Could Virtual Nanotransactions Solve the Mobile Payments Problem?

5/24/12Follow @iljalaurs

Very few people in the mobile industry will disagree that mobile payments are today’s biggest challenge for developers. In the Apple universe, there is a strong solution to the problem: Apple simply requires users to register their credit cards before they can use any services. But this approach only works for a very small segment of high end users in the developed world. For ecosystems outside of Apple’s, mobile payments simply do not work. Inconvenient credit card forms that are impossible to complete on the mobile device, fragmented carrier billing solutions, and tons of other methods have been tried without any real success. As a result, developers on platforms like Android are able to make much less money per user than they are making in Apple’s ecosystem.

As a lot of app makers gravitate towards freemium business models driven by in-app transactions, the lack of payment mechanisms becomes even more of a problem. There is, however, one emerging solution. If you look at the average revenue per user (ARPU) for social games powered by in-app transactions, such as OMGPOP’s Draw Something, it’s clear that the most powerful way to make big money is through what I call nanotransactions. Microtransactions in the range of $1-$5, usually implemented via carrier billing services such as premium SMS, provided the monetization basis for the Mobile 1.0 era of ringtones, wallpapers and Java/Brew games. In nanotransactions, the values exchanged are a few pennies only, but the high number of these small in-app transactions makes up for the size, often leading to much higher revenues overall per user of $10 and higher.

The only big problem with nanotransactions is that the value of the transaction is way less than the effort of actually doing it (completing credit card authorization, sending a premium SMS or even typing a PIN code to access your wallet). Unfortunately, given the very nature of money (which requires security, fraud, data protection, and proper regulatory compliance), it is just physically impossible to improve the user experience much.

But I think this problem can be solved with the help of virtual currencies that are not directly linked to real money. Bear with me as I explain.

As money theory suggests, a currency can successfully function if it satisfies two criteria: It must be backed by real value (just as old currencies were backed by gold) and it must be liquid (meaning it could at any time be freely exchanged into that value). Now, in the global mobile ecosystem, there are a lot of valuables that could be used to back virtual currencies, the most notable of which is consumer attention and engagement.

Already, billions of dollars per year are being spent on mobile marketing, which means that mobile users are generating value for advertisers simply by doing things on mobile, like using social networks, browsing websites, or downloading apps. In fact, if an advertiser pays an ad network or another promotional channel $1 per promoted app download, the assumption is that the user installing that app will generate at least that much value just by choosing to download the app, or in other words just for his or her own willingness to try it out. From that perspective, every aspect of user engagement has value to it—from checking the weather on a website to browsing an app store and downloading apps.

Now, if a portion of that value were passed back to the user (just like all traditional loyalty programs do with points, airline miles, etc.), and if it were stored and made available for the user to freely spend, it would create a currency solution that is not linked to real money at all. From the example above, even if 50 percent of the $1 value were passed on to the user himself, downloading just one promoted app would top up the balance by $0.50. In the nanotransactions economy, where individual items are priced at a few pennies each, that’s real money.

The best part is that the virtual nature of the currency would solve all the problems of the traditional money, like regulatory security requirements, high carrier taxes, inconvenient payment data collection forms, and so on. Transactions would be as simple as pressing one “buy” button, without any registrations and PIN codes—even simpler than on iTunes, where you still have to type your password.

My company, GetJar, launched just this kind of consumer loyalty based virtual currency platform, GetJar Gold, earlier in the year. The program rewards GetJar users with Gold “coins” for app downloads. We also provided developers with a software development kit that they can use to incorporate GetJar Gold into their apps and accept Gold coins as a way of payment for in-application items. Across the board, developers using the solution have seen 100 percent increases in conversions when augmenting the traditional payment options with the virtual currency.

I believe all the conveniences of virtual currencies are forcing a major shift in the near future and that this mechanism will account for as much as half or more of all in-app transactions. I will be very curious to see the dynamics between “local” (i.e. supported in one app only) and “global” (supported across a range of apps and developers) virtual currencies evolve. While each type does have specific advantages to an individual developer, I personally believe that ultimately, a few global currencies will become dominant. In any case, the mobile industry will benefit massively from much improved monetization for the developer and better user experiences with a greater choice for the consumer.

Ilja Laurs is the founder and CEO of GetJar, the world's largest open mobile application store. Follow @iljalaurs

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