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May 05, 2003
Minipayments?
Apple's new music store (which isn't selling to customers whose credit cards show a non-US address, unfortunately) is charging just US$0.99 per track. As anyone who's followed the long story of the quest for a viable micropayments system knows, credit card company transaction charges are sufficiently high that using a credit card to pay such a small charge isn't worthwhile for the vendor. So how does Apple do it? Jonathan 'Wolf' Rentzsch thinks he knows how.
Basically, a credit card transaction falls into two stages - authorising the transaction, then capturing (i.e. transferring) the funds. These two stages don't have to happen at the same time, and could in theory take place several weeks apart. According to Rentzsch, when you use your credit card to pay for your first track Apple could in principle seek authorisation for a higher charge (say US$9.90, or ten tracks-worth of charges) then if you don't make further purchases they'll just amend the value of the transaction when they seek to capture the funds. Sometimes you'll only buy a couple of tracks before they capture the funds, in which case they'll lose out. If you've bought ten tracks by the time they capture the funds, they've rolled up to ten transactions into one and only pay one transaction charge.
It all sounds pretty logical, but I see a small problem. According to Rentzsch's account of how these transactions work, at the authorisation stage the merchant "tells" the credit card company that the cardholder has authorised them to charge a sum (in the example above, US$9.90) to that account, which means that the customer's credit card balance is effectively increased by US$9.90. Now if Apple adjust the sum at the capture stage, this will be fine as the amount the credit card company thinks has been spent will reflect the amount the customer thinks he/she has paid. However, in the interval between authorisation and capture there's a discrepancy between what the customer thinks Apple are charging him and what the credit card company think he's being charged. Unless Rentzsch's assertion that the credit card company adjusts their customer's balance at the authorisation stage is incorrect, Murphy's Law tells us that somewhere along the line this is going to lead to someone going over their credit limit without their realising it and turning round and blaming Apple for authorising a greater charge than the customer thought he/she was paying.
Granted, the sums involved won't be large - not to mention that the notional figure of US$9.90 is purely for illustrative purposes and may not reflect the amount Apple actually charge - but it's the principle of Apple charging a sum to the customer's credit card which is different to that which the customer thinks was charged that presents a problem. It's possible that the small print in whatever agreement you accept at the music store when making a purchase covers this, but even if that's the case I can see some very bad publicity coming Apple's way over this. It might be better for them to be upfront about charging, say, US$10 to your credit card and making it clear that you have X days to spend the balance. But that doesn't sound half as inviting as "US$0.99 a track!"
[Via plasticbag.org]
Posted by John at May 5, 2003 08:57 PM
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» Credit Card Micropayments from Mike Cohen's Weblog
From rentzsch.com: an interesting piece about how Apple implements "micropayments" at the iTunes Music Store. So Apple's new music store sells songs for 99¢ per track. That sounds suspiciously like a micropayment (or at least a "minipayment") syst... [Read More]
Tracked on May 7, 2003 04:07 PM
Comments
AIUI, they're not actaully charging your card $10 so until they do they won't effect your limits. I'd imagine it would be invisable to the user. I wouldn't imagine that it'll be more than a day or two before they charge you because any longer and they may be asking for money that's no longer there or letting people think they've got more to spend than they do.
Posted by: simon at May 6, 2003 12:50 AM
According to the article I linked to it's at the first (authorisation) stage in the transaction that the vendor tells the credit card company how much they're going to be charging, and at that stage that the credit card company adjusts the outstanding balance on the user's account. I don't know enough about the system to contradict this, but it does make sense that the credit card company would want to ensure that it knew what charges were expected. Whether the credit card company would refuse to allow a further charge from a different vendor to be authorised on the basis that the credit card company had authorised a charge from Apple and was expecting to transfer the funds at some future date I couldn't say. But the article clearly implies that the first stage of the transaction does affect the balance the credit card company records.
As for the amount of time Apple would delay, that's something of a fine judgement: remember, the sooner they complete the transaction, the bigger the risk that you won't have used up that US$9.90 and the larger the proportion of that charge which will be eaten up by the transaction fee payable to the credit card company by Apple. Apple have no doubt crunched a lot of numbers in a lot of spreadsheets trying to figure out the optimum delay, and I wouldn't bet on it being all that short.
Posted by: John at May 6, 2003 11:09 PM
I have a few ideas on what the iTunes payments stores does and doesn't mean for those in need of a good micropayment device: in short, not much!
(see: fissurequeen.blogspot.com)
But at the same time, there are signficant changes on the way shortly. Two quick reasons for this: the recent settlement of the anti-trust suit by VISA/MasterCard over the "honor all cards" mandate and a more significant change -- a new security system that will shift the credit risk profile from that of the merchant to that of the purchaser...
Posted by: CC at May 18, 2003 01:25 AM
I read your post suggesting that Apple's edge over smaller companies may be down to their size and muscle. It'd be a shame if credit card-based micropayments prove to be viable only for companies with turnovers in the hundred million dollar range.
I suppose the good news is that such a situation would in principle leave plenty of room for someone to come along with a clever new idea and fill that gap in the market. Trouble is, it's been an awfully long time since it became clear that the internet desperately needs a micropayment system and that gap still hasn't been filled...
Posted by: John at May 18, 2003 10:41 PM
Couldn't Apple just authorize the cumulative total of each user's purchases in the last 24 hours? For example, they would authorize 0.99 for song #1, $1.98 for song #2, $2.97 for song #3, etc. etc. Then they just do a settlement on the final total.
How much do you think the transaction processor charges Apple for each authorization? I can't imagine it's free.
Posted by: Ryan at September 10, 2003 08:02 PM
The original article suggests the authorisation charge is on the order of US$0.12-US$0.50, so even if you assume that Apple got a particularly good deal for the iTunes Music Store that's a pretty fair chunk of their revenue per song.
The update to the original article suggests that Apple are batching their captures of funds for anything up to two days. I suppose the big questions for Apple are a) how frequently people return to their site to make additional purchases within that two day window, and b) how many buy entire albums or multiple single tracks in one visit.
Posted by: John at September 11, 2003 05:43 PM