The Way We Pay

Monthly Payments and Subscriptions vs. Micropayments: A Primer

As a consumer, I’m not a fan of the subscription model. It feels horribly wasteful paying monthly for so much that I don’t use. I’m ready to try a more intentional spending model.

Payments

When we pay for something using traditional payment rails, there is a lot more going on than most of us are aware of. This embedded complexity is partly responsible for the rise and rule of the subscription model, however, a revolution in payments is underway and micropayments may become the reigning model in coming years.

Photo by SumUp on Unsplash

Visa transactions involve several layers of processing, each designed to ensure security, accuracy, and the flow of funds. The process begins when a customer initiates a payment with their Visa card, either by swiping, tapping, inserting, or entering their card details online. The merchant’s payment processor collects the transaction information and sends it to the acquiring bank. In some cases, instead of the acquiring bank handling the transaction directly, third-party aggregators step in. These aggregators purchase transactions in batches from merchants, assuming the associated risk and fees to settle the payments. This allows them to manage the settlement process on behalf of the merchant while assuming the associated financial responsibility. The acquiring bank, whether it’s the merchant’s bank or an aggregator, then forwards the transaction details to the Visa network. Visa acts as the intermediary, securely routing the transaction request to the issuing bank, which verifies the cardholder’s account, checks for sufficient funds, and assesses any fraud risks. The issuing bank then approves or declines the transaction, sending the decision back through Visa, the acquiring bank, and ultimately to the merchant. Once approved, the transaction moves to the clearing and settlement phase, where funds are transferred from the issuing bank to the acquiring bank, and finally deposited into the merchant’s account.  Finally, each party reconciles the transaction data for records and reporting, completing the process. 

While Visa transactions are approved instantly at the point of sale, the settlement process on the backend can take 1 to 3 business days to complete. This delay is due to the need for transaction reconciliation, clearing, fraud checks, and the actual transfer of funds between the issuing and acquiring banks. The backend process involves batching transactions, verifying compliance, and making sure all parties involved are correctly credited or debited.

The entire process ensures security, but the multiple layers involved — each taking a fee — can lead to inefficiencies. While it’s a highly secure and profitable model for all involved, it’s also ripe for disruption.

Fee Structure on Large vs. Small Transactions

The fee structure for Visa transactions tends to be percentage-based, so larger transactions generally incur higher fees in absolute terms, but the percentage fee can vary based on transaction size and the merchant's agreement with their processor.

Fees:

• Interchange Fees (paid to the issuing bank): These fees are typically a percentage of the transaction amount, often ranging from 1% to 2% for standard cards, with premium or rewards cards sometimes having higher rates.

• Processor Fees: Payment processors may also offer tiered pricing for large transactions, which could involve a lower percentage fee or a flat fee. However, larger merchants may have access to better rates or volume discounts. Some payment processors have minimum transaction fees or fixed charges (e.g., 25 cents per transaction), meaning that for small transactions, the fees may be higher as a percentage of the sale, even if the rate itself is lower than for larger transactions.

• Assessment Fees: Visa charges merchants a fixed fee based on the transaction amount. These fees are generally consistent per transaction and can be a higher percentage of the sale amount for small transactions compared to larger ones but can be more favorable for merchants with higher transaction volumes.

In essence, large transactions benefit from slightly better per-transaction fee structures due to volume discounts and negotiated rates and small transactions are often more expensive relative to their value due to fixed fees and the disproportionate impact of interchange rates. This is one reason why many merchants set minimum purchase amounts or surcharges for small card transactions, as the fees can cut significantly into their profit margins.

Although necessary for maintaining the system, these fees make the process costly. The structure is profitable for each participant in the ecosystem but, from a consumer and merchant perspective, it’s not the most streamlined or cost-effective setup.

Because of the high costs and inefficiencies, the system is seen as ripe for disruption by models that could streamline payments by reducing intermediaries, thus cutting costs and settlement times.

The Subscription Model

The subscription model is a business approach where customers pay a recurring fee at regular intervals in exchange for ongoing access to a product or service.

Businesses favour the subscription model because it provides a predictable, recurring revenue stream, improves customer retention, and allows for better forecasting and scaling of their services. Additionally, subscriptions foster long-term relationships with customers, leading to a more loyal customer base that can be upsold or retained through value-added features over time.

Within existing payment systems like Visa, the subscription model is supported through recurring billing capabilities. When a customer signs up for a subscription, they authorize the merchant to automatically charge their Visa card at regular intervals (monthly, annually, etc.), which eliminates the need for repeated manual payments. Visa’s network securely stores and processes these payments at the authorized intervals, streamlining the process for both the business and the customer. The customer’s issuing bank verifies the transaction each time, and the charges are routed through Visa’s payment rails similarly to a standard transaction, maintaining security and compliance. Although these recurring charges involve standard transaction fees, the subscription model’s profitability generally outweighs these costs, making it a popular choice for digital products, streaming services, and software companies.

