PayPal to Offer Micropayments

lazarus corporation writes "According to a press release on shareholder.com, PayPal are introducing micropayments processing fees for digital goods. Will this allow musicians to do away with record companies completely and successfully sell their own music online?" It looks geared to be the under $2 area and not the couple of pennies area, so I think calling it "Micropayments" is a bit much, but it's something. Still amazing that in 2005 nobody has figured out a way to make it simple to charge a penny on-line.

Comments

Transaction Costs

[Oculus Habent]

Still amazing that in 2005 nobody has figured out a way to make it simple to charge a penny on-line.

The cost is in the partnering. Even if you can get the user to put in money in large blocks that don't kill you in financial transaction fees ($20+ is my guess) instead of being charged a few cents a day/week, you have the transaction overhead of whatever unique system each site uses (per page, per article, per section, per day, any of these with caps...), subtracting the fees from each user, aggregating the total payment to each site and providing statements to all.

The key to the micropayment game is aggregation of volume . If your company is processing 2000 payments per day of $0.01 each from 2000 different people, it's probably costing you more than it's worth. However, if you're processing five million payments a week with an average individual's cost being around $0.25, you might be breaking even. If you could get two dozen major sites and hundreds of smaller ones on board, you might make money.

Either the financial costs (actually taking and distributing money) need to be reduced, or the number of transactions per person/site need to go way up. I don't see banks and credit card companies giving out money for cheaper, so, here's the hard question: How do you get widespread buy-in on a system that only works once it has widespread buy-in? Who's the philanthropist who will fund a losing game for as long as it takes to become profitable?

Hey, maybe the government is interested! They own the money, anyway...

Re:Transaction Costs

[AviLazar]

Let's not forget things as fee's. When you use your Credit card to pay PayPal there is a merchant charge. This charge varies but it can (easily) be around 1.25 + 1% of sales. This is paid by the merchant, not the client. So if you are buying something for 1 cent, even 25 cent's, the merchant is not only not making money, he is losing money!

Now a company like PayPal probably has a pretty good system in place, where their credit card charge is less then mom-n-pop merchant - but they still have costs

It's not that we can't do micropayments, it's just that it is not cost effective.

Re:Transaction Costs

[atomic noodle]

'Who's the philanthropist who will fund a losing game for as long as it takes to become profitable?'

Those people are called 'investors', not 'philanthropists'. And there are lots of them around.

Otherwise, I agree with you completely. I just wanted to correct that one point.

Re:Transaction Costs

[gfreeman]

I think the point that was being made was that it should be insignificant to PayPal to move data around internally. The charges you mention will only be brought into play when cash is withdrawn from the merchants' accounts. Moving pennies from one account to another should be free, given that commissions are paid upon withdrawal.

With credit cards, there's no "float" - all payments go in and are paid back to the merchant minus commissions. (I am assuming that's true, please correct me if you know different).

I agree with the OP - it's surprising that in 2005 there's no real micropayment infrastructure in place.

Re:Transaction Costs

[AviLazar]

Floats almost always happen (with the exception of Wire Transfers, which usually cost 10-50$/transfer). Also, if the merchant doesn't settle their credit machine at the end of the night this delays the transaction (in this case floating to the advantage of the customer). I doubt a place like PayPal, or even any online retailer who only accepts credit cards, would do this. It still takes time, however, and companies float. Some banks have deals with each other and they minimize floating periods, but it is still there (even if just for a day, or even half a day). Remember, in terms of millions and billions, half a day of floating is still a lot of money.

But yes, I think micropayments should be in palce, but how cheap do we go. Someone mentioned that you have a prepayment account. So you stick $20 on your PayPal account. When you make a purchase you use money from that account, so you do not get hit with inter-banking fee's (i.e. ATM fee's). While this would be a good method, it would mean the client gets a HEAVY float penalty. Your $20 sits there for days, weeks, months, years! It's a good option, but many would scream bloody murder for their $20 worth of interest.

