A Transaction Revolution?

Has a cashier ever scowled when you tried to pay for a $2 purchase with a credit card? What if you wanted to use the card to buy something worth a dime? Or maybe a penny?

You couldn't do it--and for a reason more fundamental than surly sales clerks. Transaction fees for the bank network that handles credit-card purchases would eat up the retailer's profit--and then some. Today, fees are a major impediment to the sale of information over the Internet, too. But cheap processing of microtransactions--such as selling a copy of this column--could revolutionize the sale of information.

The Internet currently works best for people who want to give information away. For example, General Electric Plastics makes thousands of pages of technical product information available over the World Wide Web (, thus saving the cost of printing and mailing or faxing the data.

TIME CHARGES. But companies selling data have limited choices. They can give access only to paid subscribers, which inhibits casual or occasional buyers. The alternative, used by BUSINESS WEEK Online on America Online, relies on a service that bills you for the amount of time online, then shares revenue with data providers. Time charges and subscription fees go on your credit card.

Internet commerce requires hiding credit-card numbers from prying eyes and building links between the wide-open Net and supersecure financial networks. Companies such as Terisa Systems and First Virtual Holdings have solved the problems to the point where sizable credit-card transactions are becoming routine on the Net. But the current credit-card network is very expensive, partly because it needs huge capacity and backup systems to ensure that every transaction gets through without delay or error. "We have a minimum transaction of 31 cents, and we'd have to take nearly all of it," says Nathaniel Borenstein, chief scientist for First Virtual (, which links the Internet to the banking network.

The trick to selling bits of information inexpensively is keeping small transactions off the bankcard system. Computer scientists at Carnegie Mellon University in Pittsburgh, with funding from Visa USA Inc. and the National Science Foundation, have developed a system called NetBill (http://www.ini.cmu. edu/netbill/). It uses digital signatures to verify both the identity of buyers and the delivery of information. The cost can then either be debited from a prepaid NetBill account or accumulated with other transactions and sent to the bankcard network.

Either way, the absence of a live connection to the bankcard network drastically lowers costs. NetBill Co-director Marvin Sirbu hopes to get the processing cost down to 1 cents or 2 cents per transaction: "We want to be able to sell a page for a dime, so that it costs as little to get it off the Net as it does to walk to the library and make a copy of a journal." This fall, NetBill will premiere as part of an NSF-sponsored effort to make the contents of major research libraries available on the Net.

MONOLITHS. The ability to make micropurchases could revolutionize the distribution of information. Sirbu compares the current situation to retailing in the 1960s, before bankcards hit the scene. Department stores dominated the marketplace, partly because only they had the wherewithal to let you charge purchases. Visa and MasterCard made it possible for any merchant to offer credit, and the retail monoliths faded.

Services such as America Online and CompuServe are the online department stores. But as NetBill and others become available, how small can transactions get? "Nobody has built a penny-a-joke business yet," says First Virtual's Borenstein. But someone probably will.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE