Within the ever-evolving landscape of digital payments, micropayments have emerged as a potent, yet relatively underutilized, instrument. Recently, I stumbled upon one of the most forward-thinking papers that shed light on the history, challenges, and opportunities, of micropayments. Published by the European Central Bank (ECB), this paper explores why micropayments are so transformational and why they have not yet garnered the attention they deserve.
Key Insights:
1️⃣ The Concept of Micropayments: The concept of micropayments has been around since at least the 1960s when futurist Theodor Holm Nelson first discussed it. However, it wasn’t until the early 1990s that interest in micropayments began to gain traction.
2️⃣ Defining Micropayments: Currently, there is no universally accepted definition of micropayments. Typically, it refers to payments of very low value, often made online. In this paper, the authors define micropayments as transfers of funds with a value close to or below 1€ for the purchase of digital goods and services with immediate or almost immediate delivery.
3️⃣ Rising Demand: With the increasing demand for online content, consumers are finding themselves in situations where efficient micropayment solutions are needed. Unfortunately, such solutions are currently lacking, leading to missed opportunities.
4️⃣ Challenges of Existing Solutions: Existing payment methods come with high processing costs, making transactions below 1€ inefficient. These high costs outweigh the benefits, hindering the growth of micropayments. It clearly needs alternatives.
5️⃣ Business Cases for Micropayments: The authors identify several key business cases for micropayments:
💼 Online goods and services: This includes Resource on demand (e.g., WiFi hotspot), Content on demand (online streaming), and Service on demand (e.g., paid response to an email). Today, these cases often require pre- or post-payment, which is inconvenient and burdensome. Post payments are risky for merchants because the outstanding amount may not be paid. Micropayments could, in this context, allow merchants to adopt new business models, and consumers could benefit from content without long-term commitments.
🎮 Gaming: By 2025, the global gaming market is estimated to be worth 257 billion USD, with 3.2 billion gamers. Gamers prefer seamless payments over regular subscription fees, making micropayments an attractive option.
💰 Donations and Tips: Micropayments could make fundraising more inclusive and efficient, potentially increasing donations while reducing transaction costs and adding convenience.
🌐 Internet of Things (IoT): Incorporating micropayments into IoT might boost its full potential. The IoT market size is projected to reach 3353 billion by 2030, and micropayments could help drive the M2M (machine-to-machine) economy.
6️⃣ Alternatives Enabling Micropayments: To make micropayments a reality, several alternatives can be explored:
- E-Money.
- Instant payments.
- DLT: The authors mention the suitability of DLT, also in the context of the Lightning network. However, the authors criticize that layer two solutions come at the expense of settlement finally and that the viability of layer 2 solutions depends on the use case. The authors acknowledge further that DLT can bring down costs and increase security by improving resilience and data integrity. However, they also mention increased risks associated with DLT systems, e.g., around governance of public DLT and its immaturity. They conclude that “it is still too soon to reach a final verdict on DLT’s implications for payments and its ability to outperform traditional payment systems, also when it comes to micropayments in the IoT environment.” They also acknowledge the potential of stablecoins to potentially meet the requirements for micropayments
- CBDC
7️⃣ Potential Implications for the Retail Payment Landscape: Micropayments present various opportunities around retail payments. For PSPs, they can create new business opportunities and positive impact on current revenue streams by making economically unviable transactions profitable. The authors argue that micropayments might pay a major role around e-commerce and IoT by “becoming a standard part of our daily lives”. Scalable, sustainable and cost efficient payment systems required for micropayments. While market participants believe that DLT could potentially be used for micropayments, it needs to prove its maturity