Micropayments: from costly dreams to frictionless reality?

By: Geeq

Introduction

Imagine your favorite author proudly announcing on her social media feed the latest article she published in a popular newspaper. You enthusiastically click on the link, hoping for a deep-dive into the thoughts of your intellectual role model… only to discover that a paywall blocks your way! For a moment, you might consider buying a month’s worth of subscription – but then you realise you already pay a monthly fee for two other magazines.

If you already found yourself in such a situation and were left irritated by it, you’re not alone: according to a study in the Journal of Marketing, user engagement on The New York Times website significantly decreased after the introduction of a paywall, especially among the most active users (a drop by 57.2%). And remember, The New York Times offers one of the most affordable subscription models due to its phenomenal scale and global recognition. So you might wonder: why can’t I just pay for this one article, say, 10 cents? The idea is not new, but for several reasons, such payment models have failed to gain ground in recent decades.

The opportunity

When you were about to commit 10 cents to access the desired article in our imaginary scenario, you were about to make a so-called micropayment. Definitions vary, but such payments are generally smaller than 10-20 dollars, and can even be as small as a fraction of a cent.

The Internet seems to be the natural habitat of such transactions, given the obvious limitations of cash for fractional payments. Interestingly, the term was coined back in the 1960s by Ted Nelson, who envisioned an interconnected world different from the one we have today. Being an artist himself, he proposed the concept of micropayments to enable creators to own and directly sell their work.

Adoption has not been hindered by a lack of economic potential or possible applications. In fact, web analysts like Jacob Nielsen pointed out way back in 1998 that the main problem with subscription fees is that they provide a single, binary choice: you pay nothing (and get nothing) or pay a significant fee. More than twenty years have passed since then, but the fundamental problem of the subscription model persists to this day. As Kevin Westcott, vice chairman of US media and entertainment lead at Deloitte remarked in a recent interview, an over-saturated streaming landscape has caused media consumers — especially millennials — to suffer from “subscription fatigue.” Instead of accumulating multiple subscriptions, these people want on-demand access to the content of their choice. In future, an “iTunes for journalism” is envisionable, whereby articles or videos from various providers and authors would be accessible on a pay-as-you-go basis.

However, the potential of micropayments extends far beyond access to content. Micro-tipping or sending micro-transactions to our friends are likely to be popular use cases too. It is no wonder that the biggest social media platforms see huge potential in peer-to-peer payments, as they can easily leverage their massive user base. A growing number of people use centralized peer-to-peer payment solutions, like Facebook Payments (a feature available only in the US) or WeChat Pay to send money to friends, with the latter having reached nearly 800 million users in China at the end of 2019.

Another potentially fruitful area is the computer games industry. While games used to be one-off purchases, the rise of gaming on mobile devices and internet-enabled consoles has led to the increasing importance of in-app purchases. These transactions enable gamers to purchase additional upgrades or virtual goods. Micropayments could lower the minimum spend necessary to participate: for example, rather than buying a pack of virtual clothes for $5, they could buy a single virtual item for $0.30. While in-app purchases remain controversial among some hardcore gamers, developers could use micropayments to fine-tune their business models and untap new revenue streams.

The market appetite is clear and growing; in 2017 alone, Activision Blizzard made $4 billion on microtransactions, roughly half of which came from the company’s mobile subsidiary that operates Candy Crush. Fortnite, the most popular title internationally in 2019 and 2020, earned 1.8 and 2.5 billion by selling purely cosmetic items that enhanced the gaming experience for its fans. Playing Fortnite itself is free, and Epic Games announced in May 2020 that it had registered over 350 million users. These gamers are largely in the Zoomer Generation (those who have never known life without the internet). An estimated 22.5 million play Fortnite daily.

