Nathan Gwilliam Blog :: e-Business, Social Enterprise, Faith

Paul Allen recently asked me to identify the best solution for accepting micro-payments. The problem is that websites like LDSaudio.com, which sell a large number of products for a small amount, are charged very high minimum credit card processing fees. This makes the transactions almost impossible. For example, if LDSaudio.com sold a digital song for $1 through PayPal, PayPal would charge them $0.30 plus 2.9%, or 33.29% of the purchase price. For a site like LDSaudio.com that also has to pay royalties, this transaction fee makes the $1 micro-transaction cost-prohibitive, and so LDSaudio.com has implemented a $5 minimum purchase. However, the $5 minimum purchase has driven away customers who only want to buy one song.

So, today I detailed for Paul some of the solutions available to solve this problem of micro-transactions. I am posting a modified version of this email to share with others, and to get your feedback about micro-transactional solutions.

At the end of this blog entry I also recommend a new online financial service called Revolution Money Exchange which allows members to register, add money, share money and withdraw money FREE. They are even providing a $25 sign up bonus for all new members. Revolution Money is backed by heavy hitters, and I believe it is superior to PayPal and has a legitimate chance to replace PayPal if it can achieve critical mass.

The biggest problem with micro-transactions historically is the financial intermediary, such as PayPal. PayPal has to pay for their costs, risks, and profits. So, they have to mark up the transaction costs. Merchants that develop relationships with the credit card companies directly can cut out this intermediary (middleman) and get far lower rates. Merchants who have large volumes of orders can negotiate those credit card company rates even lower. For example, many companies won’t accept PayPal for their clients because they have negotiated lower rates with the credit card companies directly.

There are several different options the online merchants could consider to better facilitate micro-transactions:

(1) Aggregation Billing - Online merchants can aggregate all of the purchases of an active user over a period of time, such as a week or a month. Then, the merchant would run all those smaller transactions together as one purchase, and only have to pay the flat transaction fee one time. This is the model followed by iTunes which runs credit cards once per week. The problems with this model are that the merchant still has high transaction costs for the customers who do not purchase more than a single item in the billing period, and the merchant has to invest in developing this technology.

(2) Microcurrency Providers - Online merchants could use a third-party micro-currency provider like Bee Payments, but they take 25% of the transaction, which is probably a worse situation for many merchants. This solution might work for content creators who make 100% profit selling their products, or for merchants who sell digital products for VERY small amounts, but it doesn’t work for merchants who have to pay royalties or other costs of goods sold. Microsoft Points might actually be a good solution at some point in the future, but right now its not available for non-Microsoft vendors.

(3) Prepaid Accounts - Online merchants could charge a “convenience charge” to all single orders to offset the credit card processing fees. Then, the merchant could provide a prepaid points system to allow customers to avoid the convenience charge. Customers could prepay funds to an account, with some minimum prepayment amount, such as $10. For each dollar spent the customer would earn 100 point in the system, and be able to spend those points purchasing products from the merchant. Many online vendors, such as eNom, have used this model effectively. I personally have spent a lot of money on the eNom pre-payment platform, and I love the convenience of this solution. In fact, I love it despite the fact that they charge me a convenience charge AND make me prepay.

The Spare Change application on eBay is another example of this model where users add amounts, with a $10 minimum, and then can transfer money with other Facebook users who use this application. On the down side, some people are not going to want to prepay $10 if they just want a $1 song right now. Merchants can solve that by allowing them to do the single transactions, but charging them a “convenience charge” if they don’t want to use the prepayment system.

One advantage of this system is that it is easier for people mentally to spend money that is already sitting in their account than it is to put in a new credit card number for each tiny transaction. The hassle of having to enter credit card information for each micro-transaction also adds a substantial additional cost to each transaction, in addition to the credit card processing fees, and can be eliminated with this pre-payment system. Also, in theory with pre-payment the merchant will be receiving more purchases from each customer and the customers are being required to purchase in bulk with the pre-payment system. The key question here is whether the bulk purchase requirement will more than compensate for the lost order of people who only want one product and are not willing to pre-pay for multiple products or pay a convenience charge for a single item.

Also, one best and most substantially overlooked elements of this model is that many people will prepay funds that they will forget about or never use, or that will stay in their account for a long period of time before use. The aggregation of these small balances can become a large sum of money over time, and then interest can be generated from the “float” (or unused funds sitting in the bank account of the merchant). That “float” is the reason American Express travelers checks and Western Union were so successful. Earning money on the “float” is the business model of financial intermediary sites like Kiva and a huge portion of PayPal’s income.

(4) Revolution Money - Another very fascinating possibility that I have been following recently is Revolution Money and the Revolution Money Exchange. Steve Case is the Chairman and CEO of Revolution and it has a lot of heavy hitters involved, such as former Charmen/CEOs of J.P. Morgan, Mastercard, AOL, Fannie Mae and Charles Schwab, along with a former Secretary of the Treasury and Former Harvard University President.

Revolution Money claims it will charge merchants transaction fees as low as 25% of the industry average, and allow those transactions to be carried out through many different methods, such as point of sale, online, social networking sites and instant messaging. Revolution Money claims that the average credit card company charges 1.9% and that the Revolution Money solution slashes fees to 0.5%. It also claims that through Revolution Money merchants can provide immediate rewards, such as cost savings and loyalty programs.

Revolution Money Exchange is free to register, free to add money from a bank account, free to send money, free to receive or request money and free to transfer money to a bank account. It does charge transaction fees check withdrawals, check stop payments, paper statements, ACH returns and overdrafts. They have already launched a Facebook Application, but most users will hopefully never need to pay those fees.

I believe that this Money Exchange business model is a “loss leader” and that Revolution Money is focused on generating money from interest paid on the “float” left in the client’s accounts, and by charging interest on balances from their clients’ Revolution Cards. If that is the case, I think that this is a brilliant strategy and could be a very serious competitor or replacement for PayPal.

Right now, Revolution Money is giving $25 free to motivate new clients to sign up, and they are paying websites $10 per new customer they refer to Revolution Money (I don’t know how long this will last.). So website owners could add Revolution Money as the preferred payment menthod. Then, they could advertise “get $25 of our products free”. Their clients would get the $25 of products by signing up with Revolution Money and then spending that money on those products. The clients of the online merchants would get $25 of free product and the merchant wouldn’t even have to pay the $25. The merchant would receive the benefit of a giveaway to get new client signups, without having to pay the givaway cost. Also, the merchant would get the new client referral fee of $10, which might be increased if the merchant can deliver sufficient volume of referrals. If the merchants sell products that are owned by someone else, this opportunity might be strong enough to motivate the owners of those products to share in the advertising costs.

I need to do further research and testing. However, based on my initial research I believe that Revolution Money provides a strong marketing and micro-transaction opportunity for website owners. It also provides a great opportunity for each of us to get $25 free just for signing up, as Revolution Money works to build their critical mass of users.

Posted on May 17th, 2008 by admin
Filed under: e-Business, e-Commerce