Capturing the micropayments opportunity

Francesco Burelli, principal of Value Partners in London and Zoran Vasiljev, managing director of Value Partners (MEA), offer their insight into the opportunities that exist in the mobile payments sphere

Zoran Vasiljev, managing director of Value Partners (MEA)

Comm: Value Partners has recently completed a report on Micropayments – an emerging area of opportunity and challenge at the crossover of the media, telecommunications and payments industries. What are some of the key learnings coming out of report?

ZV: Digital media distributors are seeking new ways to monetise their content offerings. The growth in penetration of high-speed fixed and mobile Internet has created new distribution channels and an opportunity for content distributors to sell to new, larger audiences to offset falling advertising revenues. For the majority of content distributors, subscription-based business models remain the most appealing. However, not all types of consumers are willing to enter into such regular financial commitments and can therefore only be monetised through individual transactions of small value.

FB: The report analyses opportunities at the interface between retail payments, media and telecom. As digital media becomes increasingly central to the way information and services are delivered, the need to facilitate high volume small monetary value payments increases. There is a growing need for low cost payment services that operate in real-time, with a secure and simple user interface. They must of course meet accounting needs and compliance requirements. New payment models range from virtual currencies for social networks or gaming communities; payment aggregators; prepaid services or stored value wallets, and payment aggregators; to the service extension of established payment infrastructures.

Comm: Could you qualify what is a “micropayment”?

FB: ‘Micropayments’ is a term that identifies transactions of low value; however the exact definition varies considerably by audience. For the purposes of our report, a micropayment is defined as ‘an online or mobile, real-time or deferred, financial transaction below €5 (US$), which initiates the instantaneous delivery of a digital good’. They can be used to charge customers on a purchase-by-purchase basis for a range of digital goods, including access to news content, online music, TV shows and films.

Comm: What drives the micropayments opportunity?

ZV: The key driver of micropayments is the shift towards the monetisation of digital content and the emergence of new media business models. As media profit margins are squeezed by dwindling advertising revenues, digital content providers have sought to convert their free readership base into fee-paying customers. The demand for an effective micropayments solution originates from a range of online industries, from video on demand through in-game purchases to digital music downloads. Currently, payments for these services are accepted by incumbent payment infrastructures (e.g. direct debit and card payments) and a number of emerging payments business models (e-wallets and payment aggregators). However, the demand is yet to be met by the silver bullet of a universal micropayment solution. No solution has yet managed to combine the critical elements of low cost, high speed and an excellent user-experience together with compliance with regulation and the flexibility to support multiple distribution business models throughout the breadth of the media, technology and telco industries.

FB: Value Partners believes that the micropayments solutions landscape will remain relatively fragmented for the foreseeable future. As consumer demand and digital media distribution increase, micropayment use will grow, but it is unlikely that a single solution will cater to all types of content and parties involved.

Through research and client experience, Value Partners has identified and presented in its report a number of critical success factors that any successful micropayments solution will have to exhibit to successfully compete for a piece of this growing opportunity.

Those providers with exclusive or unique content will be better positioned to introduce a pay-wall to their content and dictate the payment solution used, while providers of more generic, easily substitutable content should be prepared to evaluate and embrace a number of different solutions simultaneously to drive consumer spend, often on an impulse basis. In either case, while the lack of a single, universal micropayment ‘silver bullet’ will not prevent content providers from successfully monetising their offering, it will increase the complexity of the challenge ahead.

Francesco Burelli, principal of Value Partners in London

Comm: In your report you mentioned that the micropayments evolution has been enabled by three, mutually reinforcing trends. Could you detail these trends?

FB: You are correct – First of all the distribution of digital content requires the ability to deliver it through high-speed connections. This with the growth of e-commerce has created an environment in which it is customary to purchase online. The growth of social networks and online gaming communities have led to the establishment of business models based on virtual goods. Internet wallets and some large scale aggregators have then enabled the establishment of early paid–for models. These inter-dependable three factors have led to an environment in which micropayment enabled business models can grow and prosper.

Comm: What can be concluded from the report?

ZV: Based on our experience, our projects and our research in the payments, media and telecom industries across the globe, Value Partners has reached a number of conclusions:

1) There is today no single answer to the desire for a universal micropayments solution, and moreover the aspiration to a ‘silver bullet’ solution is currently unrealistic. Different types of media, supplied to different types of consumer through different business models can be addressed by different micropayments solutions.

2) Whatever solution is chosen, it remains true that the user experience reigns supreme except for monopoly suppliers of digital goods and services. A convenient, seamless user experience will not only increase conversion rates of interested consumers but will facilitate impulse purchases. If costs can be minimised, compliance is addressed and fraud risks managed, then convenient solutions will gather critical mass and enable profitable transactions at low purchase costs.

3) The evolution of micropayment demand and commercial solution is still at an early stage of development.

Value Partners expects considerable activity in the space over the next five years leading to a short-term fragmentation of offerings that will be tempered in the long term by their economic viability and user preferences.