Can PayPal Make Big E-Commerce Gains with Micropayments Initiative?

PayPal Inc.'s decision to enter the broad micropayments market could help the Internet payments processor boost transaction volumes and attract new accountholders, but by how much is currently a guessing game, experts say. “I'm not educated enough yet to say whether it's going to be material,” says Gwenn Bezard, research director at Aite Group, a New York-based research firm that follows electronic payments. PayPal last week announced reduced pricing for transactions stemming from a variety of digital-content downloads, from songs to news articles to electronic greeting cards (Digital Transactions News, Aug. 31). The new fee, 5% plus a nickel per transaction, applies to payments under $2 and significantly undercuts PayPal's standard pricing to sellers, which ranges from 1.9% plus 30 cents to 2.9% plus 30 cents, depending on volume. The initiative also represents the company's first serious move into micropayments processing after nearly two years of special, reduced pricing for song downloads, which this new pricing scheme replaces. PayPal began handling transactions for Apple iTunes downloads last October, and followed that up with a deal in December to process download payments for Napster. In announcing its new pricing for digital-content transactions, PayPal said it was looking to the initiative to attract new accountholders to the brand. Indeed, Aite's Bezard says the company, a unit of San Jose, Calif.-based online auctioneer eBay Inc., is likely looking at micropayments processing as a vehicle to drive transaction growth as it pursues its long-term strategy to move away from auction payments and toward the broader e-commerce market. “It's a matter of encouraging usage,” he says. “It's not going to be a revenue driver but it will encourage people to use PayPal over and over again.” The micropayments market itself, he says, is unlikely to prove lucrative, given the low transactions values and that fact that processors like PayPal, and micropayments specialists like Peppercoin Inc. and BitPass Inc., have so far managed to penetrate less than 5% of the transaction market. But, he says, content providers may be attracted by the new pricing, which in turn may attract users who want to buy digital content but who may not have previously thought of setting up PayPal accounts. These users then may ultimately begin using PayPal for higher-value transactions. PayPal, with its percentage-based merchant pricing, earns more as average tickets increase. “[Micropayments are] not going to be the next gold mine, but the thinking at PayPal is, 'We need to be in micropayments to drive usage,” says Bezard. “It's about increasing consumer familiarity with PayPal.” In this way, PayPal's micropayments strategy is similar to its approach to person-to-person payments, the market the company started out with in 1998. This service carries no fee and accounts for less than 10% of PayPal's volume, Bezard estimates, but it attracts users who may then begin using the service to buy from online merchants. The new initiative isn't without risks, since how many new accounts it can capture and what increase in transaction volume content downloads can help drive are big question marks. PayPal refuses to release projections, and Bezard says those are numbers he's still working on, adding they may or may not turn out to be significant. A PayPal spokeswoman told Digital Transactions News last week that the company was in talks with a number of digital-content sellers interested in taking advantage of the new pricing. As of June 30, the company claimed 78.9 million accountholders, of which 22.9 million were active, up from 50.4 million and 15.5 million, respectively, a year earlier.