PayPal Hopes to Lure Publishers to Its Micropayment System

With all the talk about paid content coming back into vogue (thanks, Rupert Murdoch!), it’s a wonder that PayPal hasn’t been part of the conversation. The tech startup that’s now part of eBay has been dominant in handling online payment transactions and is projected to have $5 billion in sales by 2011, according to Bloomberg. But so far, a grand total of just one major newspaper publisher has shown interest in PayPal’s offer to handle their online payments: FT.com.

Why the slow uptake for PayPal? I talked with Sam Shrauger, vice president of global product strategy for PayPal, who said the problem is that publishers are still unsure what their business model will be online. It turns out that FT.com is more aggressive than most at charging for online content. The site already has a “metered wall” that lets people read a certain number of free articles per month; a new trial test with PayPal might charge people for daily or weekly access to articles — and perhaps micropayments down the road.

PayPal has had a micropayments product for a few years. It charges publishers a smaller fee per transaction that regular PayPal for merchants. But even that micropayment fee structure — 5 cents per transaction plus 5 percent of the value — is way too high for publishers who want to charge pennies per article. PayPal is now working on a new model for micropayments that will allow publishers to process transactions as a group in order to lower the overall charges.

“The challenge is how do you make a $1 transaction attractive to everyone from an economic standpoint,” Francesco Rovetta, director of PayPal’s mobile unit, told Bloomberg at SXSW. “We are finalizing the development of that business model.”

Meanwhile, I spoke to Shrauger in-depth last month to get an update on where PayPal was going, and how it would woo content sites to use its payment services. The following is an edited transcript of our phone conversation.

Many publishers are looking for a payment system or micropayment system for their online content. Tell me more about what you offer them.

Sam Shrauger: We recognized the need back in 2005 for publishers of any kind of content to cost effectively process small transactions. We introduced about four years ago micropayment processing which are intended for people selling things in small dollar or sub-dollar increments. Pricing is probably the biggest issue that publishers run into, because the cost for processing is prohibitive for them. We’ve introduced a pricing mechanism that is a fixed fee of 5 cents plus 5 percent of the transaction value that’s intended to be cost effective for publishers.

Our core offerings to all our merchants — whether it’s retail or content — is to provide them safe, secure and cost-effective payment processing, and do it in a way that’s fast, easy and safe for their consumers. So we’ve combined that pricing structure with all our publisher or merchant products to allow them to have a payment platform that works for their business.

So you are charging 5 cents plus 5 percent for whatever the micropayment is?

Shrauger: Right. Our typical pricing structure is anywhere from 1.9 percent to 2.9 percent of the transaction value plus a 30-cent fixed fee. That’s obviously not something that works well for folks who are selling items or content that’s under $10, so that’s why we introduced the micropayment system.

So who are some of the publishers that are using your micropayment system?

Shrauger: We have a variety of folks who are using that. We’ve had iTunes as a merchant going back to at least 2005. We have SpareChange, which is one of the big social media processors, and I can give you some other names. Napster is another one.

How does your offering compare to those of competitors such as Journalism Online and others?

Shrauger: I won’t comment specifically on any competitors, but we see two camps of people trying to support payment needs. We are a payment processing provider, and what we intend to do for publishers or online merchants is make their payment processing cost effective and safe and easy. There are a variety of folks springing up around the operational management of paid content, people who help build the pay walls and manage digital rights that goes on around that. We see those folks as partners with whom we can work with to provide the operational functions so publishers can manage paid content.

Shrauger talks about how he is less concerned with competitors than he is with publishers working out their business model for paid content:

As far as the payment part of the transaction, do you feel like you have a head start on any new players in the space because you’ve been doing it so long?

Shrauger: I think there are a lot of dimensions in payment of digital content that are somewhat unique. In any form of digital content — whether it’s music or downloadable games or paid content — there are some unique characteristics and we have experience dealing with them. In particular, there’s a fair amount of fraud in the digital goods space, probably more than in any retail/commerce vertical. Fraud management is something we’ve build our business on, and I think we have the deepest experience in managing that risk in online transaction.

The second thing is convenience, particularly when you’re talking about smaller dollar transactions. When you’re talking about folks who want to pay to read an article or download a piece of content, that’s not a transaction that consumers want to spend a lot of time in the checkout process for. One of the things PayPal has done for consumers is make the payment process safe and efficient for them. The speed of checkout is another place where we’ve distinguished ourselves.