Examples of businesses using the subscription model include newsletters (like The New York Times or Substack), personal care products (such as Dollar Shave Club), streaming services (like Netflix and Spotify), software-as-a-service (SaaS) platforms (such as Adobe, Canva, Creative Cloud and Microsoft 365), meal kit providers (like Blue Apron and HelloFresh), and fitness memberships (such as Peloton and ClassPass). These companies offer continuous access to products or services in exchange for a recurring payment.

With the subscription model, customers often pay for access to an entire suite of products or content, regardless of how much they actually use. For example, Netflix charges a flat monthly fee for unlimited access to a vast library of movies, TV shows, and documentaries, yet most subscribers only watch a fraction of what’s available. This structure benefits Netflix because it generates steady revenue from each subscriber, even if many don’t fully utilize the content offered. By offering a wide variety of options, Netflix appeals to a broad audience, but the company still earns consistent income from subscribers who may only watch a few shows or movies each month.

Micropayments 

Micropayments are small financial transactions, typically involving amounts of money that are too small to be practical for traditional payment systems due to high transaction fees. These payments usually range from a few cents to a few dollars. Micropayments are often used for purchasing digital goods, services, or content, where the value of the transaction is low, but the frequency or volume of purchases can be high. Common examples of micropayments include paying for digital content like articles, music, or in-app purchases, where the user might pay a small fee for a single song, a news article, or a virtual item in a game.

Micropayments offer a more granular and efficient way for consumers to pay for exactly what they use, rather than the broad, "shotgun" approach seen in subscription models like Netflix. With micropayments, consumers can pay only for specific content or services they actually engage with, rather than a fixed monthly fee for access to a large library where they might only use a fraction of the offerings. This model allows for more control over spending, as users aren’t subsidizing other users’ consumption of content they don’t care about or watch.

For example, instead of paying for a Netflix subscription and having to fund the entire catalog of movies, TV shows, and documentaries — much of which they may never watch — a consumer could use micropayments to pay only for the individual films or shows they actually view. This means they are spending money more directly tied to their consumption, ensuring that every dollar spent aligns with their actual interests and use, rather than contributing to the cost of content that others may be watching. Micropayments thus enable a more personalized and cost-efficient purchasing experience for consumers, particularly for those who prefer a more focused selection of content rather than an all-you-can-eat buffet like a subscription service.

The challenge with micropayments in traditional payment systems, such as Visa, is that the fees involved in processing these small transactions (e.g., interchange fees, processing fees, and Visa network fees) can be disproportionate to the value of the transaction itself. This makes micropayments expensive and less viable using conventional payment rails.

Micropayments on Blockchain Rails

Blockchain-based payment rails are particularly well-suited for facilitating micropayments due to their low transaction fees, speed, and decentralized nature. Traditional payment systems involve multiple intermediaries, each of which adds costs (e.g., interchange fees, processing fees), making small transactions disproportionately expensive. Blockchain, however, allows for direct peer-to-peer transactions with minimal fees because there are no middlemen involved. This drastically reduces the cost of processing small payments, making it feasible for consumers to pay small amounts without having to worry about high fees eating into the transaction value. Furthermore, blockchain transactions are fast, often settling almost instantly, which is crucial for micropayments where speed is important. Blockchain's ability to manage large volumes of small transactions efficiently, without the need for intermediaries, opens up opportunities for businesses to charge users for very small amounts of content, like individual articles, songs, or game items, that would be impractical with traditional payment systems.

Blockchain Is Trusted by Institutions

Institutions like PayPal, Visa, Mastercard, Stripe, and others are increasingly investing in blockchain technology because it offers enhanced security, transparency, efficiency, and cost savings. Blockchain's decentralized nature means there is no single point of failure, making it harder to tamper with or hack, which appeals to institutions concerned with fraud prevention. Transactions on a blockchain are immutable, meaning once they are recorded, they cannot be altered or reversed, which adds an additional layer of trust for financial transactions. Additionally, blockchain offers real-time transaction verification and lower fees for processing payments, which reduces operational costs for companies. The transparency of the blockchain ledger also enhances accountability, ensuring that transactions are verifiable and traceable. With these benefits, financial institutions see blockchain as a way to evolve their payment systems, reduce costs, and offer faster, more secure services to their customers, while also keeping up with emerging technologies in the digital finance space.

Blockchain Adoption Challenges

Despite its advantages, blockchain faces several challenges, particularly related to user adoption and understanding. One of the main drawbacks is that most people still don't understand blockchain or how to interact with it. Blockchain technology requires a certain level of technical knowledge, especially when it comes to setting up wallets, managing private keys, or understanding how to purchase and use cryptocurrencies. For the average consumer, this can be a barrier to entry. Furthermore, the complexity of managing assets or payments on the blockchain can be intimidating, especially for users accustomed to traditional financial systems that are easier to use, like credit cards or bank transfers.

However, developers are working to address these barriers by creating more intuitive and seamless blockchain applications. These apps are designed to abstract the complexities of blockchain, allowing users to interact with it without necessarily understanding the underlying technology. For example, instead of dealing with complex wallet addresses, users might simply log in with their email or social media accounts, and blockchain-based payments could be handled automatically in the background. The goal is for consumers to be able to use blockchain-powered systems in the same way they use traditional payment systems, without needing to understand the technical details, making the technology more accessible and mainstream.

