The internet has many digital products and services. These include music and content streaming services, articles and news on media platforms, online gaming, journals, software tools to help you edit, share, design, and proofread. Many of these platforms require us to subscribe for a monthly or an annual time-bound subscription. This gives us access the entire content and services. Spotify offers a per day plan and platforms like Spotify are making these subscriptions shorter. However, it is still a restrictive system.
Many people do not have the resources to subscribe to multiple platforms. It can be difficult for those who do have the ability to manage multiple subscriptions, or to install multiple applications on their device. Many platforms have low conversion rates, limited subscribers, and users must choose between the offerings. How many times have you tried to read news and been stopped by a payment wall that made it impossible to continue? How many TV shows have we turned down because we refused to purchase a subscription for another year?
Imagine being able, for a small amount, to purchase a single song, an article, a single episode of TV, or even a season of TV, and all this for just one song. These micropayments, which can be paid at a very low price, make it possible. Micropayments can be used to revamp subscription models, which have an all-or nothing model. These can also be a source of revenue for content creators and platforms who are afraid to create a subscription model.
This model has had some success in India, thanks to platforms like Outlook magazine. They introduced an article-wise model of micropayments in 2021. The model saw a 35% conversion rate. Micropayments can also address concerns about internet governance. They create new revenue streams that could decrease dependence on sales of personal data and advertising revenues. It is possible to make digital assets accessible to a larger audience.
Why aren’t there more platforms that support this model of business? A common reason for this is that existing payment systems don’t support micropayments. There is a lot of intermediary involvement in transactions today, as payments go through multiple entities such as banks, card companies, and payment processors before being settled. This means that it is difficult to process large amounts of micropayments because there needs to be extensive reconciliation and back-end verification between all parties. The merchant platform usually pays the intermediaries fees. Even with transaction fees as low at 2%, most micropayments will result in a higher fee than the payment’s value. This makes it financially unviable to most platforms.
Many of these obstacles could be overcome with a Central Bank (CBDC). It is issued by Reserve Bank of India. All CBDC transactions can be directly recorded and settled on RBI’s central ledger. There is no need to record, verify, or settle by intermediaries. This direct settlement model eliminates intermediaries as well as associated transaction costs. It makes processing large amounts of retail payments easier. Central banks are allowed to levy CBDC transaction costs, but no central bank has done so.
Smart contracts make it possible to program CBDCs due to their digital nature. This allows logic to be embedded into CBDC instruments, which can then automatically settle payments at a set time or when it is triggered by an event. CBDC has a crucial advantage over traditional payment methods. The program can allow a CBDC to be transferred to a platform while the user has access to the digital media asset. This is done without any human involvement. This feature allows high volumes of CBDC micropayments, which can be processed instantly and securely.
One potential problem in the existing payment system is the requirement that users create an account or provide detailed payment information for online purchases using debit and credit cards, or other payment methods. Each entity must verify the details as payment processing is done by many independent entities. If a user purchases just one item or one single song through micropayments this is likely to discourage them from making such purchases. It is possible to create CBDC infrastructure so that micropayments can be made as easy as cash at a Kirana store. A model has been proposed by the RBI where CBDC tokens can be stored in a digital wallet that can be used to make transactions. Because all CBDC tokens are issued by the RBI, seamless payments between the CBDC wallets of users and the platform may be possible.
A CBDC’s unique features can enable a micropayments model to be supported and help drive a significant shift in the way that we consume online content. The RBI is currently conducting a pilot for retail payments using CBDC. It can continue to build on such initiatives in order to evaluate the viability for a CBDC for future micropayments.