Federal Reserve Bank: Electronic point-of-sale initiated small payments of $5.00 or less are near a tipping point, according to a recent paper by the Federal Reserve Bank of Philadelphia.
Payment cards (credit, debit, prepaid and EBT) account for 38% of the dollar volume of transactions in the US, and for 35% of the total number of transactions, a Nilson Report noted in December 2005. POS-initiated micropayments of under $5.00 (electronic and paper-based) generated over $1 trillion in spending in 2003 with 400 billion transactions, according to TowerGroup, but the market is nascent with credit and debit card payments of under $5 totaling only $13.5 billion in 2004.
The existing payment card infrastructure in the US and related products are likely to be the primary vehicle for digitizing micropayments in the near term, the paper observes. In market size terms, the potential for POS-based micropayments is very large, with the electronification of unattended purchases seen as a ‘killer application’ for small payments at vending machines, parking meters, laundries and pay-phones. While the market size for POS micropayments is estimated by the FRB Philadelphia at about $160 billion, vending machines in 2004 were estimated by the Journal of Payment Systems Law to have taken in $24 billion in cash and coins at the POS.
Quick-serve restaurants, gas stations (for non-fuel purchases), convenience stores, movie theaters, parking garages, transit services and vending purchases all present themselves as markets for the conversion of small-value cash purchases, to electronic micropayments. Cost has until now been a deterrent to the digitization of POS-based micropayments, with many retailers accepting cards for a $50 transaction, but not for a total of $2. Cash acceptance in fast-servicee markets similarly endured due to traditional delays as receipts were signed or PINs keyed in, but newer technologies and processes now speed card acceptance at these locations.