The number one problem for online sellers and website owners accepting and processing micro payments is the very high fees charged by payment processors and credit card companies, which can typically eat into a significant portion of the payment revenue stream.
Before we examine the various options and solutions in dealing with this pervasive problem, we should first define what constitutes a micro payment.
A micro payment is a payment for an item or service that is of low value. For example, website payments for ring tones, pay-per-views, downloads, e-books, and subscriptions in the $1 - $3 range would be considered as micro payments. A 25 cent payment for a download or a 5 cent payment for a SMS are very good examples of lesser value micro payments.
There are two basic methods that an online seller might employ to accept a micro payment. The first method is to use a credit card, but the merchant fees would be quite high to accept a large number of payments for $1 and $2 micro payments, and this is not usually a cost efficient option.
Some online business owners whose websites sell micro payment valued good and services will ask customers for their credit card details, and will process fees and invoices to their customers' cards when account balances reach specified payment threshold amounts.
Another variation of this method is to charge the customer's credit card a minimum charge amount of (say $10), and a credit in this amount is then posted to the user's account, which depletes as nominal value goods and services are purchased from the vendor.
The problem with this method is that customers don't like providing their credit card details to strangers, and they don't like the idea of making a down payment purchase commitment for goods or services which the customer might ultimately decide not to purchase.
The other option is to process payment for each micro transaction as it occurs using an online payment system, and there are a few viable options with several companies competing in this space, some of which are much more cost efficient than others, as I shall explain.
Let's look at the following example:
Consider a micro payment in the amount of $2 USD sent internationally (from one country to another) using a business account.
I've compared the fees that each of the following online payment processors would charge to handle this payment, and present the results below, from highest to lowest cost:
ZayPay $0.99 flat fee = $0.99 (49% commission)
Moneybookers 1.9% +$0.40 = $.44 (22% commission)
PayPal Regular 2.9% + $0.30 = $0.36 (18% commission)
AlertPay 2.5% +$0.25 = $0.30 (15% commission)
PayPal Micropay 6% + $0.05 = $0.17 (8.5% commission)
Payments.Amazon 5% + $0.05 = $0.15 (7.5% commission)
CashSender 1.5% no minimum = $0.03 (1.5% commission)
The highest fees would be incurred if using the services of Netherlands-based ZayPay and UK-based Moneybookers. PayPal's regular payment service would result in an 18% payment commission, and even their lite service for mirco payments results in an 8.5% commission. By far the lowest cost micro payment processor is Canadian based CashSender, as their 1.5% commission does not have a fixed fee component. Thus, CashSender's fee is even a fraction of the cost of the next lowest provide on the list.
Many online sellers and website owners accept micro payment as the life-blood of their business operations. This means, many such payments are processed over the course of each month, throughout the year.
Therefore, to see the real bottom line effect of the fee differences presented above, we need to factor the data up to a one year analysis.
Let us assume that a typical online seller needs to process 1,000 of these $2 payments each month, which translates into 12,000 such payments every year (representing $24,000 in annual micro payment revenues).
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 ($0.99 flat fee) X 12,000 payments = $11,880
Moneybookers (1.9% +$0.40) X 12,000 payments = $ 5,256
PayPal Regular (2.9% + $0.30) X 12,000 payments = $ 4,296
AlertPay (2.5% +$0.25) X 12,000 payments = $ 3,600
PayPal Micropay (6% + $0.05) X12,000 payments = $ 2,040
Payments.Amazon (5% + $0.05) X 12,000 payments = $ 1,800
CashSender (1.5% 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 costly than the low price leader.
PayPal's lite micropay service is $1,680 more costly than the low price leader, and even Amazon, which is the second place low cost leader is four times more costly than the low price leader.
In conclusion, online sellers and website owners need to pay very close attention to which online payment service they choose to handle their micro payment transactions. Even a middle range micro payment processor will cost several thousand dollars per year more in fees than using the low cost leader.