What makes a micropayment solution succeed?

A master's thesis by...

Henrik Kniberg
hkniberg.com
http://www.kniberg.com/henrik/
+46 70 4925284


Background

During the summer of 2002 I took a break from my job at Goyada (a small  m-commerce company in Stockholm of which I was cofounder and CTO) to finish my master of science degree at KTH (Kungliga Tekniska Högskolan, or Royal Institute of Technology). In conjunction with this I wrote a master's thesis on micropayment solutions.

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Introduction

There is a common saying on the internet: “Information wants to be free”. The problem is information is not free. Information is ultimately produced by people, either indirectly or directly, and most people need money to live.

People are used to paying for physical products such as books, magazines, and videos. This is because it is expensive to create and distribute physical books, magazines and videos. Distribution of content through internet is virtually free when compared to physical distribution, but there is still a cost. Web servers, streaming servers, robust hosting environments, servers, and fast internet connections all cost money, and there is of course still the cost of creating the information the first time.

Consequently it does not make sense to distribute information services for free – someone has to pay. It does not either make sense to charge large amounts of money for information services, since the distribution costs are significantly lower than for corresponding physical distribution.

Physical information products are often distributed in chunks. Magazines and newspapers, for example, usually contain a large number of articles. On the internet, however, a user might only download one single article.

There is obviously a need for some way to accept small payments online. There should be some way to pay €0.01 to view a single magazine article, or pay €1 to buy a better set of hockey clubs in an online hockey game.

These types of small payments are known as micropayments. There is no exact definition of how small a payment must be to be considered a micropayment, so in this report I will put the threshold at €1.

There are literally hundreds of online payment systems available such as PayPal, ClickMiles, Cybergold, Cybermoola, E-gold, FirstLook, FreeRide, GiantRewards, iWon, Memolinks, Millicent, Mint, MyPoints, PointClick, TargetShop, Visa, and many more. Some require you to predeposit money in an account, some identify you via your cellular phone, some are virtual currencies that only work online, some work like electronic checks, some provide the electronic equivalence of cash in your pocket. Most internet users have not heard of more than two or three of these, if any.

Very few payment solutions have succeeded in any global scale, especially when it comes to handling of micropayments. Why is this? Why have certain payment solutions become widely established while others have faded away? This report attempts to find out what it takes to make a micropayment system succeed.

Goal of the master thesis

This master thesis was an attempt to identify the key characteristics determining the success or failure of a micropayment system. This was done in the following steps:
  • Identify the key characteristics of payment systems in general.
  • Gather a list of known payment systems today on various markets, classify them into groups, and compare their characteristics and level of success.
  • Interview relevant companies in three seperate markets: Sweden, Japan, and USA.
  • Take a closer look at some of the micropayment systems and determine why they have succeeded or failed.
  • Identify the most important factors determining the success or failure of a micropayment system.