How to start accepting small-value payments from customers |

date 08/06/2014

author Božo Juretić

Accepting small-value payments, or micro-payments, was a topic of many scientific papers, industry conferences, books and business model attempts for two decades.

Skipping over all the debates, and looking at the real-world success of various mobile payments technologies, the following mobile payments models are proven to work in practical, real-world scenarios:

  1. Premium SMS – this payment method, used since the start of SMS hype, relies on using the basically messaging systems (systems used to process “normal” SMS messages) to perform also the additional billing function. While this method of payment is extremely wide-spread (available in all countries), the technology used is limited since it was never meant for billing purposes, but for communication between the parties. Payout to the merchant is generally relatively low (although in very developed countries it can be as high as some more modern mobile payment options, discussed bellow).

  2. Direct Mobile Billing – a step forward from Premium SMS designed for web/wap purchases, DMB allows the customer to pay with a simple entry of a mobile phone number and a PIN (received by SMS to a mobile phone during the purchase). System connects with mobile operator’s billing system, and generally provides the better payout to the merchant. Payout to the merchant is generally somewhat better than in Premium SMS billing.

  3. Direct Operator Billing (or Direct Carrier Billing) – mobile operator trusts the intermediary party and allows it to access mobile operator’s billing system directly. Through various possible customer identification methods, customer (through a payments partner in between) is able to make a purchase against its pre-paid balance with the mobile operator, or to place a purchase “on account” until the next billing cycle with the mobile operator (typically monthly). Payout to the mobile operator is highest (even 75%) of all available mobile payment options, BUT this payment method is still only available in a few developed countries.

  4. Card+ Mobile Billing / Digital Mobile Wallet – customer connects his/her credit card with a mobile phone using the services of an intermediary. Whenever customer needs to make an online purchase, unique PIN is sent to the customer’s mobile phone. This PIN is entered on the seller’s website (or customer just replies “Y” to the received SMS message) and customer’s card is immediately charged. This method of payment is also very good for preventing fraud (because one card in connected to one phone, which makes mass scare fraud extremely difficult).

  5. NFC - this is the most hyped technology today, but in general it enables the customer to pay in a physical shop without the need to enter any information (PIN etc.), which makes the purchases extremely fast. But typically this payment method limits the highest amount that can be charged (without entering a PIN like in a traditional credit card payment scenario) and is used for relatively small purchases.

  6. Credit cards – although payment processors and acquiring banks do not really like them, micro-payments are absolutely possible with classical credit card acceptance methods. Generally banks do not like payment bellow 5 USD because the costs of processing multitude of such payments in too high, given how the whole industry works (banks get charged fixed fee by their processors that they use to connect to the networks of card associations), and in some cases the acceptance of micro-payments by the banks is simply too expensive. Also, the whole ecosystem of credit cards related companies (payment gateways, payment processors etc.) is typically setup to process larger payments, and the checkout process is typically “slow” (compared to “native” mobile payment methods like Premium SMS, or Direct Mobile Billing).