Big Bucks In Micropayments

Reino Parking Systems, a provider of payment systems for municipal parking lots, uses Peppercoin's system to give consumers the ability to receive text messages on their mobile phones alerting them that they've got five minutes left until expiration of their parking meters and allowing them to add time via their phones. With the soon-to-be-available version 3 of the Peppercoin system, Reino will offer motorists a prepay option, such as $20 with two free hours. The system has been in use in Australia for a year and a half and will soon be introduced in the United States, says Mark Ralston, chief operating officer at Reino.

Another Peppercoin customer, jukebox manufacturer Rowe International Corp., launched its first credit-card jukebox last year. "In our vision, credit cards will begin to replace coins and cash over the next five years," says John Margold, senior VP of sales and marketing.

Businesses such as bowling alleys, bars, and billiard parlors have switched from manual to computer-based jukeboxes, which retrieve songs from a file server over a high-speed connection. The systems have the capacity to monitor the number of songs downloaded; by installing Peppercoin technology, Rowe can aggregate these into a single bulk payment. "Peppercoin administers payments from thousands of jukeboxes on a given night," Margold says. Coin-operated machines are rapidly being augmented with credit-card readers, he adds.

Version 3 of Peppercoin will expand the payment options from the pay-as-you-go model to prepay, postpay, and loyalty programs. For example, instead of selling a single cup of coffee for $1.50, a retailer could offer a "bottomless" cup of coffee for $5 a month on a subscription basis.

This is the second go-round for micropayment technologies. The first wave took place in the 1990s, when the prospect of buying online content on demand, such as newspaper articles, gave rise to companies such as eCash Technologies Inc., which offered software for making electronic micropayments. It also gave rise to companies like Mondex, which developed a chip-based system that allowed consumers to make small-value purchases or person-to-person value transfers anonymously, exactly like cash. MasterCard bought a 51% stake in Mondex in 1996, but a trial of the system conducted in New York the following year was a notable flop, as merchants balked at the time it took to process transactions.

The early vision was that micropayments were an integral component of E-commerce, and demand for micropayment capabilities would grow exponentially. But micropayment pioneers failed when the dot-com bubble burst. Since then, changing technology, including peer-to-peer networks, radio-frequency identification, and cell phones, have helped bring micropayments into the mainstream. Visa and MasterCard, for example, have launched RFID cards that consumers can wave in front of readers for purchases of $25 or less. The cards are being test-marketed at outlets such as McDonald's and other purveyors of small-ticket purchases.

"The vision wasn't wrong, but the foundation wasn't there to generate the demand to justify deploying low-value payment services," says Ed Kountz, an analyst at TowerGroup, which provides research on payment technology for financial institutions. That foundation is now provided by iTunes and other sellers of digital content.

"Obviously, iTunes isn't a pure-play micropayments provider; they're selling both content and hardware," Kountz says. "But consumers are interested in downloadable music, and merchants need a way to offer that on either a pay-as-you-go or subscription basis."

For banks, micropayment "gateways" such as Peppercoin unlock a huge, untapped market. "It gives them something to offer to merchants who have lots of small transactions," Friedman says.

A new challenge is customer service. Handling customer-service calls costs money, which eats into profitability on small-ticket items. Peppercoin's suite includes a customer self-service feature for online merchants and content providers.

The aim is a scenario in which everybody wins: Online merchants can attract more customers and boost their profit margins, banks gain new classes of merchant customers, and the card associations gain a new source of fee revenue.