Micropayments: Where Charity and Social Networks Meet

Micropayments for microbloggers—it sounds like a no-brainer. In a community based on real-time content, social causes, and brand awareness, users will want to execute real-time transactions with the same enthusiasm with which they tweet about their favorite daily activities.

So goes the thinking behind a host of startups that aim to help users of microblogging site Twitter make payments and carry out online transactions as conveniently as appending 140-character updates to their profile pages. "It's about making a statement in the stream and telling everyone what you stand for," says Michael Ivey, chief executive of one such site, Twitpay, which lets Twitter users make online donations and pay for downloadable content. "When you donate to a charity or cause, you're making it public. Look at it as payments attached to our intentions and aspirations."

Another site, Twollars, lets users transact with virtual currencies, exchangeable for real money, in support of a cause, such as Lance Armstrong's Livestrong or the Water Project, which aims to provide access to clean drinking water in developing nations. "There are no transaction charges if you are a donor," says Twollars co-founder Eso Kant. The company relies on corporate sponsorships and charges fees for widgets, promotions, and microsites for charities, Kant explains. "We're also educating charities on how to raise funds," he says. "You want exposure? You want to bring your own charity—like the Pepsi Foundation? No problem—we'll do it for you."

The micropayments model goes to the core of who we are as people—our passions, political beliefs, cultural preferences, and aspirations. It's no longer just about George Soros making a million-dollar donation to a drug treatment program and getting a lot of press for it; it's about the millions of Twitter users making small donations and getting peer recognition for it. But just as Twitter faces big challenges in moving beyond a small core of committed, repeat users, associated micropayment sites can be expensive to maintain and may not resonate with a broad user base, experts say.

Branching Out

To get a sense of how micropayments work, consider the case of Twitter user zendawg1. Micropayment site Tipjoy lets bloggers collect tips from readers. Zendawg1 used his to make a donation to Twitanthropy, a microphilanthropy that raises money for water, sanitation, and public health projects worldwide. "From a giving standpoint, I am impressed with its ease of use," says zendawg1, who used Tipjoy to contribute to a rainwater-catchment system for a clinic in Central America. I used Twollars to make a donation toward digging a well in Kenya.

Micropayments are taking off beyond Twitter. Tipjoy is branching out across multiple social-network platforms, including Facebook. "We're moving horizontally, but Twitter certainly contributes a great deal of volume," says Tipjoy co-founder and CEO Abby Kirigin. "We want to be a full e-commerce engine for bloggers or any merchant who wants to put our payment system in their site."

To succeed, Kirigin and her counterparts will need to overcome at least two big obstacles. One is psychological. For the nontechie layperson, the concepts of micropayment or virtual currency add a new layer of complexity to Twitter (or any other social network). Many people are driven by fear and don't try new things until they become established standards. That's a big obstacle in the middle of a recession. How these startups educate users will be critical. "The process of user education is slow—not everyone is tech-savvy or an early adopter," concedes Ivey. "Nor do they realize the changes in our lives made by Twitter…many people do not see the value, so patience is a must—sticking with your plan is important."

Another big hurdle is the transactional costs involved, especially when it comes to converting real dollars into microcurrencies. "Micropayment is a concept that has been like the proverbial pot of gold at the end of the rainbow," says Lee Hower, a principal at Point Judith Capital and a former executive at PayPal, purchased by eBay (EBAY) in 2002. "I remain somewhat skeptical about widespread consumer adoption of true micropayments, even on Twitter."

Razor-Thin Margins

Micropayment systems by nature involve large amounts of small transactions for the purchase of inexpensive items; funding usually involves credit-card companies, debit cards, banks, and related players. Startups have to account for technical, storage, computational, and administrative costs, to name a few outlays. And margins from small transactions can be easily erased by these costs. "Theoretically you can lower transaction costs, but in practice, third parties still have to pay a lot to process small payments," Hower says.

Purveyors of micropayments are finding ways around these obstacles. Some use existing systems, including PayPal and Amazon (AMZN) Payments, to reduce costs and avoid regulatory hassles.

That may make things convenient in the near term, but it's not building a lasting, innovative system, Hower points out. "You're fundamentally not creating a new payments infrastructure that can somehow trump the costs associated with either the Web 1.0 platforms or the legacy platforms," he says. A more effective framework is needed—one that minimizes micropayment costs and does not restrict transactions between merchants and users who wish to donate or buy content, he notes.

Venture capitalists and other would-be investors are left wondering: If these entities are not fundamentally different, then who has the right business model? In theory, social micropayment startups are not highly complicated ventures (excluding the regulatory element), and barriers to entry remain low now that PayPal and Amazon Payments are in the picture. So how does one differentiate?

To better understand the space, it's helpful to view it as a growing ecosystem of third-party apps facilitating the transfer of money or financial pledges via Twitter or any other social network.

Merchant Acceptance Is Key

Ultimately, success will depend on how well they meet the needs and expectations of their respective users—for example, having various mechanisms for converting real dollars into microcurrencies, achieving critical mass with merchants (that's anybody selling something or promoting a cause, because merchant acceptability is essential for any payment system to succeed), and avoiding restrictions on transactions.

Micropayment startups also need to avoid potential risks, including such security lapses as stolen usernames and passwords, and avoiding activities that might taint their reputations. Monetary transactions are based on trust, and once that's broken, it's hard to repair the damage.

It's a recurring theme of almost predictive regularity in the tech industry to want to change the world through killer software apps, but sometimes the most revolutionary change is subtle and has little to do with technology. The real value here relates to the human connections that are being made in these fluid social communities. Micropayment startups are merely creating a new means of income generation tagged to real human intentions.

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