Citi Perspectives 2024 E-commerce Edition

44 | Services Citi Perspectives evidence that the founders of the modern web were preparing for the eventual advent of microtransactions. Today’s discussions around the evolution of the web and microtransactions is definitely not a new one, but instead a reemergence of the original debate. The ongoing development of web3 provides an opportunity to pursue alternative payment models, which are taking on greater importance during a time when data leaks and cyber theft is occurring all too frequently. The widespread harvesting of personal data in today’s ad supported universe has had the unintended consequence of exposing personal information, which can lead to identify theft. This has led to new privacy and protection regulations, such as the General Data Protection Regulation (GDPR) in Europe, and the California Consumer Privacy Act (CCPA), which went into effect on January 1, 2020, as well as the California Privacy Rights Act of 2020 (CPRA), that went into effect on January 1, 2023, but covers all personal information collected on or after January 1, 2022. All of this points to a shifting cultural focus on protecting data, making sure it is clear where personal data is going and how it will be used. It also opens the door to the potentially safer microtransaction-supported model, which does not require the collection of personal data. We need roads before cars can drive on them The concept behind the microtransaction is certainly appealing, but the infrastructure to make it work is not yet in place. The problem lies in the small size of the transactions, which may be fractions of a penny per interaction with a website. Currently, there is no way to cost-effectively move money from point A to point B for a value of a few cents. Using a credit card would cost 30 times the original value to send the transaction. Sending payments via ACH would cost anywhere between five and 10 times the value of the transaction. And in the case of cross-border payments, the costs would be even greater. The high cost of existing payment options suggests that better ways to manage microtransactions will have to be established. The high cost of existing payment options suggests that better ways to manage microtransactions will have to be established. Solving the problem of payment execution will be key. Many envision that cryptocurrency will be the answer. And there is a case to be made for crypto serving a role in the execution of microtransactions, but when the actual cost of mining and posting to blockchain is factored in, the computational and energy costs end up being greater than that of existing fiat currency. There are exciting technologies being worked on in crypto to address these current shortcomings and our best chance for progress is to pull the best ideas and technologies, regardless of where they originate from: fiat or crypto. The need for speed In all likelihood, whatever form the execution of microtransactions take on web3, it probably will involve instant payments, also known as real-time or faster payments. Fiat currencies are now being executed near instantly in many countries around the world. This can happen through traditional clearing systems that banks connect to via card networks, or through a variety of other schemes. As the details of the microtransaction-supported model are expected to be worked out in the years to come, bank-led clearing systems will almost certainly play an important part in the payment execution mix. Interestingly, banks are already providing back-end services for fintechs and payment service providers favored by the product and engineering teams at some of the leading payment service providers, fintechs, and tech companies. As web3 continues its evolution, finding a way