A micropayment is a small transaction amount that is usually spent on digital products over the internet. A micropayment can be a few pennies or several dollars, or even as small as a fraction of a cent.
The definition of a micropayment differs by payment processor. For example, PayPal considers a micropayment under $12. Although micropayments are mainly used in exchange for digital content, they can also be used to verify accounts and as payment.
Definition and Examples of Micropayments
Put simply, a micropayment is a small payment that is usually for a digital product or service. Depending on the payment processor or business, it can be $1, $5, or less than a cent. And although micropayments are often made online for digital content like books and music or cryptocurrency, there are other uses as well.
- Alternate name: Microtransaction
For example, services like Venmo will make micropayments of less than $1 into new user bank accounts to verify ownership. In this case, Venmo simultaneously makes equal withdrawals to negate the transfer, as transfers only serve to verify user identity. Micropayments are also used to distribute royalties, gratuities through online delivery apps like DoorDash, and freelance income through sites like Fiverr and Upwork.
Google Ads provides another example of micropayments. Creators who have monetized their content on a Google platform like YouTube can receive payment for ad views and clicks. There is a payment threshold—usually $100—that a creator must reach before payment is issued.
Until the amount is reached, micropayments in varying amounts are held in a digital wallet within the creator’s Google Ads account.
How Micropayments Work
Micropayments can work in one of two ways: through a prepaid system or at the point of sale. In a prepaid system, a customer typically pays an initial or recurring fee to a micropayment processor via a bank account that is kept on file in a digital wallet. Then, a la carte purchases are deducted in micro amounts—$1 for an app download, $4.95 for an on-demand movie, for example.
One-time micropayments can also be made—such as a food or coffee delivery placed online through an app like DoorDash. But transaction fees often exceed the payments themselves; This is a common criticism of micropayments on the retailer’s side. It’s generally thought that a company’s best financial interest is to bundle services rather than offer products through micropayments.
In response, micropayment systems with low transaction costs began to spring up in the 1990s. And since then, fintech products like online payment solutions have come to the forefront in an increasingly digital world. But the term “micropayments” was actually coined in the 1960s by Ted Nelson, an author and technology philosopher, and later fully explored in his 1982 book “Literary Machines” as a way to compensate copyright owners. Micropayments have been considered as a better payment system for royalties.
Micropayment Processors and Prepaid Systems
Examples of businesses that use micropayments include PayPal, Google Play, and the App Store. In the case of digital app platforms like App Store and Google Play, users create an ID and store payment information within a digital wallet. Users can then make digital purchases like apps or content like music, books, or movies for small amounts like 99 cents. This is sometimes also referred to as a pay-as-you-go model.
Other examples include streaming platforms like Spotify, Sirius XM, and Netflix, and cable TV companies. While subscribers will usually pay an access fee, they can purchase single services through micropayments—like a cable TV subscriber purchasing a movie on demand through their TV provider for around $5.
Moreover, some micropayment processors, including PayPal, offer a prepaid system, meaning a user loads a linked card or account for credit that can be spent in micropayments. However, transaction fee rates can be steeper on micropayments—though, in some regions, PayPal offers lower transaction rates on micropayments under $12. E-commerce sites can compare from a variety of payment processors to find ones with fees that fit into their budget
- Micropayments are small payments made over the internet and for digital products.
- Typically micropayments are used for pay-per-use digital goods like movies, books, songs, but can also be used to verify account identity or for online payment.
- Micropayments have been proposed as a better way to distribute royalties.
- Examples of businesses that use micropayments include PayPal, Google Play, and the App Store.