I’ve always generally agreed with the conventional wisdom about micropayments as a method of funding online content or services: Namely, they won’t work.  Clay Shirky, Tim Lee, and many others have made the case that micropayments face numerous obstacles to widespread adoption.  The primary issue seems to be the “mental transaction cost” problem: People don’t want to be diverted–even for just a few seconds–from what they are doing to pay a fee, no matter how small.  [That is why advertising continues to be the primary monetization engine of the Internet and digital services.]

That being said, I keep finding examples of how micropayments do work in some contexts and it has kept me wondering if there’s still a chance for micropayments to work in other contexts (like funding media content).  For example, I mentioned here before how shocked I was when I went back and looked at my eBay transactions for the past couple of years and realized how many “small-dollar” purchases I had made via PayPal (mostly dumb stickers and other little trinkets). And the micropayment model also seems to be doing reasonably well in the online music world. In January 2009, Apple reported that the iTunes Music Store had sold over 6 billion tracks.

And then there are mobile application stores.  Just recently I picked up a Droid and I’ve been taking advantage of the rapidly growing Android marketplace, which recently hit the 20,000 apps mark. Like Apple’s 100,000-strong App Store, there’s a nice mix of paid and free apps, and even though I’m downloading mostly freebies, I’ve started buying more paid apps. Many of them are “upsells” from free apps I downloaded. In most cases, they are just 99 cents. A few examples of paid apps I’ve downloaded or considered buying: Stocks Pro, Mortgage Calc Pro, Currency Guide, Photo Vault, Weather Bug Elite, and Find My Phone. And there are all sorts of games, clocks, calendars, ringtones, heath apps, sports stuff, utilities, and more that are 99 cents or $1.99.  Some are more expensive, of course.

I don’t have any idea how big this marketplace is in the aggregate, but according to AndroLib, “fully 62.2% of the apps available are completely free, compared to just 37.8% that are paid apps. That’s in stark contrast to the [Apple] App Store, which now has over 100,000 individual apps, of which (by some recent counts) a hefty 77% are paid applications — although only 30% of total App Store downloads are for paid apps.” That suggests that micropayments are doing quite well in mobile marketplaces. And this Wall Street Journal piece I was reading just yesterday, “Mobile-Payment Services Grow,” suggests there are lots of innovative things are happening in this space right now.

Of course, this gets into the semantic issue of, “what is a micropayment”? Does 99 cents qualify? I don’t know. I’ve never found any widely accepted definition of the term. Moreover, even if it’s true that a lot of people are buying “small-dollar” apps in mobile marketplaces, that doesn’t mean micropayments can fund all media going forward. It’s unlikely, for example, that we can fund quality journalism one micropayment at a time. People are just not going to pay a quarter (or even a penny) every time they want to read an article.  They might, however, be willing to pay a small monthly or annual access fee for some sites or services.  But with the exception of The Wall Street Journal and a handful of other media services, that model just doesn’t seem to have legs right now. [Although take a look at Dale Jefferson’s amazing newspapers app in the Android marketplace. Very cool. Perhaps media providers will learn from aggregation efforts like that and find a way to charge a small fee for access. But at less that one British pound — the cost of Jefferson’s app — I can’t imagine that funding a lot of content. They’ll need plenty of ads and other revenue streams to make up for what they are losing.]

Anyway, I’m not saying I have any answers here, just that my mind is still open regarding the possibility of micropayments as a method of funding online services and content. It may end up being easier for the former rather than the latter, however.

While the Wall Street Journal has noted one disturbing aspect of Sen. Chris Dodd (D-CN)’s sprawling mortgage industry bailout bill (HR 3221) –the required fingerprinting of mortgage loan “originators”–Sen. Dodd and his Republican colleague Richard Shelby (R-AL) last week introduced an even more disturbing amendment (Subtitle B of S.AMDT.4983) that would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government,” as reported by FreedomWorks (and noted briefly by the WSJ).

Specifically, online payment systems such as eBay’s Paypal, Amazon, and Google Checkout (along with banks and credit card networks such as Visa, MasterCard and Discover) would be required to report,

(1) the name, address, and [Taxpayer Identification Number] of each participating payee to whom one or more payments in settlement of reportable transactions are made, and (2) the gross amount of the reportable transactions with respect to each such participating payee.

