The number one problem for online merchants and website owners accepting and processing micropayments is the very high fees charged by payment processors and credit card companies, which can typically eat up a significant portion of the revenue stream. of payments.
Before we examine the various options and solutions to address this pervasive problem, we must first define what constitutes a micropayment.
A micropayment is a payment for a low-value item or service. For example, website payments for ringtones, pay-per-view, downloads, eBooks, and subscriptions in the range of $1 to $3 would be considered micropayments. A payment of 25 cents for a download or a payment of 5 cents for an SMS are very good examples of lower value micropayments.
There are two basic methods that an online seller can use to accept a micropayment. The first method is to use a credit card, but merchant fees would be quite high to accept a large number of $1 and $2 micropayments, and this is typically not a cost-effective option.
Some online business owners whose websites sell micropayment-valued goods and services will ask customers for their credit card details and process fees and invoices on their customers’ cards when account balances reach payment limit amounts. specified.
Another variation on this method is to charge the customer’s credit card a minimum amount of charge (say $10), and then a credit in this amount is posted to the user’s account, depleting as goods and services are purchased. services of nominal value to the supplier.
The problem with this method is that customers don’t like giving out their credit card details to strangers, and they don’t like the idea of making a down payment commitment to purchase goods or services that the customer might ultimately decide not to. to buy. .
The other option is to process the payment for each microtransaction as it occurs using an online payment system, and there are some viable options with several companies competing in this space, some of which are much more profitable than others, as I’ll explain. . .
Let’s see the following example:
Consider a micropayment in the amount of $2 USD sent internationally (from one country to another) using a business account.
I have compared the fees each of the following online payment processors would charge to handle this payment and present the results below, from highest to lowest cost:
ZayPay.com $0.99 flat rate = $0.99 (49% commission)
Moneybookers.com 1.9% +$0.40 = $0.44 (22% commission)
PayPal.com Regular 2.9% + $0.30 = $0.36 (18% commission)
AlertPay.com 2.5% +$0.25 = $0.30 (15% commission)
PayPal.com Micropayment 6% + $0.05 = $0.17 (8.5% commission)
Payments.Amazon.com 5% + $0.05 = $0.15 (7.5% commission)
CashSender.com 1.5% no minimum = $0.03 (1.5% commission)
The higher fees would be incurred if using the services of Netherlands-based ZayPay and UK-based Moneybookers. PayPal’s regular payment service would result in a payment fee of 18%, and even their lite service for mirco payments results in a fee of 8.5%. By far the lowest cost micropayment processor is Canada-based CashSender, as its 1.5% commission does not have a flat fee component. So CashSender’s fee is even a fraction of the cost of the next lowest provider on the list.
Many online sellers and website owners accept micropayments as the lifeblood of their business operations. This means that many of these payments are processed over the course of each month, throughout the year.
Therefore, to see the actual final effect of the rate differences presented above, we need to factor the data down to a one-year analysis.
Let’s say a typical online merchant needs to process 1,000 of these $2 payments each month, which translates to 12,000 such payments each year (representing $24,000 in annual micropayment revenue).
We then need to adjust our data to reflect the annual fees using each of the respective online payment services, and the data is presented as follows, again listed from highest cost to lowest cost:
ZayPay.com ($0.99 flat fee) X 12,000 payments = $11,880
Moneybookers.com (1.9% + $0.40) X 12,000 payments = $5,256
PayPal.com Regular (2.9% + $0.30) X 12,000 payments = $4,296
AlertPay.com (2.5% +$0.25) X 12,000 payments = $3,600
PayPal.com Micropayment (6% + $0.05) X12,000 payments = $2,040
Payments.Amazon.com (5% + $0.05) X 12,000 payments = $1,800
CashSender.com (1.5% with no minimum) X 12,000 payments = $360
The most well-known company in the online payment space is PayPal, which is owned by eBay. PayPal’s regular online payment service is actually $4,000 per year more expensive than the low-price leader.
PayPal’s lightweight micropayment service costs $1,680 more than the low-price leader, and even Amazon, which ranks second as low-cost leader, is four times more expensive than the low-price leader.
In conclusion, online sellers and website owners should pay close attention to the online payment service they choose to handle their micropayment transactions. Even a mid-range micropayment processor will cost several thousand dollars per year more in fees than using the low-cost leader.