Micropayments Version 3.0
By Valerie Thompson, Wed Jul 11 00:00:00 GMT 2001

The mobile phone is emerging as a way of handling micropayments for digital goods and services. How mobile network operators and banks are reinventing the mobile phone as a micropayment platform beyond the mobile wallet concept?

Remember micropayments? Once hailed by journalists, search engine makers, writers, artists and musicians as a reliable way to get paid on a pay-per-view basis (or pay-per-download or pay-per-print) for material put online. But micropayment solutions have failed miserably. Only a few much-cited exceptions, such as the Wall Street Journal online and adult-oriented content sites, have been able to generate hefty revenues based on micropayment plans.

Loyalty points (Beenz, Flooz), Internet-based cash transfers (PayPal), electronic wallets (Kleline, Qpass), payment aggregators, and payment gateways (WorldPay) are some of the methods tried to handle payments for goods and services less than 25 Euros, but they have just not taken off the way salt, metal coins, and most recently plastic cards have done.

Now, in what could be called version three of the micropayment concept, the ubiquitous mobile phone is being hailed as a way to handle payments for digital content. What has given the industry hope is the multi-million dollar European and Asian ringtone and SMS logo business, intensely popular with the youth market. It seems that people are willing to pay for more than just voice calls on their monthly phone bill.

In the UK alone, international ringtone vendor, UCP AG (Lugano), sells about 100,000 ringtones a month at a charge of 1 pound each, according to Edward Orr, UCP's UK managing director. That's about 1.2 million downloads a year, at a pound a pop, which equals 1.68 million dollars. UCP is only one vendor in the UK market. There are dozens more. The UK is only one country in a GSM market that has hundreds.

It is not just ringtones, fortunately for the credibility of this market, but it is also financial success, of service providers, such as Paybox's (Raunheim bei Frankfurt) over-the-air recharging of pre-paid cards.

These facts have many industry insiders hoping ringtones are just the thin edge of the wedge, paving the way for the mobile phone to handle all kinds of micropayments and larger payments in the future.

A quick global survey of recent micropayment announcements, looking at who the service providers are, who the vendors are, and what the emerging trends are, reveals that although there is a lot going on, the mobile micropayment market is extremely immature. "There is a vast amount of experimentation taking place around the world. But the business models are not yet clear," says Anuj Kapur, Product Manager Mobile at 724 Solutions (Toronto).

All the signs of immaturity

The micropayment market is fragmented, there are no standards, no global industry consortiums, dozens of competing vendors, no clear leaders, partial solution, inflexible technologies, and no consensus among the mobile network operators.

The Global Mobile Service world-wide organization says it is taking strides to support mobile services, but it has yet to offer specifics on what measures it will take and it doesn't look like micropayments are a part of the plan. In the battle for mobile payments, industry insiders see the banks on one side and telecommunications operators on the other. "Who will lead in a particular country, depends whether or not the banking industry or the mobile telecoms industry is crowded," explains Kapur. "In some countries banks and telcos are working together. A classic example is Spain's Telefonica and BBVA in the Movilpago joint venture."

But is there really a battle for micropayments? Some payment providers, such as PayBox, backed by Deutsche Bank, want to distance themselves from the "nickel and dime" image of the micropayment concept.

"We would like to stress that Paybox is not just a system for micropayments, although we have a solution for micropayments. It is a viable alternative to traditional payment methods and is now Austria, Spain, and Sweden and soon in the UK," says Anja Stolz, Paybox spokesperson.

Paybox wants consumers to buy pizzas, pay taxis and hotels, as well as transfer money between bank accounts using the mobile phone. Paybox is partly owned by Deutsche Bank and is independent of the mobile network operators, so far. It looks like the German bank is doing some cherry picking in this case.

Mobile network operators are not as aggressive as on might expect in this space. "Micropayment schemes are a very low priority of mobile network operators," confirms a venture capitalist in Munich working for a major European telco.

A look at some of the current micropayment methods in use by mobile network operators today (and this does not include the mobile wallet schemes) illustrate how fragmented the market is.

- Italian mobile network operator Omnitel enables its subscribers to pay for online music and other Internet purchases using their pre-paid voice card

- The Internet portals of BT and France Telecom are working with another US based company called iPIN, which also posts the micropayments to credit cards.

- T-Online uses the Net900 service which makes users call a premium phone line and bills content usage to the fixed phone line for web content.

