Micro payments: Small fee, big benefit

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There was a day in the not- so-distant past, when purchasing a song required buying the entire album on CD, 8-track or vinyl record. Since 2003, the iTunes Store has offered single songs for download costing as little as 99 cents.

What made the iTunes Store revolutionary was not offering digital music, but allowing individual transactions of one dollar, called micro payments. Now, this financial capability allows companies to break products into smaller pieces to buy or even rent.

Exchanging money electronically is a challenge, especially for very small dollar amounts. With credit and debit cards, a whole series of fees are exchanged with each swipe of the card. These fees cover the cost of processing the charge by all the companies involved and provide the customer with an incentive to use their card.

The actual card company, for example Visa or MasterCard, sets an interchange fee. Then the issuing bank, the other company name on the credit card, marks up this fee. Finally, individual sellers must use a merchant service to accept credit cards and they also have a fee. The fee involves both a per transaction rate as well as a percent of the total. This is why many stores have a policy to only accept credit cards for purchases over a certain dollar amount.

PayPal, best known for their personal payment services, offers a merchant service for commercial clients. Their standard rate is 30 cents per transaction plus 2.9 percent of the total. For a single iTunes song, Apple would have to pay over 30 percent of the charge in fees alone; this is where micro payments enter.

PayPal considers any charge less than $12 to be a micro payment, and they, along with other merchant services, now offer a lower per transaction fee but higher percentage fee. This rate is 5 cents per transaction, plus 5 percent of the total. Again, for the single track in the iTunes Store, Apple now only has to pay 10 percent of the total charge.

This micro payment system allows a whole group of companies to offer inexpensive products and services that were not financially feasible before.

Apple has not stopped at music downloads but they have added movies, TV shows, books and iPhone “Apps,” many of which are also priced at 99 cents.

Now, big, bright-colored kiosks sprout up at supermarkets, fast food restaurants and convenience stores. Redbox is using these kiosks to provide DVD rentals for only $1 per day with no minimum.

Car rental is not new but Zipcar’s hourly car rental is. This service allows individuals to rent cars for as little as $8 per hour. The closest rental lot is at University of California, Riverside.

For the techie crowd, Amazon Web Services offers web server rentals starting at 2 cents per hour. The company targets big businesses that occasionally need lots of extra server power for this service, but individuals can rent servers as well.

Look for the next service to take advantage of this financial micro payment capability. Is it only a matter of time before we start buying our books a chapter at a time?

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