but it doesn't command any respect whatsoever as far as I'm concerned.

Re:PayPal venerable?

[LostCluster]

PayPal's reputation issues basically got wiped clean when eBay aquired them. Really, what's now called "PayPal" looks a lot more like eBay's BillPoint than the original service.

Re:PayPal venerable?

[DAldredge]

Why do you dislike paypal so much?

I have processed quite a few transactions via paypal and have yet to have any trouble. Just set you paypal account to not accept credit card payments helps quite a bit.

Re:PayPal venerable?

[LetterJ]

Why do you dislike paypal so much?
<p>
Can't speak for anyone else, but for me, the $12,000 that was stolen from my credit cards and bank accounts that were linked to my Paypal account contributes a little bit. I got it all back, but it took nearly a year and to this day, Paypal flags my name as fraudulent. So, not only was I a victim, but if I ever come near Paypal again, I get accused of being a theif.

Re:Questions still abound.

[venicebeach]

It seems like that is exactly what they are doing. From the article:

The company's software uses advanced encryption and mathematical models to avoid charging a seller a fee each time an item is sold. Instead, the system statistically selects a representative sample of the transactions for billing.

For example, the software might randomly select one sale of a $1 song from among 20. It multiplies this one sale by 20 to represent the other 19 sales, and passes along $20 to the seller. But by lumping the sales together, only one transaction fee, not 20, is charged.

"Would you prefer to be paid $1 minus a 25 cent transaction fee each time you make a sale," Dr. Micali asked, "or zero dollars 19 times and $20 minus a 25-cent transaction fee once?"

banking monopoly monster

[Doc Ruby]

Search Google for (paypal class action), and you'll find consumers' desperate attempts to protect ourselves from their online payment monopoly, like the PayPal Warning. If regulators were doing their jobs, PayPal itself would be on a leash. Their acquisition by eBay offers a monstrous power in eCommerce, which the PayPal unit has been steadily abusing. Any meaningful alternative in any online payments would help, whether they get micropayments right or not.

Hurdles involved

[Turing Machine]

From what I've seen of the two, Bitpass is a lot easier to set up on the user end. Peppercoin requires the user to download and install software, while Bitpass doesn't. While you and I might not be too troubled by this, many people are. That's a significant advantage for Bitpass. Also, Bitpass appears to be considerably easier to set up on the server end, though that's just my impression from reading the docs. I haven't actually implemented either yet.

This could change if Peppercoin managed to convince the major browser players to include their software with the browser. Certainly having Rivest onboard will go a long way toward getting some credibility for Peppercoin.

Re:Questions still abound.

[Turing Machine]

With Bitpass, at least, you can go to their site and click on the "Share" tab.

They don't have a HUGE number of clients yet, but it seems to be growing pretty fast.

PayPal treats sellers like crap.

[b0r0din]

If you have a merchant account on PayPal, or before you get one, I would advise going to this site. It discusses the problems with paypal in good detail. I am in the process of setting up a merchant account, and the kinds of things they do are rediculous. There's a class action lawsuit currently against them. They have a great system if you're looking to pay for an item, but if you're selling one, watch out.

Re:Constant drain = constant pain.

[JaredOfEuropa]

I can stomach an up-front cost, a known trade of resources, or even a subscription

By contrast, I hate subscription sites, especially if I only need access to their info once. Especially since it usually involves credit cards, handing over my personal details and receiving, opening and replying to a confirmation e-mail. I would much prefer to answer a simple dialog "This website charges $0,10 for access to this information. Pay yes/no?". Especially if the payment could be done anonymously.

A potential problem with such payment systems would be the websites that trick you into accepting, then try to feed you the information piecemeal. Pay $0,10 to access the article... and when you accept, it's another $0,20 to see the essential graphs and pictures, and $0,30 to get the conclusion. A bit like the $1 / minute phone services with a voice-response system..... that..... speaks..... really..... slow.... and has menu's of 22 levels deep. Not very honest, but not exactly illegal either.

Re:I don't mean to evangelize but...

[igrp]

Woops, sorry - the first this was actually meant to point to paypalwarning.com.

Sorry about that (I guess I should have used the preview function).

Is Bitpass a scam?

[Animats]

Bitpass has many attributes of a scam.

• Basically, they're selling money with credit cards. Credit card merchant accounts don't normally allow you to do that. That's usually considered a cash advance, or loan, for which you have to be a lending regulated institution.
• Bitpass disclaims all possible liability for transactions. Then they state that transactions are anonymous to earners. This makes refunds almost impossible.
• They use "Entrust" SSL certificates, which Entrust says guarantee almost nothing. Verisign at least does some minimal verification.
• Bitpass claims that they're not a merchant, they're not a bank, and they're not an intermediary, in further attempts to avoid liability. Contrast this with iBill, which acts as a reseller and offers customer service and refunds. Bitpass doesn't do that.
• They want 90 days to refund your money if you cancel.
• The disclosures required by California law, the name and actual business address of the business, don't appear before the "enter credit card" page. The info is on the site, but that's not good enough.

Bitpass is either a depository institution, like a bank, or a "check seller", like companies that sell money orders. Either way, they should have the appropriate license and be subject to bank regulations and audits. You can't just go into business handling other people's money without oversight.