What Are Micropayments & How Do They Work?

Today, consumers can purchase practically anything online, sometimes for very small payments known as micropayments. Usually defined as a transaction less than a dollar—and occasionally even a fraction of a cent—a micropayment can be used to buy everything from digital products like eBooks, movies, and songs, to services like video editing.

As the internet continues to offer more digital content and services, and financial technology continues to advance, micropayments are becoming a more relevant and secure way to do business.

1. Pay as You Go – This method simply charges a customer’s credit or debit card a small one-time payment for every article, service, or virtual item. This method has some advantages since it encourages consumers to make impulse buys for low-cost digital goods. However, making impulse purchases doesn’t encourage consumers to come back and keep buying from the same merchant. More importantly, the transaction costs that come with these micropayments (which are often higher than the micropayments themselves) often do not make this method very cost-effective.

2. Prepay – This method allows a consumer to make micropayments on items like app downloads or on-demand movies using the virtual currency on a gift card or in a digital wallet. Customers that use online or in-store cards or pay a subscription fee are using this type of micropayment. Since prepay combines all of a customer’s future micropayment purchases into one large sum, it makes the transaction cost worth the expense. Using physical gift cards to make micropayments also enables consumers to buy from brick-and-mortar stores and not just online. And since this virtual or cryptocurrency can often only be redeemed at a certain provider, customers have more incentive to return to that business.

3. Post Pay – With post-pay, consumers pay after they’ve made a certain number of micropayments. Merchants keep track of a consumer’s transactions and then bill them all in a single amount. Consumers that take a subscription approach to this model may be billed a standard amount at the end of each month in exchange for unlimited access to digital items and services from that provider. This type of payment takes on the advantages of encouraging impulse buying from shoppers and since customers pay for all of their micropayments in one large amount, the transaction fees are more manageable.