Peppercoin gets some press

[R. A. Hettinga]

http://www.boston.com/dailyglobe2/048/business/Solving_the_problem_of_micropaymentsP.shtml

I *stIll* think they should sell it to PayPal...

Strong identity to catch the check-bouncers, and all that.

Cheers,
RAH
-------

Boston Globe Online

UPGRADE 
Solving the problem of micropayments 

By Hiawatha Bray, Globe Staff, 2/17/2003 

MIT professor Ron Rivest has come up with a new way to throw away money on the Internet. With luck, it'll make him a fortune. Rivest is one of the three people who devised the encryption system that allows us to transmit our credit-card information safely over the Internet.  The company that grew out of this work, Bedford-based RSA Security Inc., is one of the leaders in the field.  He's a fellow of the American Academy of Arts and Sciences and the Association of Computing Machinery.  Put it this way: Rivest knows what he's doing.  So what's all this about throwing away money? 

Actually, it's a fascinating proposal for solving one of the toughest -- and smallest -- problems of Internet commerce.  It's easy to buy a $20 CD online, or a $100 hard drive or a $20,000 car. But how do you buy something online when it only costs a buck or two? 

This is what's called a micropayment, and it turns out to be remarkably difficult to do.  Entrepreneurs have been banging their heads against this problem for the past half-decade or more, and with good reason.  There are lots of desirable digital products that might sell like popcorn if there were a practical way to pay for them.  Music, for instance.  Some subscription services will let you download tunes at 50 cents apiece, but you have to pay a subscription fee as well.  We're still waiting for a service that lets anybody drop by at any time, and purchase a single song. 

This is because it costs so much to process a single financial transaction.  Most Internet shopping happens with a credit card.  The merchant selling the goods must pay a transaction fee to the credit card issuer.  This usually amounts to a few percent of the sale price, plus a flat fee of 25 cents or so. 

But this flat fee is the same no matter the size of the purchase. When the merchant is selling Tom Clancy novels at $30 apiece, the fee doesn't matter. If it's an MP3 of the latest single from Sheryl Crow, that fee will eat up all the seller's profits, maybe even put him in the red. 

''You can't do small payments with credit cards,'' said Rivest. ''From the merchant's point of view, you probably can't do under $5 and make a profit.'' 

What's needed is a method that slashes the cost of the transaction. Enter Rivest, his colleague and fellow computer scientist Silvio Micali, and their new company, Peppercoin Inc., which plans to solve the problem with doses of encryption and statistics. 

The service will be free to consumers, who sign up with Peppercoin and provide a credit card number. Now the user can go to any Peppercoin retailer and purchase a single, very cheap item -- an MP3 song priced at 50 cents, for instance. By clicking on a link, the music gets downloaded to the customer's computer. The merchant gets a Peppercoin -- a sort of electronic token that's got the customer's digital signature embedded in it. 

What's the token worth to the merchant? It depends.  Peppercoin uses an algorithm that assigns a value to the token.  Actually it assigns one of two values. Either the token is worth some preset amount -- say, $10 -- or it's worth nothing at all.  When the token is worthless, the merchant throws it away. When it's not, the merchant collects $10 from Peppercoin, even if the customer only spent 50 cents. 

It seems utterly nutty until you apply this method to millions of 50-cent transactions every month. Maybe 5 percent of these transactions will be sent to Peppercoin, which processes them through the credit card system. The rest are thrown away.  This keeps transaction costs way low. And the transactions that are processed have a value of $10 apiece, which brings in cash to make up for the 95 percent that were thrown away. Spread over millions of purchases, it all averages out. 

But even if Rivest's math is correct, the success of Peppercoin is far from assured. The dot-com graveyard has a special section for companies like Digicash and Cybercent that failed to solve the micropayment puzzle. 

''A payment system is a real chicken-and-egg problem,'' said Rivest. Consumers won't embrace the system unless lots of merchants accept it; merchants won't sign onto the system unless the customers are there. Peppercoin hopes to break the cycle by signing up some major media companies in time for its debut later this year. 

Letting consumers buy hit music recordings for a buck or less, without charging $10 a month in subscription fees, could be just the thing to ignite the micropayment market. And if more consumers sign up for Peppercoin, more vendors will start offering products -- magazine articles, digital games, even those annoying cellphone ringtones. Many of these goodies will be items that are presently given away, because there's no efficient way to charge for them. 

With Peppercoin, companies will be able to make us pay. And at the microprices made possible by his software, Rivest figures millions of us will be happy to let him throw our money away. 


-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

---------------------------------------------------------------------
The Cryptography Mailing List
Unsubscribe by sending "unsubscribe cryptography" to majordomo at wasabisystems.com