The cost of trust

As described by JP Koning in a 2019 op-ed, however, the clearing and settlement fees of payment networks like Visa and Mastercard remain a barrier to wider adoption of micropayments. In his example, a writer who expects to sell a short story for 25 cents per view has to pay not only a 0.05% charge, but also a $0.21 fee on each “small ticket” debit card transaction on the Visa network. As a result, credit card fees would consume almost all of the writer’s revenue for such a transaction. In short, micropayments will never be viable as long as transaction fees exceed the value being transferred.

In the music industry, while Apple did make it possible to purchase single tracks on iTunes, this model has now largely been supplanted by streaming, which is a far less favorable arrangement for most artists. According to the BBC, Apple Music pays about £0.0059 (around $0.0084) per stream. The artist typically receives only 13% of the revenue, which roughly equals to $1 for every thousand streams. The inequality of payouts can reach shocking extremes: last year, violinist Tamsin Little tweeted that she had received only £12.34 for 5-6 millions streams over the previous six months. The effects of this unbalanced allocation of streaming revenue have been particularly pronounced during the coronavirus pandemic, when earnings from live performances suddenly dried up.

Security is another key point of concern, as users need to provide access to their digitally stored money to make frequent, automated micropayments feasible. According to the latest Capgemini World Payments Report, 87% of payments managers think their companies face a high likelihood of cyber attacks. Here, the ostensible convenience of centralized payment gateways comes at a cost, as a successful hack could potentially expose the personal information and bank details of millions of users.

What’s blocking blockchain?

The emergence of blockchain technology promised to greatly reduce the costs associated with centralised financial intermediaries. A blockchain is akin to a decentralized database, whereby information is distributed among thousands of separate computers called nodes. Blockchain-based cryptocurrencies like Bitcoin can be divided into eight decimal places, making it seemingly ideal for microtransactions, while networks like Ethereum hint at the potential power of smart contracts to automate financial transactions.

Unfortunately, however, blockchain technology fell short of its promise. Firstly, the average user cannot handle the technical complexity of managing wallets and security keys on their own. Crypto exchanges flooded into the market to facilitate access, but introduced some of the drawbacks of the old system in the process, namely centralization, high transaction fees and security risks. For instance, Coinbase charges $0.99 if the total transaction amount is less than or equal to $10. Secondly, the extreme price volatility of popular cryptocurrencies like Bitcoin makes them unfit for most retail transactions. As trader and philosopher Nassim Nicholas Taleb recently observed, “a currency is never supposed to be more volatile than what you buy [and] sell with it”.

However, arguably the biggest barrier to blockchain-powered micropayments is systemic. Vitalik Buterin, the founder of Ethereum coined the term “scalability trilemma”, which means that a distributed ledger can maximise only two of three key attributes: decentralization, security, and scalability. Unfortunately, a micropayment system cannot compromise on any of these attributes, as it must be able to securely manage transactions in large volumes at rapid intervals.

Typically, the more nodes a blockchain network has, the safer it is thought to be. However, as the system expands, processing payments will take longer and consume more electricity, to the point that the system becomes unworkable for processing microtransactions.

Changing the game

Scalability was one of the key challenges that we sought to overcome when developing Geeq. We set out to reengineer decentralized consensus to make it possible to securely transact micropayments for fractions of a cent without a central intermediary. After years of modeling, analysis, and community participation, we achieved our goal. We did this by altering the incentive structures of nodes to make them compete in terms of the accuracy of their work rather than computing power or cryptocurrency wealth. We call this new consensus mechanism “Proof of Honesty”. While a detailed technical explanation is beyond the scope of this article, you can find more details in our whitepaper.

Due to its scalability and low transaction costs, Geeq is an ideal basis on which to build a decentralized micropayment network. In the future, such networks could help to rebalance the economy away from content aggregators and payment intermediaries and toward content creators. This would benefit end consumers too, giving them some respite from subscription fatigue and greater choice over the content and services they wish to consume and how they pay for them. Ultimately, a larger share of the population could use micropayments safely in everyday situations, without having to worry about the security of their payment details or private data. Although we are just at the beginning of this transition, we see an exciting road ahead.

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