Article about e-micropayments by David Geer

Page 1

August 2004

I N D U S T R Y T R E N D S

-commerce is certainly nothing

new. Many people buy books,

CDs, clothes, travel, and other

products and services over the

Internet every day. However,

after years of online purchasing, one

long-promised aspect of e-commerce

has remained largely unfulfilled: elec-

tronic micropayments for items that

cost $5 or less.

Now, though, there appears to be a

growing demand for e-micropayment

technologies that would enable the

purchase of items and services such as

MP3 music files, magazine and news-

paper articles, Web-based comics, pay-

per-view videos, database access, and

driving directions.

Highlighting the demand for micro-

payments, Apple Computer says its

iTunes Music Store sold about 70 mil-

lion songs, at 99 cents each, during

its first year of operation, ending

April 2004, and 95 million songs as

of July 2004.

In addition, personal publishing has

become pervasive during the past few

years, with many Web sites specializing

in comics, music, and art. Content cre-

ators would like to make money from

this type of material and thus are inter-

ested in e-micropayment technology,

said Professor Andrew Odlyzko, direc-

tor of the University of Minnesota’s

Digital Technology Center. Without

such a technology, these providers gen-

erally give their content away.

Also, said Nitesh Patel, senior wire-

less analyst for Strategy Analytics, a

market research and consulting firm,

the boom in mobile phone use among

young people has increased the demand

for ways to buy low-cost ring tones,

icons, and games.

The ability to buy inexpensive items

conveniently would eliminate the need

for buyers to pay large subscription

fees for entire sets of material when

they only want selected pieces of con-

tent. It could also reduce the incentive

to share files illegally.

Providers of inexpensive content see

micropayment technology as a way to

generate revenue, said Kurt Huang,

founder, chief product officer, and pres-

ident of e-micropayment-technology

vendor BitPass.

Using credit cards for each purchase,

as is usually done with e-commerce, is

impractical for inexpensive items be-

cause the credit card fees and associ-

ated costs eat up sellers’ profits. In

addition, online merchants must spend

time and money checking a credit card

holder’s identity and available credit

before approving a purchase, which is

also impractical for small transactions.

Because of this, several companies

are developing e-micropayment prod-

ucts, including BitPass’s Core BitPass

System and BitPass Studios; Firstgate’s

Click & Buy; Payloadz’s PayLoadz.

com system; Paystone’s personal, mer-

chant, and group-pay accounts (for

handling high-volume payments such

as commissions, rebates, or paychecks);

and Peppercoin’s Peppercoin 2.0.

Despite the promise, not all industry

observers say the approach has a bright

future. In addition, the technology

faces several obstacles, including the

need to convince sellers and users to

trust and work with e-micropayments.

THE TECHNOLOGY IN DETAIL

Most credit card processors charge

merchants a minimum fee of between

15 and 35 cents per transaction, said

Dave McClure, director of the devel-

oper network for PayPal, a service typ-

ically used for larger online purchases.

This would be impractical for providers

of inexpensive content because it rep-

resents all or much of the profit on

many sales.

Strategy Analytics’ Patel said that in

the late 1990s, micropayment providers

like Beenz, DigiCash, and Flooz didn’t

succeed because the vast majority of

online vendors were not interested in

selling inexpensive items. In addition,

at that time, consumers expected most

online content to be free.

A challenging development task

Typically, buyers acquire low-cost

digital content in one of two ways: by

either giving a single content provider

large prepayments that would cover

multiple purchases or receiving a bill

from a vendor after making numerous

small purchases.

However, this requires individual

content providers to track each cus-

tomer’s purchases, which may not be

worthwhile for small transactions.

Also, these relationships lock a buyer

in to an individual provider.

E-Micropayments

Sweat the

Small Stuff

David Geer

Page 2

Computer

I n d u s t r y T r e n d s

Other key challenges for e-micro-

payment technology include security,

ease of use, the ability to handle high

transaction volumes, and record keep-

ing related to banking regulations.

General approaches

In meeting these challenges, micro-

payment vendors have taken a number

of general approaches.

Usually, the payment-service ven-

dors’ Web sites enable buyers to access,

via a link or button that opens a sec-

ond browser window, e-micropayment

applications that can combine pur-

chases from multiple online sellers.

In many cases, users of a single e-

micropayment technology can make

prepayments to an account, which they

can then use for purchases from multi-

ple content providers.

Some e-micropayment technologies

don’t process a user’s small purchases

until they total perhaps $20, noted

Rob Carney, Peppercoin’s vice presi-

dent of marketing. The multiple pur-

chases then incur only a single credit

card processing fee, which is relatively

low on a per-purchase basis.

With some e-micropayment sys-

tems, the money goes first from the

buyer to the payment-service vendor,

which then pays the merchants. With

other systems, buyers pay sellers

directly, via the e-micropayment appli-

cation. E-micropayment providers get

their revenue from charging fees to

content sellers.

