More startups working to crack the code for micropayments
For years, business models based around micropayments have been touted as an alternative to advertising, offering a new form of revenue for all kinds of content creators, enabling users to pay for the exact quantity of services they consume. They have even been suggested as a way to create alternative insurance products, for example forms of car insurance where drivers pay per journey.
But while the clearing and settlement fees of established payment networks such as Visa, Mastercard and even PayPal have long made such schemes unviable, a number of fintechs have made progress with establishing completely new payments rails that could facilitate micropayments in an economically sustainable way.
U.K.-based fintech Bottlepay is preparing to launch an app-based micropayments solution based on bitcoin’s Lightning network. While the app is built on bitcoin protocols, it can accept payments in pounds, euros and dollars, with plans for any other currencies in the future. Bottlepay hopes to target high street retailers seeking cheaper methods of accepting small payments, and foresees future applications in media company paywalls whereby readers have the option of paying per story.
“This is a scaling solution built on top of the bitcoin blockchain,” explained Steve Cheyne, founder of Bottlepay. “Think of it like the ATM machines connected to the main banking network. Each ATM has a cash reserve backed by the bank, as does a Lightning node backed by the bitcoin network. One node will accept the transaction, milliseconds later another node will release the payment instantly, and in a peer-to-peer decentralized fashion. No middlemen taking huge cuts of the payment fees.”
Blockchain protocols have long promised to solve the problem of administering many tiny transactions at low cost, but scalability has previously been a problem. However, Cheyne points out that the advantage of the Lightning network is that it makes it possible to skip the usual 30-minute time frame for validating bitcoin transactions.
“The network has tens of thousands of nodes working together across highly secure smart contracts, which makes it capable of scaling to any demand,” he said. “It’s only once a node wants to cash out that it would need to write to the main blockchain. Meanwhile, that node could have processed hundreds of thousands of transactions.”
Other blockchain-based micropayments solutions are in the pipeline. IOHK, an Edinburgh University spinoff company, is working on a solution called Hydra, which is built on the Cardano third-generation blockchain.
New platforms for facilitating micropayments are making some headway through niche verticals such as web development, internet culture and gaming. San Francisco-based fintech Coil has developed one such platform, through which it is attempting to change the dynamics of how online content is monetized. Users pay a monthly subscription fee, which is then disbursed as a series of micropayments to various content creators through Coil’s Interledger technology, based on how much time each user has spent consuming their content. So far it has proved moderately successful. This year, Coil struck a partnership with image sharing platform Imgur, and has other deals in the pipeline.
However, Coil CEO Stefan Thomas noted that while Interledger is a novel payments rail, it is not a blockchain.
“Interledger does not use any blockchain technology, so it does not rely on a shared ledger or any form of consensus,” he said. “Instead, it is more akin to the technology powering the internet, which relies on routing individual messages across a network of peered institutions. The fact that Interledger does not use a shared ledger is actually an important part of what makes it so scalable and able to serve extremely large volumes of very small payments.”
But both Cheyne and Thomas say that it will likely take the input of social media giants — such as Facebook with its proposed Libra currency — to convince the public at large of the value of micropayments in everyday life.
“Social media platforms can help get more people involved in digital payments given their vast reach and user bases,” said Cheyne. “Once people start noticing the convenience of digital payments, it could lead to worldwide mass adoption of micropayments.”