Credit card associations could get left behind in the small-value payments market if they do not lower transaction fees, and their reluctance to do so is making some online industries less profitable, merchants say.
Some merchants are considering an alternative payment model already popular in other countries -- attaching small-value charges to a cell phone bill.
Mike Hogan, the vice president of technology and operations at Turbine Entertainment Software Corp. in Westwood, Mass., said the main problem is that credit card fees typically involve a flat base cost of a few cents, plus a percentage of the transaction.
This setup is not practical for merchants that rarely charge more than a dollar, he said. "When you're talking a quarter transaction and the transaction fee is a nickel, that's 20%. It's only a nickel, but it's 20%."
Turbine Entertainment sells the popular online adventure game Asheron's Call, and Mr. Hogan wants to generate a new source of revenue: selling virtual items to be used in the game (such as flaming swords) for 25 cents. Mr. Hogan said his customers "live and breathe this game almost as much as they live and breathe outside the game," and the add-on item market would be lucrative if the transaction fees did not consume his revenue.
Alex St. John, the founder of WildTangent Inc., a computer game developer in Redmond, Wash., said he would prefer to let people play his Internet games for a quarter each time. Instead, he said, credit card pricing structures have forced him to adopt a completely different model: Customers buy the software outright for $20.
That model is not a good fit for his product, he said -- half of his prospective buyers walk away when his Web site asks for their credit card information, because many consumers are reluctant to input their card information for purchases that low. "If I can get rid of that damn step, I can double the money I make every day."
Mr. Hogan and Mr. St. John were among the many merchants who voiced concerns over the lack of credit card micropayment pricing at a micropayments conference Tuesday in New York, hosted by the aggregation service Peppercoin Inc.
Beth Horowitz, MasterCard International's senior vice president for product services, seemed to offer some hope of a solution. "The industry as a whole has been under pressure from a pricing perspective and from a business-model perspective, so clearly we need to evolve," she said.
When the merchants pressed her on whether the Purchase, N.Y., card company would evolve and adjust its fees for micropayments, she said, "We are certainly looking at it very closely, and it will be done."
But in a phone interview the next day, she said MasterCard is not considering changing the pricing structure.
John Gould, a director of the consumer lending and bank cards practice at the TowerGroup, a research unit of MasterCard, said the card associations have been unwilling to change their pricing model to make micropayments economical.
One of the most successful of the current …