June 30, 2004

Peppercoin - credit card facilitations

This article has finally pointed me into the right direction with Peppercoin. Call me slow, but the trick is to totally ignore the tech. Being a techie by nature, this does not come naturally, one keeps searching for a modicum of sense behind it.

Peppercoin are positioning themselves as yet another credit card facilitation company. Like Paypal. In fact they are duplicating Paypal's business model to a T: First swamp the space with lots of "cool tech" noise and bring out some versions. For Paypal, this was their long forgotten Palm Pilot money feature, and for Peppercoin it is some statistically inspired token scheme. Second, buy customers. Paypal paid $10, then $5, using what looked like half their investment money to do this.

Third, migrate users from the cool tech to the basic tech and from the credit card to the debit card: web front end, everyone has an account, everyone feeds their account from their bank account. (Actually there's another step in there, between 2 and 3, but it doesn't add any to the explanation.)

Hey presto, we have a user base and a transaction flow and we're set for the billion dollar buyout.

It's not as silly as it seems. Banks have shown they can't do this, as have the credit card companies. Why not copy what worked in the past? Paypal did when they copied First Virtual and rectified their mistakes, and their recent actions leave them wide open for an alternate.

Yahoo! News
Credit Cards Enter the Micropayment Game
Mon Jun 28,10:24 AM ET

By MARK JEWELL, AP Business Writer

BOSTON - If your image of a typical video-game arcade customer is a teenager emptying quarter-filled pockets into a machine to do battle with space aliens, think again. Today's high-tech games increasingly appeal to an older set. And soon those customers will be able to use credit or debit cards as a payment option.

These so-called "micropayments" are gaining currency on the Internet (news - web sites) as a way to perform small-ticket transactions such as downloading a song or accessing other online content.

But most micropayment systems require customers to establish prepaid accounts, to get around the hassle and transactional costs of entering card information for each purchase.

Now, however, one player in the micropayments market, Peppercoin Inc., has come up with a system that also facilitates the more familiar way of buying things - by credit or debit card at the time of service.

One early customer is Incredible Technologies Inc., a manufacturer of coin-operated video games like the Golden Tee golf game. It has selected Peppercoin 2.0 to process credit card transactions in its future lineup of games, which will be able to take credit card swipes.

Peppercoin expects customers offering online music and other products will sign up for the service as well, said co-founder Perry Solomon.

The biggest obstacle to using credit cards for micropayments is the cost of transaction processing. Typically, a transaction costs 20 cents to a quarter, plus 2 percent to 3 percent of the price of the item being sold. For very inexpensive products, the transaction expense can wipe out any profit.

Peppercoin 2.0 has reduced the transaction expense to less than 10 cents, Solomon said.

With some sophisticated games costing a dollar or more to play, that cost structure is affordable.

The cost reduction is possible, he said, because of a patent-pending method of lumping together individual transactions into one transaction to reduce the cost to the merchant.

The method was devised by Ron Rivest and Silvio Micali, two Massachusetts Institute of Technology (news - web sites) faculty members who are Peppercoin investors and board members.

With the average American's wallet now holding five credit cards, the micropayments market could increasingly turn in the direction Peppercoin is heading, said Ed Kountz, a technologies analyst at the research firm TowerGroup in Needham, Mass.

"Clearly, the ability to leverage an existing consumer habit - the credit card - we think is an important one," Kountz said.

Posted by iang at June 30, 2004 06:15 AM | TrackBack