Micropayments: Where Charity and Social Networks Meet

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"The process of user education is slow—not everyone is tech-savvy or an early adopter," concedes Ivey. "Nor do they realize the changes in our lives made by Twitter…many people do not see the value, so patience is a must—sticking with your plan is important."

Another big hurdle is the transactional costs involved, especially when it comes to converting real dollars into microcurrencies. "Micropayment is a concept that has been like the proverbial pot of gold at the end of the rainbow," says Lee Hower, a principal at Point Judith Capital and a former executive at PayPal, purchased by eBay (EBAY) in 2002. "I remain somewhat skeptical about widespread consumer adoption of true micropayments, even on Twitter."

Razor-Thin Margins

Micropayment systems by nature involve large amounts of small transactions for the purchase of inexpensive items; funding usually involves credit-card companies, debit cards, banks, and related players. Startups have to account for technical, storage, computational, and administrative costs, to name a few outlays. And margins from small transactions can be easily erased by these costs. "Theoretically you can lower transaction costs, but in practice, third parties still have to pay a lot to process small payments," Hower says.

Purveyors of micropayments are finding ways around these obstacles. Some use existing systems, including PayPal and Amazon (AMZN) Payments, to reduce costs and avoid regulatory hassles.

That may make things convenient in the near term, but it's not building a lasting, innovative system, Hower points out. "You're fundamentally not creating a new payments infrastructure that can somehow trump the costs associated with either the Web 1.0 platforms or the legacy platforms," he says. A more effective framework is needed—one that minimizes micropayment costs and does not restrict transactions between merchants and users who wish to donate or buy content, he notes.

Venture capitalists and other would-be investors are left wondering: If these entities are not fundamentally different, then who has the right business model? In theory, social micropayment startups are not highly complicated ventures (excluding the regulatory element), and barriers to entry remain low now that PayPal and Amazon Payments are in the picture. So how does one differentiate?

To better understand the space, it's helpful to view it as a growing ecosystem of third-party apps facilitating the transfer of money or financial pledges via Twitter or any other social network.

Merchant Acceptance Is Key

Ultimately, success will depend on how well they meet the needs and expectations of their respective users—for example, having various mechanisms for converting real dollars into microcurrencies, achieving critical mass with merchants (that's anybody selling something or promoting a cause, because merchant acceptability is essential for any payment system to succeed), and avoiding restrictions on transactions.

Micropayment startups also need to avoid potential risks, including such security lapses as stolen usernames and passwords, and avoiding activities that might taint their reputations. Monetary transactions are based on trust, and once that's broken, it's hard to repair the damage.

It's a recurring theme of almost predictive regularity in the tech industry to want to change the world through killer software apps, but sometimes the most revolutionary change is subtle and has little to do with technology. The real value here relates to the human connections that are being made in these fluid social communities. Micropayment startups are merely creating a new means of income generation tagged to real human intentions.

Zeledon is a former research analyst at International Data Group in San Francisco. He is currently researching the growth of the financial social Web and runs a digital consulting firm, Virtualista.

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