Entering new markets has become a simplified process nowadays. Thanks to the Internet and technological innovations, payment modes for goods and services have also undergone changes and in certain occasions, even radical ones. Numerous business models have witnessed a shift, being forced to adapt to make higher volumes of smaller payments. These micropayments represent challenges and hurdles that providers need to overcome.
What is micropayment?
As the term itself may let one guess, a micropayment refers to a financial transaction that involves a very small amount of money, most of the time not exceeding a US dollar, as defined by PayPal. It is a type of payment that occurs online and in certain cases, it can even amount to a fraction of a cent. Such financial transactions can occur in exchange for an application download, a service or a web-based content, for example. As these payments are too small to be feasible for processing through credit card companies, they require a special and adapted type of system.
Examples of micropayments being used currently
Micropayments have proven fruitful for app and digital music purchases. A well-known example of micropayment is the system launched by Apple for iTunes Store and started selling songs for 99 cents each. Currently, Uber can be referred as a company based on micropayments: even if it can make 10M US dollars as total payments to drivers per day, this sum has to be fragmented into thousands of smaller payments. Ebay, Airbnb, and Etsy are also good examples of companies relying on micropayments to meet the preferences of buyers. Micropayment is equally attracting publishers of digital content who see it as an alternative manner to monetize content.
Challenges faced by micropayments
Micropayment represents hurdles that many companies are failing to overcome to date. There are numerous features that need to be considered wisely and measured before implementation.
Businesses selling products or services around payments of very small sums can see that the fees consume a large part of the total transaction value. Micropayments make them less able to absorb additional business costs, resulting in the lack or absence of profits.
Since micropayments occur online, they are equally transported and stored in digital form. This aspect in itself represents a plethora of technological issues that many companies fail to overcome. Businesses involved in micropayments must take note of the following aspects:
- Ensure security of micropayment system
- Offer a flexible design that can also adapt quickly to changes in case of a rapid increase of transaction traffic, for example.
- See to it that the system in place is reliable and serves customers 24 hours a day without any point of failure.
- The system should allow interoperability of currencies like digital cheques and tokens.
- Defining anonymity aspects and concerns; if merchants and banks generally have none, customers may have partial anonymity.
Fees may deter users
As the Internet offers an unimaginable amount of free content to users, placing even a minimal fee on websites may deter users. The latter may even be pushed to continually determine whether the product or services are worth the cost. Internet users are accustomed to free content and may be tempted to opt for free similar counterparts available.
Negotiating partnerships to stay safe
Every transaction, especially international ones, entails fees either as a flat charge or as a percentage of the total value of the payment. As such, the most cost-effective providers should be sought. Naturally, many banks are not interested in micropayments as their own returns will be minimal. In this case, a platform provider may be chosen that aggregates small transactions and offers low flat rate for all transactions processed. This will avoid unnecessary negotiations with multiple banks.
Be ready for money licenses and regulations
It is a monumental task to set up your own global payment system. You will have to comply with numerous consumer protection regulations and, of course, obtain money licenses in every market where you will be operating. Procedures regarding money licenses can reveal to be very costly and tedious, especially in the United States where each state requires money services businesses to have a different license.
Furthermore, you must ensure that every micropayment is in line with the regulations of your own country and of that of your customers. To smooth this part, you may choose to partner with a B2B cross-border payment provider.
Ensuring customer convenience is crucial
Even if certain services or products may cost next to nothing, consumer rates convenience and experience have to be guaranteed. You must remember that customer experience is the primary motivation in many transactions and your micropayment system should be as seamless as possible to prevent clients from backing out before completion of the transaction.
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