Online payment systems—the options

Online payment systems—the options

Banner ads encourage visitors to leave your site and visit those of your competitors

One of the major challenges web content providers have had to face over the past few years has been that of devising an economic model that allows them to make money from their investment in the Internet. A variety of models have been developed, but none so far are entirely satisfactory, and some are fundamentally flawed. Banner ads, for example, if they are well targeted, encourage visitors to leave your site and visit those of your competitors—precisely the opposite of the desired behavior. And the subscription approach tends to put off all but the most committed of users. Because subscriptions require a significant up-front payment, people must be convinced they will get value for money before they are willing to part with their cash.

Micropayments

What is currently lacking is a simple, universally accepted method of exchanging small sums of money on the Web. Such a system would enable content providers to levy small charges of just a single cent or even less—known as "micropayments" within the web community—on users accessing their non-free content. This should in turn see the quality of web content generally improve, and the amount of advertising decline.

Credit cards are completely unsuitable for informal transactions

Clearly, conventional credit card transactions—the normal method of purchasing on the Internet—are entirely unsuited to handling such payments. Aside from the form filling and the perceived security hazards that would put off potential customers, small transactions of this kind would cost merchants far more to process than they would earn. Also, credit cards are completely unsuitable for informal transactions such as paying back a friend the money you owe them, or buying a second-hand camera at an eBay? auction.

A number of companies and organizations are taking steps toward implementing a solution. The World Wide Web Consortium (W3C) has released a working draft of its Common Markup for micropayment per-fee-links specification. This sets out the methods for embedding into web pages the information required to initialize micropayments. One of the goals of the W3C's specification is to allow multiple "electronic wallets" to coexist interoperably.

Electronic wallets

Like finding yourself in Peru with a pocket full of Greek drachmas

Electronic wallets are one of the industry's key approaches to implementing micropayments at the user level. Companies such as Qpass are seeking to overcome the limitations of credit card transactions by amalgamating the online purchases of registered users into a single sum, which is then debited from their credit cards on a monthly basis in the usual way. This enables much smaller sums to be billed to credit cards than would otherwise be possible. While such initiatives are to be commended, the main problem with them is that users of the service can only benefit when they spend money on sites that have also signed up for the particular service. On nonmember sites it is useless, like finding yourself in Peru with a pocket full of Greek drachmas when all the banks are shut.

Compaq's MilliCent? is one such system which has so far gone live only in Japan. MilliCent has several advantages over its competitors which could see it leading the way in the immediate future. The main one is obviously the powerful leverage wielded by the Compaq name, which makes it far more likely that vendors will sign up with MilliCent than with a similar service operated by a company they've never heard of. In addition, Compaq claims that its service is easy for vendors to set up and operate. The software takes account of scenarios such as refunds, failed purchases, and hands-free operation, and Compaq estimates that it will take an average merchant just four hours to become a working MilliCent vendor.

Real-currency models

PayPal could become the biggest person-to-person payment system on the entire Web

An alternative online financial model is provided by PayPal. The major differences between their service and the electronic wallet systems are that PayPal is based on real currency, and that it allows money to be transferred securely to anyone in the world, as long as they have an e-mail address. There are no fees for signing up or for using the basic services. In fact, PayPal will give you $5 simply to join, and another $5 for every friend you convince to do the same. A range of business and premier facilities is also on offer, such as instant online auction payments and low-rate credit card receipts. This is probably the cheapest and easiest way for a trader without a merchant credit card account to accept credit card payments. PayPal has also taken account of the ever-expanding mobile market by enabling its pages for WAP devices and Palm hand-helds. The company already claims a customer base of over 2 million people, and is growing rapidly. Certainly the industry has taken notice. Investors in the venture include heavyweights Goldman Sachs, Nokia, and the Deutsche Bank. If, as promised, PayPal can deliver a full range of services internationally, they could become the biggest person-to-person payment system on the entire Web.

Another of the most exciting online payment initiatives has been devised by eCash, which is seeking to provide a wide range of financial services including bill payments, micropayments and electronic checks, all backed by its own proprietary technology. Among the claimed benefits are low transaction costs, no penalties for low-value transactions, and improved security over other similar systems. They even go so far as to claim that eCash eliminates fraud from online transactions. The power of the system is that it works in conjunction with existing financial institutions in order to provide the services. This in turn gives vendors confidence that payments will be honored, and customers the security of having a local or known institution handle their transactions. The system can also handle wireless payments with ease and, like PayPal, is built on the real-cash economy which gives it far greater credibility than its electronic wallet competitors.

Which, if any, of these services will eventually come to dominate the market is impossible to foresee. There may be room for several of them at the top table, or some other visionary development may supplant them all. But the pressing need for a widely acceptable solution to the problem of how to make everyday, low-value payments on the web guarantees that whoever comes up with such a service will find themselves becoming very wealthy indeed.