New standards could help development of micropayments

The World Wide Web Consortium (W3C), an organization that determines technical standards for the Internet, is close to developing the specifications for electronic payments.

The standards could help kick-start the nascent micropayment industry, which has struggled to achieve consumer and business acceptance. But before that can happen, industry analysts say several challenges must be overcome in the less-than-a-dollar payment market.

Micropayments are small Net transactions, such as when Web sites sell access to a news story for 50 cents or to a real-time stock quote for 6 cents. While the concept and the technology are valid, the industry already has seen some companies falter while waiting for broad acceptance.

Digicash filed for bankruptcy last year and First Virtual has moved away from online payments. Meanwhile, CyberCash has also refocused its efforts away from micropayments. The company faced a difficult time in gaining acceptance with its CyberCoin product and dropped its efforts in the United States in February but continues with the product in Asia and Europe.

"I see the standardization as having no impact on CyberCash. That's not our core business," said Dennis Cavender, chief financial officer. "Our business is payments to enable merchants to grow their revenue. We enable credit card and authentication, whether for brick and mortar stores or those on the Internet that want to get paid."

The work of the W3C comes when the micropayment industry is encountering something of a second wind.

Compaq, through its acquisition of Digital Equipment, launched its Millicent e-cash technology in Japan last summer. The technology allows users to pay from 4 cents for clip art to 40 cents for one hour of access to a video game.

IBM has posted its Micro Payments software code on its AlphaWorks site to generate feedback from software engineers and spur the industry.

The issue of creating a standard for micropayments arose following a proposal from the W3C's Electronic Commerce Interest Group in 1998.

Under the proposal, a common language would be developed for encoding micropayment information and an applications programming interface (API) that will allow the browser to communicate with e-wallets.

The last working draft of the common mark-up language for micropayments was published in August and is in the "last call" stage. During this period, final comments from the public, W3C members and other groups are being collected, said Janet Daly, a W3C spokeswoman.

The proposal is expected to emerge from the last call stage early next year. This will be followed by a six-week period in which W3C members review the information and determine whether it should be sent back to the working group for changes or onto the director for a final decision on establishing standard specifications.

Despite CyberCash's stance that it has moved away from micropayments, analysts still believe the W3C's efforts will help the company.

"Standards will help CyberCash. The standardization of payments under $10 has been on the minds of [CyberCash chief executive] Bill Milton and banking industry moguls for years," said Paul Merenbloom, an analyst with Prudential Securities. Merenbloom has a "strong buy" recommendation on CyberCash and a target price of 13.

CyberCash shares reached a 52-week high of 24 on April 14 and low of 6.69 in September. Since then, the shares have gained nearly 70 percent and are now trading at about 11.

But despite the pending standards, analysts note challenges remain, including encouraging merchants to accept such small purchases, creating a way to identify the customers and validating that the customers have approval to make the purchases.

If a merchant accepts a micropayment from someone unauthorized to make the purchase, the merchant is held liable for covering the cost and crediting the amount to the rightful owner, Merenbloom said.

"For a micropayment, merchants may say it's not worth it to have all this headache for a purchase under $10," he said.

And although digital certificates have come on the scene to act like debit cards, merchants' credit methods may become proprietary--taking their cues from the brick-and-mortar retailers.

"Amazon, for example, may want you to use only its wallet when you're on its site and not apply it to Barnes and Noble. It's like some of the retailers' credit cards. You can't use a Nordstrom card at Sears," Merenbloom said.

Ulric Weil, an analyst with Friedman Billings Ramsey, said micropayments have not caught on in the United States but are popular in Europe, where so-called smart cards are in heavy use.

He noted that CyberCash has tried to establish a strong position in the United States and has not made a large push overseas.

"They have their eye on the overseas market, but their finances are not that strong to make a strong move," Weil said.

Cavender, however, contends that although the international business is strategically important, the company's finances has no bearing on why it has not made more inroads overseas.

He added the growth for merchants and CyberCash's core business is in North America.

Weil added that despite the efforts underway with the W3C, he has not changed his recommendation for CyberCash. He has an "accumulate" recommendation on the stock.