And lastly, the micropayment structure that we are offering is very compelling. People say that they typically have to pay pretty high costs per transaction, and the PayPal micropayment rates are very effective for people wanting that.

How would you break down the revenues you get from regular PayPal payments and micropayments?

Shrauger: We don’t break out those numbers publicly, but I would say that if you look at the overall world of e-commerce, I think paid content, which includes all digital goods, is about a $49 billion market this year. Relative to overall e-commerce which is about $250 billion to $300 billion. So paid digital content is smaller relatively to the total e-commerce market — about 15 percent to 20 percent. And within that, micropayments are a fairly small but growing percentage of that market. We think it’s about 25 percent of all digital content sold. So the market itself is not that large, but it’s something that’s starting to grow, and will grow even more as cost effective payment options come into the market. That’s been the barrier to folks effectively managing businesses on a micro-transaction level.

Shrauger explains why PayPal is a better fit for newspaper publishers than Google for processing payments:

What were your challenges to get micropayments to work? Was that the main challenge or were there others?

Shrauger: The other challenge that’s always a driver in this space is that the process for a user to make a micropayment has to be very brief. Whereas consumers are used to checking out with a full shopping cart experience and filling out some payment pages for a typical payment process for $50 or $100, that’s not something they are interested in doing for a $1 or $3 transaction. The focus for us has been to make the actual process of payment as fast and efficient as possible for the consumer.

For people who have PayPal accounts already it’s a very fast and quick experience.

The other thing I would add is the point around fraud. The other thing in the digital space is that the fraud rates tend to be higher than in other verticals largely because the goods are delivered instantly, as opposed to physical goods, where the merchant has time to check an order or check a customer before shipping the product to them. In the digital goods context, you make your payment and your game currency or whatever you’re buying is available instantly, so it’s something that can be turned around and resold really easily by a fraudster.

So how does the micropayment system at PayPal differ from the regular PayPal transaction?

Shrauger: What a lot of these merchants will do is, after a first payment with PayPal, they will allow you to make purchases without having to log in every single time you want to make that purchase. We have a product that allows them to initiate another transaction against your account without you having to log in every time. What that allows you to do is one-click payments effectively with those merchants.

If someone is trying to sell a micropayment that’s literally 5 or 10 cents, that would be hard to do with PayPal if you are charging 5 cents, right?

Shrauger: There’s obviously a floor to where micropayments processing for anyone is tenable. What I would say there is we’re always looking for ways to make those transactions more cost effective and get pricing structures that will work across the entire spectrum of transaction sizes.

Shrauger explains how some merchants aggregate their own micropayments before processing them, similar to what iTunes does:

Is there anything else that publishers would like to see other than fraud protection?

Shrauger: Everything I read about paid content makes it seem like it’s so binary: either paid content is going to work or it’s not going to work. My perspective and PayPal’s perspective is that there will be models that work in this industry and they will be very dependent on a lot of things. It will depend on the content and the demographic of who consumes that content, and where it’s distributed. Every one of those business models might take a different form. Some will be successful on a subscription basis, others on a micropayment basis, others might be successful with a hybrid of those things. Our perspective is that we can offer the publisher the ability to operate their business in whatever way makes sense for them and not have the cost of payment processing be an impediment to that.

What about internationally? Do you see publishers outside the U.S. showing interest in payment systems as well?

Shrauger: Absolutely. I think it was in the fourth quarter of 2008 that we made our micropayments processing available worldwide, and we support 24 currencies now, and it’s something we’re continuing to expand. If you look globally everyone’s wrestling with the same set of issues. Will consumers pay, and if so, in what fashion and in what amount? How do we then process those transactions? Those are global needs.

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What do you think about PayPal as a possible vendor for publishers who want to charge for their content? Is it a viable option or too expensive as currently set up? Share your thoughts in the comments below.

PayPal logo photo by Lava via Flickr.

Mark Glaser is executive editor of MediaShift and Idea Lab. He also writes the bi-weekly OPA Intelligence Report email newsletter for the Online Publishers Association. He lives in San Francisco with his son Julian. You can follow him on Twitter @mediatwit.