| Cash Transactions Micropayments
are common in the non-electronic world and are generally paid for
with cash. A convenience store, for example, can afford to support
cash transactions for products costing less than a dollar because
the transaction cost is small. But there continues to be a transaction
cost. Let's say that the clerk is paid only $6.00/hour (to keep
transaction costs down). But we keep him very busy, completing one
transaction per minute, 60 per hour. Without figuring in overhead
for rent, utilities or other expenses, these transactions are costing
the convenience store 10 cents per transaction. If we want to keep
the 10 cent transaction cost at or below 3% of the selling price,
the convenience store must sell products that average at least $3.33
per sale.
Cash based micropayments work because the cash is easily recognizable
and represents value in hand, not credit that may or may not be
paid. Counterfeiting does exist, of course, but it is relatively
rare compared to the volume of cash transactions.
Electronic Transactions Micropayments in the electronic
world are familiar with telephone service. Many new telephone
services have recently become available for which micropayments
are made electronically. Get a number from directory assistance
and they will connect you to that number for 30-50 cents...a micropayment
tacked on to your monthly phone bill. Miss a phone call? Tap in
the numbers for call return and for an electronic micropayment
of about 75 cents the phone company will call that caller back
for you.
In the United States most local calls are not metered as long
distance is...one can make as many calls as she likes for as long
as she likes for a flat monthly fee. Not so in many other countries.
In Japan, for example, local calls are metered resulting in a
micropayment for each phone call.
Transaction costs for these micropayments are kept low through
automation and minimizing accounting costs. Automation replaces
high priced labor costs with more productive computer costs. You
(your phone) is automatically identified at the local office as
soon as you pick up the handset. Accounting costs are minimized
by simply appending these small charges to your existing bill
(they don't have to find out where you live or whether you're
a good credit risk with each transaction).
These examples demonstrate two ways to keep transaction costs
low: use a trusted medium of exchange like cash that does not
require much verification and accounting or use a fully automated
electronic system that requires relatively little overhead. Both
approaches are being pursued for commerce on the Net.
The new trusted medium is called electronic cash. Various schemes
have been proposed and some are in practice today but the problem
so far is trust: since electronic cash is so new few people know
it exists, much less trust it. It will take time for people to
become confident using electronic cash. Fortunately, we're talking
about micropayments, so not much trust is needed...it's not as
though one would face financial ruin if there turned out to be
a problem with electronic cash.
For electronic commerce, the second method, low cost automated
accounting systems, is actually the same as the first. Electronic
cash can be viewed as a low cost accounting system. Electronic
cash is not represented by a piece of paper or a disk of metal
as physical cash is but by serial numbers that represent money.
The serial numbers can be moved and verified securely across the
Net making electronic cash itself part of a low cost accounting
system. |
