Study: Huge Need for Micropayments

FRAMINGHAM (05/01/2000) - Back in the early '90s, when the Web was starting to gain ground, micropayments seemed to be the key to the growing e-commerce market.

Merchants could sign up with micropayment companies, which would handle online billing and payments that ranged from a few cents to about $10.

But the systems never really caught on, says Avivah Litan, an analyst at Stamford, Connecticut-based Gartner Group Inc.

Gartner is in the midst of a study on the use of micropayment services. The goal is to survey 150 major retailers, asking if they offer low-priced items online, and if so, whether they use micropayment services. So far, of the 75 merchants surveyed, 13% said they offer items for $10 or less, but none use micropayment vendor services, says Litan.

"The moral of the story is that there is a big need for a solution, and none of these vendors have caught on," she says. "It's just not showing up on their radar screens."

Fading Hype

When micropayments first came on the scene, people were still struggling with the concept of cyberspace, and there was a strong demand for Internet-exclusive billing systems, explains Paul Hagen, an analyst at Forrester Research Inc. in Cambridge, Massachusetts.

But eventually, users began to realize they didn't need separate online billing systems, Hagen says.

"Why not just take a credit card and roll everything up?" he says. "I think [the micropayment concept] was overkill. It was a solution looking for a problem."

So after a few years, micropayment companies started to fade from the scene.

They enjoyed a minor comeback with the recent explosion of e-commerce, but things have settled back down, says Hagen.

"It ebbs and flows," he explains.

The biggest barrier for most micropayment vendors is that their services require too much extra work for merchants, says Litan. Often, merchants have to install special software or create links to the company's Web site.

Another problem, she says, is that micropayment systems aren't universal. To buy an article from The New York Times on the Web, for instance, customers can pay through Seattle-based Qpass Inc. The same customer might then want to download software from Santa Clara, California-based McAfee.com Corp., but McAfee uses Seattle-based eCharge Corp. to handle its billing.

"No one's got critical mass," says Litan.

One merchant who asked not to be identified says his company is trying to sharpen the relationship with its micropayment vendor, but the results haven't been impressive.

For merchants, the one benefit of using a micropayment vendor would be if that vendor had a large member base and attracted customers to the site. But so far, he says, his company's micropayment vendor hasn't generated much traffic for his site.

There is also the problem of security. Customers want to be sure their information is secure, and merchants need protection against fraud.

Many micropayment vendors use digital signature technology to ensure the identity of the buyer. And several, such as eCharge, cover losses from fraud.

"That's a big deal," says eCharge Chairman Ron Erickson.

Leader of the Pack?

Although micropayments aren't taking off, there may be some potential leaders on the horizon.

Qpass, for instance, has focused on attracting publications such as The Wall Street Journal Interactive Edition, LATimes.com and Forbes.com.

"I think Qpass has found a nice little niche," says Hagen.

But the big push, according to both Litan and Hagen, seems to be on person-to-person payment companies such as PayPal.com in Palo Alto, California, which merged in March with its competitor, X.com Corp.

In fact, PayPal, which provides a popular payment method at online auction site eBay Inc., recently reached the million-consumer mark.

"Conceivably, that could be a winning solution," says Litan.

PayPal has a new competitor, though. Billpoint Inc. in San Jose, which offers a similar payment method, was launched by eBay and San Francisco-based Wells Fargo & Co. in March and has been doing very well, says Hagen.

"I think it's going to be huge," he says of the market for person-to-person payments.

Erickson says eCharge doesn't view person-to-person payment systems as direct competitors. "We see them more, if you will, as a Western Union of the Web."

The entire micropayment industry has a long way to go before it's a well-defined entity, says Erickson.

"Is there business there?" Erickson asks. "I think it's a real chicken-and-the-egg thing."

Micropayments haven't taken off because there hasn't been much to buy on the Web for less than $10, he explains. But if there's a simple payment service, more products will become available.

The industry will take off "when you can just go click, click and have it happen and show up on your cable bill," Erickson says.

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