While advertising revenues have been disappointingly low for most applications on Facebook and other social networks, another option app developers are increasingly turning towards is micropayments for virtual goods or premium features. Both Facebook and MySpace have admitted that they are working on their own payment systems, and Apple could play a role as well since it already has a payment system in place for iPhone apps (although even Apple is running into some bumps).
While the bigger players are fiddling with their payment system plans, nimbler startups are moving in to fill the gap. One of these is Spare Change Payments, which is trying to become the Paypal of micropayments. A year after launch, more than 700 apps across Facebook, MySpace, and Bebo use Spare Change for micropayments. Spare Change is processing $2.5 million a month in micropayments, which is a $30 million annual run-rate. The apps that are having the most success with micropayments are games and ones that sell virtual goods.
Over a million people have already signed up for Spare Change. Hundreds of thousands of those use it actively on a monthly basis. And it is not all nickels and dimes. Last year, 250 people spent more than $1,000 apiece on digital goods through Spare Change.
Now, the company is making it easier for consumers to pay through Spare Change with a new payment widget that pops up in each app instead of sending people off to a separate payments page. You can choose between several payment methods including a credit card, Paypal, Spare Change credits, or through your mobile phone bill. Once you buy a minimum of $2 worth of Spare Change credits, you can use them as currency for apps that charge as little as $0.10 at a time. It is also introducing a PIN ID for users who choose to tie their accounts to a credit card so that they can use the same PIN across any app that uses Spare Change. The experience is designed to be familiar to anyone who has ever downloaded an app from the iTunes store. You enter your PIN, and then go back to the app. The company accepts payments from 190 different countries.
The first app to launch with the new widget is Mind Games on Facebook. It requires developers to add only three lines of code. Spare Change will roll it out to MySpace and Bebo soon. Spare Change is designed specifically for social networks. Customer support is done via the direct messaging systems inside each network, and the company analyzes the social graph to sniff out fraud. For instance, it looks at how many friends someone has and other factors to assign risk scores to individual consumers. Spare Change has been bootsrapped with only about $500,000 in seed funding, and two of the co-founders (Mark Rose and Simon Ru) previously worked at Paypal.
For micropyaments, Spare Change is much cheaper than Paypal, which offers its own micropayment option. Paypal charges 5 percent plus $0.05 for transactions less than $12, but only for premium accounts that qualify (otherwise, for most small accounts, it is the normal rate of 2.9 percent plus $0.30) . In contrast, Spare Change takes a processing fee of 8 percent for each transaction. CEO Lex Bayer points out that while Paypal has a micropayments offering, it does not seem to be a huge priority. “PayPal is not well designed for micropayments or digital goods,” he says. The logic driving Paypal is to encourage larger transactions because that is where Paypal makes more money.
A bigger concern for him should be if Facebook, MySpace, or Apple ever decide to jump into the micropayments game. Meanwhile, he has an opportunity to stake out a piece of the micropayments market and fight it out with the other startups eying the same prize. For instance, Zuora recently launched subscription billing for Facebook apps, Zong and Mobilecash are trying to tap into mobile payments (although the fees are still too high). Whoever figures it out first will be collecting more than just nickels and dimes.
I see micro payment as the future for most platform based apps. The question is if and when a player can establish enough of a client base that they become the de-facto standard (like paypal for personal transactions) so that the method goes mainstream into the consumer base.
Is paypal itself making efforts to move into that space?
SKYPE should get into this market. 5 years ago, micropayment in Europe for porn-sites was handled by calling surcharged phone numbers. it’d provide a password for access sites. very simple.
SKYPE could implement something like that very easily and partner with apps.
Targetting a specific market gives them an edge over paypal, with the help of Facebook’s platform, it would be a great traction for them.
TechFilipino
I have a service which accepts micro-payments from its customers. My service is not social-network based.
1. A good micro-payment solution cannot ask the customers to register in order to buy in the websites that support it. I’ll not use such a service since it reduces conversion. There’s got to be a better way.
2. 8% is reasonable for MP. PayPal’s 5% + $0.05 is reasonable too.
3. “PayPal offers support for Micropayments to merchants for US to US, GB to GB, AU to AU, and EU to EU transactions”. This is NOT okay. MP solutions must be globally accepted. Are they expecting me to show a different price if my customer is from Saudi-Arabia ???
that’s precisely why I think SKYPE should get into this market. 5 years ago, micropayment in Europe for porn-sites was handled by calling surcharged phone numbers. it’d provide a password for access sites. very simple.
SKYPE could implement something like that very easily and partner with apps.
Any micropayment system that uses a false currency will fail, or have a hard time gaining traction. Look at how reviled Microsoft Points are.
That doesn’t seem to be true in gaming. I think one part you’re missing is secondary markets for in game items. That makes things you buy in games have real value, even if you can only officially sell them for a virtual currency in game.
Paypal needs competition badly. Google checkout has changed its fee structure to equal paypal. Glad to hear of this startup. I like how they identified an underserved niche (micro payments) and tailored their service to meet that need.
I really do wish these guys the best of luck! Given the potential for Facebook, Paypal and Apple to build similar systems they might need it.
I always prefer extra competition though!
They are going to jail.
Amazing what these are doing with $500,000 in boot strapped funds. I could see PayPal pulling out some gimick of a marketing campaign to compete and there it would go. They need to appeal to their user base more with a video to explain their mirco payment process. That would be cool a 2-3 minute video, it would pay off
They should change the name to Spare Cents and buy my sparecents.com imo.
I wish them well. I had similar ideas, but lack of motivation to implement.
Unfortunately, even with a completely rampant financial system in many respects it is VERY hard for micro-payment providers to stay ‘legal’ in the eyes of the IRS and Justice dept.
Best of luck not becoming NeTeller!
What’s up with NeTeller? Never heard of before ..
And why should it be hard to stay legal?
$30M yearly revenue is impressive for a service that uses fake money. I don’t see these types of services ever being the standard of MP though. Everyone hates fake money. This may work ok for FB apps and similar type things, but not for anything else.
Like taking your kids to Jillians or Dave & Busters…spending 20 dollars for 8000 credits…video games costing between 200 to 1000 credits per play.
After a while, you have no idea how much your paying for anything when funny currency is used.
Fake money? You mean “Virtual Currency”, which is subject to all the regular havings of so called “real” currency. Inflation, Deflation, etc.
If the points can be ‘cashed’ out, there is no difference between real and fake currency (that is unless Space Change went out of business).
Props on the $30m revenue.
@jordanwillms
fake money? like the Fed is solid currency???
HA!!! http://tr.im/hNWG
“250 people spent more than $1,000 apiece on digital goods through Spare Change.” – i want to know who these people are and what are they buying? so weird.
This is interesting to know. Still confused though – actual revenue, not just virtual – ie if everyone cashed out at the same time would they go under?
Like Bill Me Later, watch PayPal buy these guys a few years from now when they’re at a much higher valuation.
The problem with micro-payments: micro-profits.
Great post!
Thanks,
Ben Fryxell
http://macmaniapodcast.com
can any one speculate as to when facebook or myspace will launch their micropayment systems?