Alternative Online Payments: The Dream That Refuses to Die


[Editor’s note: As a New Year’s exercise, we asked a select group of Xconomists to answer this question: “What’s the craziest idea out there that just might succeed?” ]

After nearly twenty years of failed attempts, I’m still a believer in the potential transformative power of the “crazy idea” of alternative Internet payment systems, particularly micropayment engines and alternate currencies.

Payment systems are simply mechanisms to streamline and calibrate the exchange of value. It’s easier to assess the relative worth of cloth from India and tobacco from America if you can translate both into standardized European coinage. Modern payment systems also provide simplicity and security through the use of trusted third-party settlement agents such as banks and credit card associations. But none of these mechanisms are built into our DNA, and there’s no reason to think that today’s systems are the final word.

In fact, the Internet brings with it the potential for so many innovative payment mechanisms as to threaten chaos. This chaotic prospect, combined with the inherent conservatism of payment system users and the understandable desire of payment providers to protect their turf, has so far doomed nearly every new payment system enabled by the Internet. The few exceptions—most notably PayPal—have survived in large part through a strong alliance with the existing players in credit cards and banking. PayPal is (like First Virtual before it) largely a security-conscious overlay on the existing credit card and banking systems.

That kind of limited innovation is more than enough for the powers that be—the large financial players who are more interested in maintaining their near-monopolies than in enabling new kinds of economic activity. Not surprisingly, however, the interests of the banks and card associations are not necessarily in sync with those of the rest of us.

From Digicash to Cybercash to BitCoin, there have been plenty of demonstrations of the technical feasability of alternative Internet payment mechanisms. And in the physical world, alternative currencies such as Ithaca Hours have hinted at the potential for a community to revitalize itself by taking control of its own money supply. In times of economic hardship like today, the poor and unemployed have traditionally reverted to barter to exchange goods in the absence of currency, but those transactions have been limited by geography and personal circles of trust. With Internet-based alternative currencies, however, barter-like transactions can be extended to a global scale. The poor and unemployed can begin to trade with each other from across the world, using an “artificial” money supply to begin the climb out of poverty long before governments get around to increasing the money supply or doing anything else to help them.

But it’s not just the poor and unemployed who can benefit from alternative payments. Today, merchants grumble mightily about the fees they pay to the credit card associations, but they have no real alternative, as the number of credible retail payment systems can be counted on one hand. Imagine instead a world in which hundreds of payment mechanisms competed in an open market; it’s inconceivable that the prices paid by merchants wouldn’t come down with the competition.

Most important, however, are the new kinds of applications that might be opened up by a more diverse set of online payment options. For example, there have been dozens of proposals for solving the spam problem by using required or optional payment in one form or another. My personal favorite is the “attention bonds” proposal of Marshall van Alstyne, in which emails are accompanied not by postage per se, but by an enforceable promise by the sender to pay a penalty fee if the recipient considers a message to be spam. This kind of innovative idea will likely remain a pipe dream until the Internet has a robust infrastructure for alternative payments.

A cynic might say that, because of the power of the banks and card associations, such an infrastructure will never come to be. I’m a bit more optimistic; I think the powers that be will continue to resist any attempt to open up the world of payments, but they’re unlikely to succeed forever. At some point, the combination of a clever new payment system and a market niche that needs it will be so useful that the world won’t let it die. And then, “suddenly”—after decades of waiting—we’ll see people sending money by email, new institutions floating their own currencies, and micropayments enabling sub-penny transactions that accumulate to form the basis of whole new industries.

I’m confident that such a change will come, because the value of democratizing and diversifying payment systems will be too great, in the long run, for society to ignore. But I can’t begin to predict when it will happen; I just hope I live to see it!

Nathaniel Borenstein is chief scientist at e-mail management firm Mimecast. Based in Michigan, he is the co-creator of the MIME e-mail standard and previously co-founded First Virtual Holdings and NetPOS. Follow @drmime

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  • I so agree with you on that. I think the niche that will really need it and has the potential to overcome existing systems is collaborative consumption. Dollars and current payments systems are inherently centralized and designed for centralized business models. With collaborative consumption democratizing decentralizing business models into peer-to-peer mode, things like AirBnB will need new currencies and new payment systems to really become mainstream. But I think it’s not enough to create alternate currencies and payment systems with the same rules. We will also have to reinvent the basic rules governning those new systems so that they are really adapted to a p2p economy and so that they don’t end up in the same mess as traditional payment infrastructures. Things like negative interest rates, absence of physical artifact and so on will have to be evaluated.

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  • Marshall

    This is great set of ideas and the prospect of democratizing currencies makes them all the more attractive.

    The barrier seems not to be technology but rather the ages old chicken-and-egg adoption problem. Even for credit cards, launch friction in the 1940s and 50s arose from getting merchants to honor cards the consumers did not yet carry while getting consumers to carry cards the merchants did not yet honor. It took awhile but credit cards work quite well now.

    The same is true here. Virtual currencies and attention bonds need both senders and receivers, like consumers and merchants, to be willing to use them.

    Maybe a firm like Facebook or Google will issue such a currency and the system will finally take off. It really should.

  • Case to point – mPesa in Kenya – so successful that it was estimated to be at least 2% of the Kenyan economy, and it had the banking sector after it trying to pull it into the regulatory net.

    The alternative payments innovation appears to be taking place in regions where the banks and credit associations have not fully established themselves. Consider this – it takes pennies to make a digital phone call transmitting voice, but it takes dollars to transmit funds, ergo the potential arbitrage does exist.