The internet offers us a myriad of digital goods and services: music and content streaming services, articles on various news and media platforms, online games, online journals, and various software tools that help us edit, share, design and proofread. Most of these platforms require a time-bound monthly or annual subscription which gives us access to all content or services available. While these subscription periods are getting shorter, with platforms like Spotify now offering a per-day plan, on the whole it remains a largely restrictive regime.
Not everyone has the means to subscribe to multiple platforms, and those who do often find it inconvenient to manage multiple subscriptions or house so many applications on their devices. As a consequence, users have to choose between offerings, leaving many platforms with low conversion rates and limited subscribers. How often have we wanted to read a piece of news only to be hit by a paywall that makes us immediately lose interest? How many TV show recommendations have we ignored because we refuse to buy yet another year-long subscription for a 3-day binge-watch?
Now imagine being able to pay for a single song, a single article, or a single TV show season or even an episode, for a fractional sum. This can be made possible using micropayments, which are payments of an extremely low value. Micropayments can revamp subscription models by improving conversion rates for platforms, which currently have an all-or-nothing model. They can also provide a viable and lucrative income source for platforms and content creators currently hesitant to develop a subscription model for fear of losing users.
This model has seen some success in India with platforms like Outlook magazine, which introduced an article-wise micropayment model in 2021, witnessing up to a 35 per cent conversion rate. Micropayments also address various concerns of internet governance. They open up new revenue streams which could reduce dependence on revenues from advertising and the sale of personal data. Digital assets can also be democratised by making content available to a much larger user base.
So why aren’t more platforms supporting this business model? One commonly reported reason is because existing payment systems are unable to effectively support micropayments. Transactions today have a considerable amount of intermediary involvement, since payments pass through various entities including card companies, banks and payment processors before they are finally settled. This requires extensive back-end verification and reconciliation between all the parties, making it challenging to process large-volumes of micropayments. For this reason, intermediaries levy fees for their services, which are typically borne by the merchant platform. Even with transaction fees as low as 2 per cent, for most micropayments this fee would be greater than the value of the payment itself, making it financially unviable for most platforms.
A Central Bank Digital Currency (CBDC) could overcome several of these barriers. Since it is issued by the Reserve Bank of India, all CBDC transactions are directly recorded and settled on the RBI’s central ledger, without the need for the transaction to be recorded, verified or settled by intermediaries. This direct settlement model eliminates intermediaries and associated transaction costs, thereby making the processing of a large-volume of retail payments more feasible. While central banks have an option to levy CBDC transaction fees, no central bank has chosen to do so thus far.
The digital nature of a CBDC also makes it inherently programmable through the use of smart contracts. This means that logic or code can be written into a CBDC instrument allowing payments to settle automatically at a predetermined time or when triggered by a specific event. This is a critical benefit that CBDC provides over existing payment methods. A CBDC can be programmed to be transferred to a content platform at the same time as the user receives access to the chosen digital media asset, with no human involvement. This feature can facilitate a high volume of CBDC micropayments to be processed instantly and securely at the same time.
A potential point of friction in the existing payment process is the requirement for users to create an account or provide extensive payment details for online purchases made via debit or credit cards and other payment methods. Since payments are processed by numerous independent entities, they each need to verify these details. This is especially likely to disincentivise purchases made through micropayments, where a user is purchasing just one article or one song. CBDC infrastructure can be designed to make micropayments as easy as using cash at a kirana store. The RBI has proposed a model where users can store CBDC tokens in a digital wallet through which they can make transactions. Since all CBDC tokens are issued and processed by one entity, the RBI, seamless payments may be possible between the CBDC wallets of the user and the platform, without the need for additional information to be provided by the user.