This requirement would produce, starting in 2011, a detailed record of information about every “participating payee”– i.e., anyone receiving at least 200 online payments in a year worth at least $10,000 in total.  This record would include entries for not only most online merchants but also the “long tail” of small sellers through sites like eBay who eke out more than $10,000 in revenue (not profit) as well as those who collect donations online, as many non-profits, blogs and other user-supported sites do.  Such granular data collection becomes particularly troubling when one considers that, individual payees would be identified by social security number, as would sole proprietors of small businesses who use their own social security number instead of obtaining a separate Employer Identification Number. 

The Center for Democracy and Technology (CDT) noted this danger at a hearing held by the House Small Business Committee on June 12 entitled “Electronic Payments Tax Reporting: Another Tax Burden for Small Businesses,” also noting that:

the proposal would likely lead to the collection and retention of further personal and financial information relating to small business accounts; could create serious problems for small businesses in the event that credit card companies or other payment facilitators make errors in recording or reporting data; and would establish a dangerous precedent in enlisting private sector intermediaries to track the behavior of customers for purely governmental purposes.

What, exactly, does the IRS want to do with records of how much online payees receive?  As Kristie Darien, Executive Director of the National Association of the Self-Employed, explained:

The IRS has suggested that the data could be utilized to create industry profiles, taking the total credit card receipts reported for a particular business sector and then extrapolating this information to create industry averages.  These new industry profiles stemming from credit card receipts could then be used by the IRS to make judgments regarding other items on the tax return such as estimations on cash payments.

This could lead to more aggressive IRS auditing of those identified as having received online payments, a concern raised by National Small Business Association (NSBA) President Todd McCracken :

Not only would it be difficult to determine an applicable average for a particular small business, creating a huge new audit burden on companies that may legitimately fall outside their industries’ “averages” but it also raises privacy concerns.  The new industry profiles would then be used by the IRS to judge other items on a tax return. For example, the IRS might see that dry cleaners make an average of 60 percent of their transactions through credit cards, so if the agency reviewed the tax return of a dry cleaner that significantly deviated from that average, it may question that return.  In turn, that business may be more likely to be audited, especially since the IRS has, in the last two years alone, increased audits of small corporations by 150 percent and there is every reason to believe that number will continue to increase.

So what does any of this have to do with the mortgage industry?  Nothing, except that legislators are always looking for new sources of tax revenues and seem particularly desperate to fund a bailout of the mortgage industry.  Ranking Member Chabot (R-OH) noted IRS estimates that an 83.7% rate of collection of all taxes due produced a $290 billion shortfall in tax revenues in 2001, but also noted “serious concerns regarding the proposal to address non-compliance through electronic payments reporting” and proposed to focus instead on tax simplification.  Yet these new data reporting requirements, estimated to raise $9.802 billion over ten years, must seem a particularly juicy prize–regardless of the costs of increases government surveillance of the Internet and the reduction of financial privacy. According to the NSBA, this proposal “has Th[is] proposal has been broached in various forums and, over the past year, it was even suggested as a means of helping to pay for the farm bill.”  So, in essence, Sen. Dodd and Sen. Shelby want to take advantage of the popular pressure for a mortgage bailout to dramatically expand government oversight of online payments.

While the privacy implications of the proposed requirements are bad enough, especially for individuals, one must ask:  What’s next?  A system for collecting detailed information about online payees could easily be expanded to include information about online payors .  Beyond merely requiring, say, Paypal to identify how much each online merchant received in total payments, Paypal could be required to provide information about individual payments and their sources.  One can imagine all sorts of arguments for the collection of such data, from ensuring that online shoppers actually pay the often-ignored “use taxes” that many states charge on online purchases to the perennial favorite of cutting off sources of financial support for terrorism.

But whatever legislators and regulators might attempt in the future, this latest proposal is just one more assault on online financial privacy–and burden on the system of online payments that supports not only commerce but a wide range of the “Free” web.