Can this be done electronically - yes, the technology is already here. But banks are old school and are greedy. Put it this way, my friend works for a company that knows how much it costs banks for ATM charges (from one bank to another)...it's about 4 cents (as of a couple of years ago). But bank's charge about $2 from the foreign bank, and probably around $1 on your banks end (assuming you do not have a special account). So you suffer a $3 charge for a 4 cent transaction. Talk about price gouging.

Stuff that matters?

[EvilCabbage]

Screw Paypal. Seriously. I've quit dealing with anybody only accepting Paypal as payment methods, I've voiced my dissent (in a calm fashion) over their continued poor service and especially after the recent charity "issues", I'd urge other people to do the same.

Re:Stuff that matters?

[Tom]

Name an alternative.

My online game accepts donations. I've looked very hard two years ago when I added that feature, and I found a total of two services I could use (PayPal and Moneybookers). Everyone else asks either for a ridiculous set-up fee or is otherwise unsuited for small businesses, donations, etc.

I started offering both. In 18 months, a grand total of $10 was sent through Moneybookers, compared to a few thousand through Paypal. Guess which one I dropped.

Re:Stuff that matters?

[Anonymous Coward]

Charity issues?

You do realize the charity issues had to do with an individual that was taking charity payments that wasn't a non-profit, had just opened this particular account on a holiday weekend when no one was minding the store (probably less than a quarter of the staff at PayPal) and was raking in thousands of $$$s on a product they categorized as a physical product but wasn't forcing their people to enter physical addresses into the Paypal system that is designed to look for fraud. On top of that, several people complained that they think this might be fraud on said holiday weekend.

Honestly -- I'd be glad that someone put a temporary halt on my money if the people collecting it really didn't have a clue what was going on. They didn't know who they were going to give the money to -- they wanted to give directly to the RedCross, but the Red Cross told them that they only accepted direct donations and nondirect needed to go through UnitedWay which a LOT of people object to (I won't give to any organization through united way -- I had a fund raiser for the 9/11 attack that raised $50k and was SUPPOSED to go through Red Cross using United Way as a front, and I find out that less than half went there, while a good portion went to administrative fees -- this is something I needed to verify because the event organization's accountant needed to have this on record or I would never have found out).

So the one charity issue I know you were thinking of was done rather poorly. Paypal protected everyone involved. They didn't take the money and run, nor did they stop anyone from donating -- infact they clarified that if you want to donate through PP and make certain 100% of the funds went to Red Cross, you needed to use the link to the Red Cross...and not some random link that someone claims is going there.

PP has a few problems, but most involve people that are working with shady individuals and get their accounts locked. I'd rather my account is locked for a month while its disputed than with my bank issued CC processor where I'm just left with a loss AND a chargeback.

Yeah, this is off topic. Please mod it as such. Its not a troll or a flame just because its anonymous.

Re:Stuff that matters?

[Blakey Rat]

What about Amazon.com? They offer the same service as PayPal, have a MUCH better reputation and at least as much name-recognition.

Re:Paypal seizes $27K of Hurricance Katrina Red Cr

[Anonymous Coward]

Yeah, seriously. I'm not going to trust anything PayPal does until they are properly regulated by the FDIC. Right now they answer to nobody.

Re:God forbid....

[ScentCone]

God forbid ... that the artists themselves would have the ability to sell and market their own music without big companies trying to get their piece of the pie.

It's not entirely clear what you mean, but I'm assuming you're refering to a company like PayPal "getting a piece of the pie" by facilitating those transactions of a buck or two. What's your notion, instead? That the musicians re-invent micropayments themselves, establish the infrastructure, the banking connections, etc., thus cutting out "the man," and then having no time to ever write or record another lick of music?

We're a civilization of specialists. Most musicians don't grow all of their own food, either, and instead allow other people to get a "piece" of their food money. Someone else gets a piece of the pie when the band replaces the brake pads on their van, too. Making it easier for artists to handle small transactions is making it better for the artists, but it isn't better for anyone if the people building systems like that have no expectation of making a living off of their own efforts and investments themselves.

