Micropayment What it is How it Works in Fintech

Micropayments are small online transactions, typically less than a dollar or even a fraction of a cent. They are used to distribute digital rights, royalties, and facilitate in-game purchases, online tipping, and IoT device coordination.

The definition and value of a micropayment can vary between payment processors and businesses. Some companies consider any transaction below a dollar as a micropayment, while others set the threshold at $5.00, $10.00, or sometimes $20.00.

Key takeaways:

– A micropayment is a small online transaction, sometimes just a fraction of a cent.

– The definition of a micropayment varies based on the payment system.

– Micropayments can be used for royalties, advertising, freelance jobs, and cryptocurrency transactions.

Micropayments have become possible through advancements in fintech, which focuses on making financial products accessible at a low cost. However, very low fees may not be feasible for credit card companies, leading to the emergence of micropayment systems.

The term "micropayment" was first coined by Ted Nelson in the 1960s, who envisioned payments as small as one ten-thousandth of a penny. Although the web now relies on advertising, Nelson’s idea laid the foundation for the hypertext transfer we have today.

Micropayment platforms handle small transactions by collecting, storing, and distributing payments on behalf of sellers or service providers. Payments are stored until they reach a certain amount and then paid out. Consumers also need to set up an account with the same micropayment provider for easy payment facilitation.

Another method used by micropayment systems is the prepaid system. Users deposit money into an account with a micropayment processor and can make purchases by debiting their account. PayPal offers this type of service, defining micropayments as transactions under $10.

Micropayments are mainly used for digital purchases, as they are not practical for physical goods with additional shipping costs. Business owners and e-commerce sites often struggle to find a credit card processor due to high fees. Additionally, different micropayment processors handle micropayments differently, leading companies to choose the system that minimizes fees.