I have done a thorough analysis of this; I have a band website builder app that has a MP3 store.

You should look primarily at the fees. Paypal's standard account has is around $0.30 per transaction + 3%. If you Google "PayPal Micropayment" they have an account that is not advertised publicly with lower fees for small transactions. The downside is you have to make a new account to use it, including a different bank account. I spoke to our PayPal account manager, and he said there is no internal plans to change this or promote the micropayments plan.

btw, you have a URL for that band website builder that has an MP3 store? :)

I think you're better off NOT taking micropayments, primarily because the cost of authorizing the transaction dominates the actual value of the transaction.

What do I mean? Well, suppose you had asked me to pay a nickel to read this comment thread. I value my own time at about a hundred dollars an hour. I've already spent more than a nickel of time reading this thread, so clearly I should have been willing to pay a nickel to read it. But the mental decision point on whether to cross the penny gap or not, plus the amount of friction it would take for me to authorize this transaction (fish out credit card, type in digits, sign in, click "Are you sure you want to pay $.05 to this merchant?", yadda yadda), is worth far more than a nickel of frustration to me. That increases the cost of the content to me but it is revenue that you don't capture.

Rather than selling things for micropayments, do what essentially everybody does in this space: sell a microcurrency in macro-units ($10, $20, etc), and then make authorizations to spend the microcurrency as friction free as possible. For getting over that penny gap on the first transaction, you probably want to give people a significant incentive to buy their first hit of microcurrency -- 100 dragon eggs for $5 instead of $10 like usual, whatever.

Clarifying edit: for non-Americans reading this comment, it might be useful to know that a nickel is .05 USD and a penny is .01 USD. They're the common names for two of our low-value coins.

This is one of the reasons I like PayPal and use it in preference to credit cards for online purchases. It has very low friction. To buy something online I normally need to get up, find my card (back when I used CC frequently, I had the numbers memorized, but no more), type in digits, go through the whole procedure.

Whereas, with PP, the site just takes me to PayPal's site where cookies know who I am, so I just enter my password, press OK, and I'm done.

It's gotten to the point where I often check if a vendor takes PayPal as soon as I even think of ordering.

TipJoy solves that problem. Just click the button and the "money" is transferred. You don't even need to register until they decide that you probably have "paid" enough to make it worthwhile.

I am not associated with them, but I love the idea, think it's a great modeel, and am about to become a customer.

That is a good idea. Billing monthly maybe possible too, depending on the product/service.

I think the problem is there is no great answer to your question. Here are a few possibilities though:

TipJoy (http://tipjoy.com/) is making a play as a micropayment platform I believe. I think they're a YC company as well.

Amazon Flexible Payment Service (http://aws.amazon.com/fps/) is also one to scope out.

Thanks much -

Has anyone used Amazon FPS vs. PayPal vs. Regular processor?

Shoot me an email if you have any questions about Tipjoy. We're working on something closer to what FPS provides: ivan@tipjoy.com

pretty basic amazonfps question - do customers have to have an amazon account to complete their transaction?

PayPal offers a micropayments fee model with $0.05 transaction fee + 5%. It beats their standard model on transaction amounts up through $11.90.

well, depends on what you want to do. you could aggregate like tipjoy does, if that fits your model.

there's also http://aws.amazon.com/fps/

there's also one other good one out there, but i can't recall the name since i don't use it. will edit/reply later if i can remember or find it.

A micropayment is less than $0.01 USD. Otherwise, it's just a "payment."

This is a great question. I assume PayPal is not the answer in this space even though Apple uses them on the iTunes store.

Apple also aggregates payments. I use my PayPal account (somehow that lets me avoid sales tax...who knows why...) for iTunes. Typically they'll bill me immediately for the first song (presumably to make sure my PayPal account still works), then they seem to aggregate anywhere from 1 day to 1 week worth of purchases up to about $30 before billing again.

They did this aggregation when I just had my plain old credit card number linked as well, although I don't think they ran the first charge immediately (probably just reserved funds).

I didn't know that iTunes uses PayPal for credit card charges. Do you have a source on this?

Take a look at your payment options in your user account preferences. You'll see a paypal option.

I assumed they only offer PayPal in hopes of bringing PayPal's customers even at the sake of margin.

A big audience to consider with PayPal is teenagers who may not have their own credit card. Parents could set up a PayPal account to let kids purchase things online (Without having access to their CC#). Or if a kid doesn't have a CC, they may use PayPal as a means to order products/services that require a CC. I know when I was in early high school I used PayPal when I didn't have a credit card to order records and cds. That could be why Apple accepts it.

I see, but it's possible that they accept PayPal but don't use them to process the credit card charges. I always wondered how big operations like iTunes do their credit card processing.

Yea definitely. I wouldn't think Apple would use PayPal to process the credit card charges. I was just explaining why they might accept it as a form of payment.

i wrote an article about this same subject, http://newsolareclipse.com/2008/12/micropayment-systems-the-...

Both Paypal and Amazon do micropayments with fees of $0.05 + 5%. So basically, your fees for a $0.99 cent MP3 is around 10 cents. It definitely makes micropayments feasible.

We did the analysis about 2 years ago for a charity and went with paypal - I believe the reduced fees for smaller payments only applies if you open your account in the United States.

check www.alertpay.com

have a look at www.onetouchpurchasing.com

if you want to go to Asia and willing through an HK LTD. we can help you in asiapay.com (full disclosure: I'm a director) :)