Certainly artists that don't find this sort of tool useful can just... not use it! If tip jars at bars and coffee houses are more their speed, then that's always an option, too.

Structural problems

[confusion]

There are some structural problems with micropayments that need to be overcome:

- paypal sucks. Everytime I think I should give them a second chance, they bombard me with 10 more reasons I need to stay away. They are like Best Buy in that regard.

- Charge/merchant processing is still horribly expensive, to the point of making this unattainable. Long ago I had thought that paypal was going to smash the deathgrip that charge processors had on the world, but that has not come to pass, as they likely are also a victim of the charge processors.

If I spend $.50 per month on digital media, and even if charges are batched monthly AND they get a super deal on charge processing costs, they will likely end up with

That's nice

[Dan East]

I'm a developer that has used PayPal to receive monies for the sale of thousands of copies of my software over the past several years. So I am one of those that doesn't perceive PayPal as evil, as they have never screwed me over personally.

However, as nice as it is that PayPal is going to make this happen, it really needs to be implemented within the actual banking system. I guess things are still too antiquated in some banking circles to reduce the transaction overhead enough to allow micropayments. However since their communication is already 100% digital, one would think they could make this happen if only they really wanted too. I guess too much human interaction is still involved, and it would be very difficult to track down theft when instead of a few hundred dollar transactions, someone has to look at several thousand 5 cent transactions.

Also, when micropayments become commonplace, I expect phishing to grow immensely. If something only costs, say, a quarter, then a person would be more likely to pay because the risk is so low (I can see the spam subjects now: "Download top-40 songs for only 25 cents each!"). And thus it follows that when the consumer is fleeced, they will not be as likely to pursue the issue to get their money back. My daughter lost a quarter in the vending machine last week, and it simply wasn't worth the effort on my part to hunt someone down to try and get a refund.

Also, can you imaging trying to contact the FBI to report an interstate theft of this kind?

"How much of your money did they take, sir?"
"25 cents"
"Did you know I get paid $20 an hour, and you have already used up $2 of my employers time just talking to me?"
"No, I didn't"
"[click] [sound of dialtone]"

Dan East

Re:My 2 cents...

[gravos]

There are TONS of things that paying a penny or two for would be really useful, and could make your online browsing experience much better.

For instance, imagine paying a penny to read a webcomic on a site (like, say http://penny-arcade.com/). It's a pittance to you, assuming all you have to do is click one button to make the payment. If 10,000 people pay one penny to read that comic, the author has made $100. This is a great way to support online content-based sites, and also to rid them of ads. Something that can get the darn ads off the Internet would be great!

scam.. expensive.. what else comes to mind?

[Exter-C]

seems overly expensive for "micropayments"..

Re:Spam

[Tony Hoyle]

Been tried.. wouldn't work.

1. Who would collect these payments? You really think a spammer in korea would pay them? The ISP? I don't use my ISPs mail system (neither do spammers, btw.)
2. Mailing lists... LKML would go bankcrupt in about a day.

Re:God forbid....

[Lumpy]

Musicians already do have this ability.

it's called a live concert. musicians have been doing this for 90,000,000 years. they can sell admission without giving "the man" a cut of the pie.

Hell I see musicians doing this on street corners in large cities.... Ok calling some of them "musicians" is a bit of a stretch.

There are thousands of ways for you to get paid without paying fees, taxes, extortion payments. unfurtulately all of them require you to be able to physically touch the person buying from you.

anything else either requires billions to build or buy your own infrastructure or you pay "fees".

Re:Spam

[Sancho]

1. PayPal, or whatever micro-money-management service everyone agrees to use. And I don't think a spammer in Korea would pay them either, but they'd be blacklisted if they didn't.

2. This would almost have to start out on the client with un-paid e-mails being either dumped in the bit-bucket or used as another factor in a Spamassassin-like filter. As more people began using it, it could theorhetically be an authentication on the server so that the bad mail is never delivered to the end user in the first place, which would, of course, cause a problem for mailing lists unless the whitelists were server-side as well.

