But credit cards have their limitations. They are not suitable for purchases of digital content costing less than a few dollars per transaction (micro-payments). The card system is not cost efficient for processing small payment amounts, and in many cases the minimum transaction amount is around US$10.

To sell digital content, a different payment method is required. In the early days of the internet, developers created ?e-money,? enabling consumers to purchase low-cost items online from a website supported by the e-money provider. However, there was the potential for fraud on the part of the e-money providers, to whom consumers supplied their credit-card numbers in exchange for tokens.

Many of these early attempts to create e-money mechanisms for managing micro-payment transactions schemas met with business failure (e.g., early micro-payment vendors such as Flooz, Benz, Digicash). Even for feasible business cases, the failures often occurred because the merchants had to implement additional hardware/software requirements, and the customers had to prepay. It was simply too difficult to implement, and not worth the (then) small revenue streams from the internet.

But the situation is much different now. New micro-payment services allow customers to set up online accounts tied to their chequing and savings accounts, thereby reaching a whole new segment of customers without credit cards. Micro-payment also has another future as a replacement for cash to pay for goods and services at shops, cafes, bars, libraries, printers, pharmacies, sports centres, photocopying and laser-printing shops, as well as for bus and taxi fares, or for any purchase in which coins are used.

What are evolving from the early attempts are three distinct micro-payment schemas:

- The Retail Model which utilizes a stored value system
- The Telco Model which leverages the telcos? billing system
- The Financial Model which uses a multi-application smart card with an e-purse

The Retail Model - Stored Value Systems

The principal of the stored value systems is based on the micro-payments schema: store value accounts are connected to a credit card in which a consumer has to load credits in order to make a purchases, or connected to a stored value account that accumulates payments and makes authorizations based on increments.

With a stored value system, the consumers need to register for the services online or by phone; they have to provide a credit card number and load a balance. In order for the consumer to be able to make re-loads, the system needs to remember his or her information. Stored value systems are common in the service industry, for example as part of the McQuick service in Canada.

Telco Model - Micro-Payment Billing

The rapid penetration of GSM handsets has already led to a situation in which more individuals carry a telephone than carry a bankcard. Additionally, people tend to have a single mobile telephone from a single operator, whereas they might have multiple bankcards.

This suggests that mobile operators have access to demographic segments not available to traditional financial institutions. By targeting the right demographic group, mobile operators can use their own billing systems to register micro-payment transactions. Pricing wireless applications on a per-use or subscription basis is the best way to appeal to consumers and to give them value for their money. More importantly, separating content fees from transport fees allows carriers to keep all transport revenues while enabling a revenue stream for content providers.

The Financial Model - Smart Card with E-Purse

The smart card uses chip card technology and is designed for secure payments over the internet and mobile phones, and for micro-payments such as those made in fast-food restaurants, movie chains, convenience stores, vending machines, payphones, and on mass transportation and toll highways. A smart card payment scheme can manage low-value and high-value payments. The low-value payment scheme is known as e-purse, which is a cash-like, prepaid scheme, where the user has the choice of making either personalized or anonymous payments.

Purchases can be made on the internet by a smart card reader that connects to a PC. Secure internet payments may be made just as they are in shops which use this device. The internet merchant uses a terminal which is similar to a normal shop merchant?s, and payment and collection are made in the same way.

An example of an intra-regional standard for cash is the NETS Singapore CashCard under the Visa Cash brand, which has been implemented in Singapore, Philippines, and Korea, and recently in Thailand.

Standards are required to develop nation-wide smart card?based electronic purses that operate on a regional basis. Coupled with the possibility of location-based services driven by the mobile telephone network, the mobile telephone operator is well positioned to market goods and services to consumers on a one-to-one basis.

Conclusion

There are a number of challenges facing the retail banking sector today. The tradition of providing a customer with account access via a cheque or magnetic striped card is no longer the way to attract or retain ever-more-discerning consumers. Escalating card fraud and new delivery channels have changed the business landscape forever.

Micro-payments tied to a chip card could be a winner. The trends indicate that the most feasible solution?and the one increasingly embraced worldwide?seems to be the smart card, a plastic card which stores all personal data in its embedded microchip and which can be used for many functions, thereby doing away with the need to stuff wallets with many other single-function plastic cards. Another factor is the migration of credit and debit cards from magnetic strip to EMV, which allows these cards to be used seamlessly for micro-payments.

The users have already been educated. They know how to use plastic cards, and using smart cards would be the same, but common standards are important. The added advantage with a chip card is that a loyalty feature can be added to the chip, a natural extension which none of the other micro-payment methods can handle well.

There are some issues associated with a smart card schema. For example, security needs to be foolproof: once a card has been breached, the cost of replacement is high. Security costs money, and so smart cards tend to be more expensive than other methods.

With the stored value system, the problem is user acceptance. Users have to manage their own accounts, and if there are many different service providers the user has many accounts to manage. In order for a real stored value system to work, the banks have to get behind it and adopt a standard which merchants can sign up for.

The success of the mobile operators will depend on the number of merchants or content providers who adopt the operators? billing systems. In order to attract customers, merchants are offering phone-customization features such as ring tones, games, screen savers, and music. It is a good market, but the real adoption will happen only when merchants can accept payments.

The retail model will see minimum success. Large retailers might develop loyal customers who would use smart cards or a stored value system offered by a financial services organization.

Over the next few years it will be interesting to see which technology will demonstrate staying power and be adopted by consumers.