In general, vendors use passwords

and encryption to provide security for

e-micropayments. Also, e-micropay-

ment applications no longer require

that users install plug-ins or other soft-

ware downloads, which used to be

sources of security holes.

Payment-service vendors sometimes

have Web-hosting companies operate

their systems to provide a stable, reli-

able platform. Other reliability ap-

proaches include uninterruptible power

supplies, backup power generators, sec-

ondary sources of Internet access in

case the primary connection crashes,

and other types of redundancy.

encryption and also records the IP

addresses of buyers’ machines for ref-

erence in case problems occur.

The company charges content pro-

viders an up-front fee—which varies

based on the complexity of the pro-

ject—for set-up, integration, and con-

sulting. Firstgate then tailors its

systems with business rules for each

participating merchant.

The company bills buyers’ credit

cards, debit cards, or phone accounts,

once they have accrued a few dollars

in charges. North American customers

can buy material via a charge to their

bank accounts.

Firstgate aggregates consumer micro-

purchases across merchants to enable a

single processing of multiple transac-

tions, explained Chief Operating Offi-

cer Ed Burrell. “This reduces processing

costs, per-purchase credit card fees, and

administration,”he explained. Firstgate

then remits money to merchants via

checks or bank transfers.

PayLoadz

PayLoadz works with about 1,000

merchants and generates about $3 mil-

lion per year in revenue, explained

founder and lead developer Shannon

Sofield.

Rather than having prepaid ac-

counts with PayLoadz, users pay sell-

ers directly through PayPal, which also

verifies that the buyers have enough

money in their accounts to make the

purchase. Merchants pay PayLoadz a

flat monthly fee based on their sales

levels, rather than a percentage of each

transaction.

PayLoadz delivers files via a secure

server to the customer using PayPal’s

Instant Payment Notification system,

which lets vendors integrate PayPal

with their back-end operations. Buyers

never see a PayLoadz interface.

The PayLoadz system consists of an

application server that hosts the Web

site and handles transaction process-

ing, a file storage and delivery server,

and a database server. Separating the

components into servers tuned for spe-

cific roles improves performance and

Micropayment systems also work

with error-checking technology to

reduce the chances of transaction-han-

dling mistakes, noted Ossip Kaehr,

Firstgate’s chief technology officer.

Most vendors offer ease of use by

making their e-micropayment inter-

faces look like the credit card interfaces

that customers are used to.

MAJOR E-MICROPAYMENT

VENDORS

The various commercial e-micro-

payment technologies are similar in

many respects but differ in others.

BitPass

BitPass deducts the cost of small pur-

chases from a buyer’s account that has

been prepaid via a credit card or some

other payment system such as PayPal.

The approximately 1,000 providers

that work with BitPass register their

content and services with the company

and install gateways on their Web-

servers to the e-micropayment tech-

nology.

When buyers click on BitPass-

enabled content on a seller’s site, the e-

micropayment system prompts them to

enter their password in a new browser

window. Once the system confirms that

buyers have enough funds in their

account, they can access the content.

BitPass pays merchants via PayPal

or by using the Automated Clearing

House electronic-funds-transfer system

to deposit money directly to their bank

accounts.

Firstgate Internet

Firstgate works with about 3,000

providers of articles, information,

games, and other content and has 2.5

million customers, mostly in Europe.

For security, Firstgate uses pass-

words and secure sockets layer (SSL)

There appears to be

a growing demand

for e-micropayment

technologies.

Page 3

August 2004

Acquiring bank

Small

payment

gateway

Merchant

aggregation

service

Issuing bank

Consumer

aggregation

service

Consumer

aggregation

service

Merchant

aggregation

service

Small

payment

gateway

Payment

network

Merchants

Merchant

Consumer

Source: Peppercoin

Figure 1. Peppercoin e-micropayment technology. When a consumer buys an item from a

merchant, the transaction passes through a small-payment gateway to the payment

service’s system. Among other functions, the gateway feeds payment information into

the system’s service for aggregating multiple payments by consumers to merchants. The

consumer aggregation service authorizes consumer spending, integrates with credit cards

or other payment instruments, and presents a summary aggregated bill. The merchant

service handles the sellers’ end of the transaction. The banks that handle the money

transfer have their own aggregation services.

To reduce overhead on small trans-

actions, Peppercoin uses an online self-

service customer-service module.

MACROCHALLENGES FOR

E-MICROPAYMENTS

E-micropayment technology faces a

number of obstacles to success. For

example, said the University of Minne-

sota’s Odlyzko, although e-micropay-

ment technologies may be reliable, they

run on the Internet, PCs, and browsers,

which are not always dependable.

Economic factors

E-micropayment products deal in

very small transactions and thus poten-

tially yield low profit margins, noted

PayLoadz’s Sofield. Therefore, it may

not prove to be economical for many

companies to invest in and distribute

the expensive e-commerce systems

only to get thin profits dependent on

high transaction volumes that might

reliability, Sofield said.

For security, PayLoadz uses SSL with

128-bit RC4 encryption.