Overblown

[Jeff Molby]

Micropayments have significant challenges, but I don't think this is one of them. It's every bit as expensive for me to dispute few pennies as it is for them to resolve the dispute. I've been known to throw away pennies when cleaning because I didn't care enough to find a jar.

Certainly, I would file a dispute if a pattern of overcharges arose, but I doubt I would even take the time to go over my statement unless it amounted to more than $5/month.

Are there really people here that value their time at a couple pennies per minute?

More than that

[JavaRob]

I think nobody wants to BUY anything for a penny, either. Or -- they don't want to make hundreds of tiny purchases. No matter how easy it is. All micropayments do is *discourage* you from using a service more -- because every little thing you do will cost you money.

Think about it -- what do we have in the real world that works in micropayments? The closest thing I can think of is phone service (where each minute of long distance costs you 7 cents, or whatever).

And most phone companies are trying to AVOID the metered usage model, because people don't like that realization that as they're talking, that money is draining slowly out of their pocket. So - unlimited local calls, free nights and weekends, etc. etc.. The more you talk the more value for your money you get... so this kind of plan gets people in the habit of using the phone for long stretches of time. Then they're willing to pay more (since they feel like they're getting more!), and the usage habits transfer to the standard metered hours.

But now think about a nascent online service. What's bad for a basic, necessary service like phone is HORRIBLE for brand-new, NON-commodity service. An online service needs to do everything it can to encourage you to use it more, to use it all the time, to incorporate it into your life. That's where the money will eventually come from -- people who feel they're getting a lot of value out of it. Nickel-and-diming you to death (and anything that gives you that feeling -- no matter how cheap it is in the end) is the exact opposite of what they need to do.

I haven't thought this through far enough to figure out the ideal alternative -- maybe cheap year-long (unlimited) subscriptions to networks of sites? -- but I feel like micropayments will always give me a bad feeling.

Penny-level Micropayments as an income source?

[Andrew Lenahan]

It's already fairly obvious why "penny" micropayments haven't been embraced by consumers (inconvenience, privacy, annoyance factor) as well as why they're unattractive to transaction service providers (costs of disputes, etc.).

Much rarer are discussions of the topic from the content-creator's (artist/writer/cartoonist/musician/poet/whatever) point of view. Minimum wage is roughly $5/hour in the US and $10 in the UK. You'd need 500-1000 visitors paying a penny EACH HOUR just to equal the princely sum you'd make behind the grill at McDonalds. And that isn't even figuring in the transaction fees, advertising, taxes, hosting fees, bandwidth, DRM, software, customer service, etc. Obviously, not an attractive concept to most artists.

One response might be "Okay, you won't make much, but it's better than giving it away!" Not necessarily. Free content has a great deal of fluidity: it can be linked, quoted, forwarded, blogged, passed around the office, etc. Achieve a certain level of success in offering free content, and one can make up a tidy living selling merch and other residuals... Homestarrunner is a good example of this business model.

Given the staggering amount of transactions needed just to compete with minumum wage, I can't see penny or nickel-level micropayments ever taking off.

Re:Tell me more?

[JourneymanMereel]

In PayPal's defense, there are a lot of people out there running scams claiming to be raising money to help the hurricane victims. After raising substantial amounts of money, they keep it rather than donate it. Unfortunately, things like that happen anytime there is a need. Something Awful may very well be one of the excpetions, but how is PayPal supposed to know that. I'm guessing based on his comments that he most likely was fully intending to give the money to the Red Cross while rewarding those who donated with free stuff he already had sitting around. It's unfortunate, but I can certainly understand why the account would be flagged as suspicious and shut down.

On the other hand, not allowing money to be given to the Red Cross because "the United Way is PayPal's relief organization of choice" is just plain rediculous!

Re:Spam

[jim_v2000]

What about people who run their own mail servers?

Re:Actualy, it's more like:

[QMO]

"Who's going to sue them for $50?"

Someone will sue for $3.27 plus $32,700,000 for "mental anguish."