Micropayments and Transaction Fees

Micropayments and Transaction Fees

Yesterday I wrote about my frustration that every news outlet that doesn’t want to – or more likely can’t – rely on advertising alone, wants to push me down a subscription route. I said that I am basically maxed out as far as news subscriptions go right now. I’d like a pay-as-you-go offering, much as I do if I fancy buying a copy of the FT at the weekend, or a once-in-a-while Sunday Times (then I remember that Rod Liddle still writes for them, and that puts me off for a while).

When I Tweeted a link, the folk at Axate wrote to alert me to their service which does much of what I’d like. Indeed a couple of people on Twitter also mentioned them, highlighting the fact that Popbitch uses them.

The idea is simple. You have an Axate Wallet, and load it up with some money – the minimum is £3. Then when you reach a site that accepts them, you can pay a small fee (or voluntary tip) via your wallet to the news provider directly. You can set your wallet to auto top-up so that there’s always some money in it.

I don’t know what they’re charging the sites – but let’s assume it’s somewhere around 30%. Sites probably also need to do a bit of dev work to integrate Axate’s payment system into their paywall. But that’s it.

The only real issue is that it’s still early days for Axate and they only have a few local UK publishers and a couple of magazines on board, alongside the aforementioned Popbitch. I do wish them well.

But why do you have to even create a wallet and put as little as £3 in it to begin with? The answer is card transaction charges – where a variety of banks and financial group charge a retailer (or news provider, or anyone charging for their products or services) for the privilege of collecting customer revenues.

Obviously, even handling cash has a cost. Try paying in bags and bags of loose change into your local bank branch and see what they say. There’s also the time cost for an employee to travel to a branch to pay in cash, or to pay a security company to come and collect it. So cash isn’t completely free.

When transactions are digital, there are still middlemen to pay.

I will begin by noting that my local independent convenience store has a sign on their new plexiglass screen at the cash desk informing customers that the minimum card transaction is £2. They’ve worked out that taking card payments below that price costs them money.

But how much does a transaction cost? I’m not an expert, but some Google searches basically broke things down like this for the UK:

  • A transaction charge – something like 1-3% of the purchase price
  • An interchange service charge – 0.2-0.3%
  • An authorisation fee – £0.01-£0.03

Beyond these, there are the costs of having the machine, which are rented out on a monthly basis, along with a monthly service charge payable if you don’t reach a set minimum amount in transaction fees.

Note that these costs can vary between credit and debit card transactions, and American Express tends to charge more – hence Amex card users getting used to being told that they can’t use their card at a specific location.

So if I buy a £1 can of Coke in my local newsagent, it might be costing them:

  • £0.03 in transaction fees
  • £0.003 in service charges
  • £0.03 in authorisation fees
  • £0.063 in total

Just over 6p doesn’t sound bad. But if you were only making 10p on a £1 transaction, you might prefer to keep the full 10p rather than get less than 4p by accepting a card.

Camelot says that retailers selling their products earn 5% on draw based tickets, and 6% on scratch cards.

So on that basis, if I buy one Lucky Dip for Saturday’s Lotto draw at £2, it might be costing a newsagent just shy of 10p (6p + 0.6p + 3p) to conduct the transaction, but Camelot is only giving them 10p for the sale. They’re only up 0.4p!

Now big retailers have vastly better deals, and their costs are much lower. Nobody cares at Tesco if you buy a single 25p lemon on your debit card at the self-service checkout. They’re probably not making a loss on the transaction, but even if they are, they can afford it across all the other transactions.

But it’s notable that even a company like Apple doesn’t actually charge you immediately for that 79p app purchase. They wait a few days to see if they can roll up that charge with other purchases to reduce their costs in processing small payments. (Although I’m sure that again, they have market leading low payment costs anyway).

So what kills micropayments are those fixed fees in the costs. If everything was just a percentage, then it wouldn’t matter if you’re spending 25p or £25 – the relative cost would be the same. But the card processing industry doesn’t work like that. They make good money when you just want to buy a pint of milk. They’re probably not inclined to change their models.

I’m certainly not an expert in this area, but if feels ripe for a root and branch shake-up, which would then make paying multiple small fees trivial.

Finally, the smallest amount I’ve ever seen anyone pay by card was the person once in front of me in the IKEA cafeteria queue. He was an employee getting a drink and he had a deep employee discount meaning he paid just 15p for his drink – which he paid for by debit card.