Paystone Technologies

Customers in North America,

Australia, New Zealand, and parts of

Europe can access Web content after

setting up prepaid Paystone accounts

by mailing funds directly to the com-

pany using their bank’s bill payment

service or by depositing cash at any

Bank of America branch.

Merchants that sell content via

Paystone create links to the e-micro-

payment system. Customers follow the

links, enter their Paystone password,

and are redirected back to the content

they want to purchase.

For security, Paystone uses 128-bit

SSL encryption.

Peppercoin

Massachusetts Institute of Tech-

nology cryptography expert Ron Rivest

and fellow MIT computer scientist

Silvio Micali founded Peppercoin.

Buyers at participating Web sites

who want to use Peppercoin see the e-

micropayment technology’s interface,

which looks like a common credit card

interface, noted Bob Nix, the com-

pany’s vice president of engineering.

The application’s new version,

Peppercoin 2.0, doesn’t require pre-

enrollment or predeposit of funds.

Consumers just enter their credit or

debit card information with the mer-

chant online as usual, and Peppercoin

processes the transaction.

As Figure 1 shows, the application

uses a universal aggregation technique

to efficiently process many small inter-

actions between multiple consumers

and merchants as a few large transac-

tions.

The company uses RSA BSAFE soft-

ware to provide encryption and digital

signing capabilities for the security of

a buyer’s information and the transac-

tion’s integrity. Digital signatures can

authenticate a message’s sender’s iden-

tity and verify that no one has altered

the original content.

not materialize.

Also, Odlyzko said, content pro-

viders eventually may find that they

can economically and successfully sell

small items bundled into larger pack-

ages on their own, thereby eliminating

the need for third-party e-micropay-

ment technology.

Insufficient demand

Perhaps the key marketplace chal-

lenge for e-micropayment vendors is

making content providers aware of

their applications and selling them on

the idea that their services are effective

and worth paying for.

Currently, said Strategy Analytics’

Patel, many merchants are not inter-

ested in using e-micropayment tech-

nology until they see one or two

products prove themselves over time as

being reliable and attractive to buyers.

Also, digital content is scattered all

over the Internet. There are relatively

Page 4

Computer

ments into devices like cell phones and

PDAs.” However, researchers must fig-

ure out how to run e-micropayment

applications on handheld devices,

which have performance, memory, and

battery-life limitations.

For example, Odlyzko noted, the

cryptography required for e-micro-

payment security uses considerable

processing power, which can run down

mobile devices’ batteries. Researchers

are working to solve this problem.

Technical improvements notwith-

standing, Odlyzko said, micropay-

ments are likely to make slow progress

in the marketplace during the next five

years simply because of low demand.

“It is a technology with grand ambi-

tions and limited prospects,” he said.

Not all industry observers agree.

“Micropayment technology will

few sites where potential buyers can

see large amounts of digital content

grouped together. This makes it less

convenient to buy the material, thereby

reducing the number of online microp-

urchases and thus the demand for e-

micropayment software.

icropayment use is beginning to

grow in Japan and with

European news and publishing

companies. If the technology becomes

widely used, e-micropayment vendors

may have to deal more effectively with

such potentially thorny issues as refunds

and customer support, explained

BitPass’s Huang.

In the future, said Odlyzko, “There

will be progress in usability and, in par-

ticular, in incorporating micropay-

become more pervasive as more con-

sumers pay for personalized content

and services,” said BitPass’s Huang.

Over time, said PayLoadz’s Sofield, this

will cause the use of micropayments to

grow “at an incredible rate.”

As this occurs, said Erik Michielsen,

an analyst with ABI Research, the sale

of low-cost content will increase, com-

petition will grow, and the price of

the material will decrease, which will

encourage more use of micropayment

technology. I

David Geer is a freelance technology

journalist based in Ashtabula, Ohio. Con-

tact him at geercom@alltel.net.

I n d u s t r y T r e n d s

Editor: Lee Garber, Computer,

l.garber@computer.org

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Seventh International Conference on the

Unified Modeling Language <<UML 2004>>

October 10 – October 15, 2003, Lisbon, Portugal

http://www.umlconference.org/

Corporate Sponsors: SINFIC, Springer

Co-sponsored by ACM SIGSOFT and the IEEE

Computer Society

KEYNOTE SPEAKERS

Krzysztof Czarnecki, University of Waterloo:

Generative Software Development

Desmond D’Souza, Kinetium:

Goals, Viewpoints, and

Components – an MDA perspective

Oscar Nierstrasz, Software Composition Group,

University of Berne:

Putting change at the center of

the software process

COMMITTEE

General Chair – Steve Mellor, Project Technology, USA

Conference Chair – Ana Moreira, New University of Lisbon

Program Co-Chairs – Thomas Baar, Alfred Strohmeier,

Swiss Federal Institute of Technology in Lausanne

UML 2004 includes both research and industrial tracks. The

2005 conference will be renamed MOdel Driven

Engineering Languages and Systems (MODELS 2005).