- M1 subscribers in Singapore is billing its subscribers for vending machine purchases in a public trial

- US mobile network operators, such as Cingular and AT&T are working with Qpass, a service provider that posts micropayment purchases to credit cards. (Although this is technically a mobile wallet, it's included because it's the only US example of mobile micropayment)

- South African mobile network operator MTN offers Internet merchants the ability to bill their customers on a pay-per view basis on the MTN phone bill.

Maybe it is a market that will fall by default to the network operators. Strand Consult (Copenhagen), a consulting company, thinks so. It says that the mobile network operators are best positioned to deal with micropayments, pointing to "premium SMS" as the way to handle low value transactions.

SMS payments are easy to engineer because users either have a contract account with their mobile phone operator, or a pay-as-you-go account, say the analysts at Strand Consult.

But the operators will have to get moving to make SMS micropayments a reality . Needed are roaming agreements between operators to handle the premium priced SMS. "I don't think there are even widespread roaming agreements in place for normal SMS," says Nicolaj Nielsen, Business Analyst with Strand Consult.

It could be that new players, such as third party clearinghouses, will step in to handle transactions between the end users, the merchants, content providers, and the mobile network operator and they will manage the billing between operators. Such clearinghouses would deliver portions of transactions to each of the players involved in the delivery of the online and offline content, enabling content providers and merchants to sidestep this whole issue.

Newcomer to the mobile payment market, Wmode (Calgary), plans to do just this. It will take advantage of existing agreements and roaming infrastructure to make it easier for merchants to accept mobile payments from customers regardless of the mobile network operator that provides their subscription. Emanuel Bertolin VP Marketing & Sales of Wmode told TheFeature that trials will begin this year and its clearinghouse services will be interoperable with North American and European networks.

From the network operators' point of view, there are basically two methods to handle micropayments, neither of them particularly new or technologically innovative. 1) post-paid accounting, taking small purchases made off and online onto the mobile phone bill via a premium priced SMS or a premium priced voice line and 2) pre-paid cards.

Post-paid accounting

Boxing fans in the UK pay for the latest news on the heavyweight boxing matches. They pay a pound a day for an SMS update (so-called premium SMS) or they dial a premium rate phone number to get the latest bulletin. This form of payment taps into existing billing relationships and is not new in the telecommunications industry. It relies on mature Interactive Voice Response technology. It's what happens when people use telephone directory assistance numbers, phone sex, and other "premium" services.

Users of Minitel, Compuserve, and Btx, the pre-Internet proprietary networks will remember being charged premium connection rates for certain content.

Micropayments via SMS is just a variation of the above. "It has a massive potential user base, as almost all digital cellular phones have an SMS text messaging facility," says Nielsen.

There is a risk of fraud, as there is with any billing system these days. A monthly statement with literally hundreds, if not thousands, of billable items presents a challenge to consumers and a huge opportunity to practice something called cramming, a newer form of fraud, that involves placing unauthorized or misleading charges onto phone bills. It is up to the operators to keep pace with these kinds of hacks, which are usually well documented on easy to find web sites.

Pre-paid accounting

Some call it a license to print money. Pre-paid cards are used in Asia by gaming sites, according to a recent article in the Wall Street Journal, and in the US where there are dozens of such cards for making purchases at fast food restaurants, convenience stores and music outlets.

These stored value cards, either a separate smartcard or the mobile phone users pre-paid cards, come loaded with a cash amount which can be spent at certain merchants' sites, both on and off the network. One of the newest is in Europe is the Italian service called Omnipay, which has Vitaminic CEO and founder Gianluca Dettori excited. Omnitel subscribers can use their mobile phone's pre-paid account to buy goods and services from dozens of web sites.

"For our market, the youth market, a pre-paid solution that exploits the mobile phone, is the perfect fit," says Dettori. Vitaminic lets its users legally download music.

Dettori acknowledges that if the payment method takes off, he will have to deal with multiple mobile network operators in multiple national markets, as Vitaminic operates in ten countries including Italy, UK, Germany, France, Scandinavia, US and Ireland, but he says that hurdle does not deter his satisfaction with the solution.

"With this in place and the credit card solution, payments are not a problem. I can concentrate on our biggest issue, the competition from illegal music sites," says Dettori

Valerie Thompson is a freelance business and technology journalist, specialized in emerging networking and computing topics. She lives in Zurich, Switzerland.