Battlefield: Micropayments
Electronic micropayments will have a massive effect on the traditional payments industry. For online gamers, avid Facebook users and other niche groups (yes, Facebook users – you are still niche!), this is not exactly news. But the major credit card companies are yet to recognize the potential of these markets and have not secured their futures as leaders in this rapidly growing space.
First a definition: micropayments are transactions, typically electronic, which represent a very small transfer of money. The exact amount is subjective, but for the purposes of this piece let’s assume a micropayment falls anywhere between a $0.99 iTunes download and the cost of a falafel sandwich.
Major credit card companies already play in this space. Apple’s iTunes accepts all the major networks, and even McDonald’s now accepts plastic. But neither of these channels has been won. In the case of Apple and many other web-based retailers, they also accept PayPal – arguably a more convenient and perceivably more secure method for online payment. And in the case of McDonald’s and other fast food restaurants, cash is still king. However, whatever penetration credit cards make into the quick-service food industry, I believe it will eventually be leapfrogged by something more expedient, such as mobile payments.
Diving further into the obscure, but eventually-to-be-mainstream, micropayments are happening within video games and across social networks. The Economist featured an article this week about Electronic Arts’ upcoming video game, Battlefield Heroes. In a complete shift of business model, EA is giving the game away for free via download, and instead relying on in-game “character upgrade” purchases for revenue. The methods of payment for these upgrades are TBD, but it’s fair to say that it will likely accept credit cards amongst a number of other fragmented options. Regarding Facebook and other social networks, Spare Change and a number of other technologies have sprung up to facilitate small peer-to-peer payments for widgets and other items.
To-date, credit cards have remained somewhat unaffected by this trend for two main reasons. First, micropayments are emerging, but have not yet hit the big time – as the online and mobile communities mature (literally and figuratively), this will change. Second, plastic currently feeds the back-end of online payment networks, such as PayPal. By this, I mean that people often fund their PayPal accounts using credit cards, so the card companies are still getting a piece of the action.
For companies, such as American Express, Visa and MasterCard, this “backseat revenue” produces a false sense of security because these networks are built on brand and customer experience. And as long as PayPal is the face of the transaction, they are not only taking home most of the revenue, but also capturing the intrinsic value of name recognition. Under this setup, it’s only a matter of time until the traditional guys get squeezed from the equation. Moreover, the big card companies lose transaction data sitting behind the PayPal facade. They no longer know whether their customer is shopping for a pair of sandals or a set of stereo cables – they both look like a $40 PayPal transaction. As you see, losing the micropayments battle is not only a short-term loss, but can be a gateway to more serious issues down the road.
In the fragmented market of micropayments, the MasterCards of the world hold a serious advantage if they choose to use it: BRAND! But they should make their move now while the battle is not yet won.
Priceless.