Stablecoins

Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically by being pegged to a reserve asset such as a fiat currency (like the U.S. dollar) or commodities (such as gold). Unlike volatile cryptocurrencies like Bitcoin or Ethereum, which can experience large price fluctuations, stablecoins aim to provide the stability of traditional money while offering the benefits of digital currencies, such as faster transactions, lower fees, and the ability to operate on decentralized networks.

Stablecoins are particularly well-suited for micropayments for several key reasons:

1. Price Stability: Because stablecoins are pegged to fiat currencies or other stable assets, their value doesn’t fluctuate wildly. This makes them ideal for small, consistent transactions where price volatility could be an issue. Consumers and businesses can rely on stablecoins to facilitate payments of a few cents or dollars without worrying that the value of the payment will change significantly during the transaction.

2. Low Transaction Costs: Traditional payment systems often charge high fees for small transactions, especially when using credit cards or bank transfers. Stablecoins, operating on blockchain networks, typically have much lower fees. This is crucial for micropayments, where high fees could negate the value of the transaction itself. With stablecoins, both consumers and merchants can process payments without worrying about the cost of transaction fees eating into profits or the consumer's budget.

3. Fast and Efficient: Stablecoin transactions are processed on blockchain networks, which settle much faster than traditional banking systems. This is important for micropayments, which benefit from near-instant settlement. Consumers can quickly make small payments for digital goods or services without having to wait for the slow processing times of traditional financial systems.

4. Global Accessibility: Stablecoins are typically based on blockchain, which means they can be used anywhere in the world, with no need for currency conversions or international transfer fees. This is especially valuable for businesses looking to accept payments from customers in different countries. It also makes micropayments possible on a global scale, as users do not need a traditional bank account or specific payment infrastructure to make or receive payments.

5. Programmable Payments: Stablecoins, like other cryptocurrencies, can be programmed into smart contracts to automate micropayment transactions. For example, a website could charge users a fraction of a stablecoin each time they view an article, or a game could charge for in-game purchases using microtransactions. This kind of automation further reduces friction and makes it easy to execute frequent small transactions.

All this to say, the low fees and instant settlements attributed to stablecoins are a game-changer for industries relying on small, frequent transactions.

Looking Forward

The acquisition of Bridge by Stripe for $1.1 billion marks a significant step in the growing integration of blockchain and stablecoin technology into mainstream payments systems. This deal is the latest in a series of moves by established financial giants like PayPal, Visa, and Mastercard to invest in blockchain technology, underscoring the potential these innovations have for revolutionizing digital payments. Stripe CEO Patrick Collison described stablecoins as "room-temperature superconductors" for financial services, emphasizing their transformative impact in streamlining payments and addressing inefficiencies in current systems.

One of the key benefits of this acquisition is how it helps bridge the gap in user education—a major hurdle for the broader adoption of blockchain. By acquiring Bridge, Stripe gains a set of APIs that simplify the integration of stablecoin technology, making it easier for developers to incorporate blockchain into their applications without requiring deep technical knowledge from end-users. This means that consumers and businesses alike can engage with stablecoins in a way that feels seamless and familiar, without having to understand the complexities of blockchain technology. This addresses a major barrier to blockchain adoption, as the complexity of setting up wallets or handling private keys has traditionally deterred non-technical users.

Furthermore, by streamlining the process and allowing developers to more easily build with stablecoins, Stripe is paving the way for a future where micropayments—small, everyday transactions—are more practical. The acquisition positions Stripe to lead the way in making blockchain a viable option for millions of small transactions worldwide, enabling businesses to reduce costs and consumers to pay more efficiently. As Stripe, Bridge, and other companies invest in blockchain infrastructure, they are not only creating the technical framework for micropayments but also helping make blockchain technology more accessible and user-friendly, ultimately smoothing the path for broader adoption.

Micropayments powered by blockchain could very well mark the death of the traditional subscription model, and that’s a win for consumers. With the ability to make tiny payments for specific pieces of content, users are no longer tied to the “all-you-can-eat” pricing of services like Netflix, where they’re essentially subsidizing content they don’t watch. Instead, blockchain allows for precise allocation of hard-earned dollars, so people pay only for what they actually use or consume, whether it's a single article, song, or in-game item. This shift would give consumers far more control over their spending.

It’s not just consumers who stand to benefit. App developers and content creators can also take advantage of this shift, boosting their bottom lines by charging for exactly what users want, rather than having to accommodate for the fee structure of traditional payments solutions. With micropayments, developers can monetize every action or engagement—whether it’s a single download, a one-off feature, or a microtransaction—enabling them to generate steady, consistent income while avoiding the churn of subscription cancellations.

This move toward micropayments could transform the way we consume digital content, putting the power back in the hands of consumers and offering sellers a more direct, scalable, and efficient way to profit.

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Derek