Are Credit Card Processors Shutting Down Online Virtual Currency And Subscription Gaming Models Illegally?

I work with a number of online game companies and startups and have been informed that the credit card processing companies are now denying them access to credit card processing facilities for legal gaming transactions.

This trend started several months ago coincident with Zynga and Pureplay leveraging virtual currency to generate revenue from casual online game play. It is also coincident with an increase in the number of "sweepstakes" gaming sites emerging as a result of the successful purchase of WPT.com by PartyGaming. This purchase has drawn attention to the fact that a number of gaming sites (EA Club Pogo, SpadeClub, etc.) have been operating successfully under this model and it is a very attractive way to legally generate revenue from online game play.

Their are two aspects of this new new credit card processing policy that are disturbing.

1.) Are legal authorities in the US putting pressure on the credit card processors to not accept perfectly legal gaming transactions?
If this is the case is that directive legal? Can a federal or state institution strong arm a business to do or not to do something when there is no legal justification for that directive?

2.) Existing online gaming sites that have been processing credit card transactions under this model continue to do so.
This situation is the most disturbing because it leads to monopolization in the US online gaming sector by companies that have grandfather clauses allowing them to take transactions. All of the new companies seeking to enter the market are frozen out.

This entire situation highlights the very confusing and contradictory nature of US gaming law. It also points out the frightening power of credit card processors and credit card companies to arbitrarily decide who they like and do not like.

The irony of all this is that the collusion of government authorities and credit card processors is leading to an undeniable un-American activity on the part of government and credit card processors.

The solution is simple. Is it legal or is it not? If it is not all businesses should be denied credit card processing of these gaming transactions. If it is legal then let them all have their transactions processed.

Optimizing Pay for Play Conversion

In a recent blog I discussed the benefits of using Free Play as a tool to avoid the dreaded credit card fall off problem and to create a retention pool that allowed fatigued Pay for Play players to continue with a game property in the Free Play pool. Another option is to offer a lower risk Pay for Play product that bridges the gap between a Free Play and a Pay for Play offering. Certainly providing a Free Play and Pay for Play product combination is powerful and preferential to a pure Pay for Play offering. However, the step from Free Play to Pay for Play can be too steep for some players. To minimize the risk and perceived player trepidation associated with a Pay for Play offering a lower entry fee option should be considered. This could be in the form of a mirco-transaction for a single game, table, tournament, etc. Or it could be a flat fee payed for a fixed game access period.

A possible critique of this strategy focuses on the lower revenue per customer for Free Play or Micro/Subscription transactions. Certainly this is true but it leaves out the fact that the pool of players interested in playing for free and for a lower committed monetary amount is higher. The illustration below attempts to show that these pool size differentials can be dramatic leading to a nice revenue stream from the two lower risks options. This approach should also take into account the higher conversion rate to Pay for Play and the retention value of these other models. If you combine all of these factors into the cost of acquisition you will find that this triad approach results in a superior return of marketing budget invested.

The other advantage of this combined revenue model approach lies in the conversion overlap of the three transaction models. The illustration below shows that the overlap of the micro/subscription model with Pay to Play players is higher then the overlap of Free Players and Pay for Play players. This makes sense because people that have never transacted or frequently Play for Free have a higher likelihood of staying put as opposed to players that have monetarily transacted in some fashion. This phenomena suggests that offering an intermediary transaction is very important to monetize players in a Pay for Play model. In fact the Play for Free model is growing exponentially and virally through the proliferation of social networks. These social networked players are playing and inviting their friends to play in extraordinarily high numbers. However, a bridge to get these players over to a higher yielding Pay for Play model is required to take full advantage of these ever growing pool of players.

An operator can partner with other operators that offer complementary game proposition. Each of them could focus on a market segment and exchange players. However, this should be a temporary solution unless legal constraints necessitate branding and operator distinctions. Branding is important and brand switching can be confusing for a player. A player would most likely want to stick with one brand and stay within one property.

In conclusion, the online gaming world is evolving quickly with the concept of a game is changing with the total numbers of players increasing rapidly. Many of these players are playing for free, casually and enjoying it. The size and comfort level of this Free Play pool is significant and should be used to build player confidence and retention in a Pay for Play site. The transition from Free Play to Pay for Play can be made more effective if an intermediary, lower risk/reward offering is made available to players. It is preferential that this combination of different experiences and transaction models be provided under a single brand umbrella.

My experience working with Pay For Play and Free Play gaming sites has shown how important a Free Play offering is for the success of a Pay for Play gaming model that requires a player to transact via a credit card payment. There is a symbiotic relationship between models that require payment and those that do not. In a perfect world a gaming operator would actively support both.

The illustration below represents a classic marketing funnel report starting with the initial visit of a potential player to a Pay for Play site driven by various marketing programs.

The illustration represents the consistent drop off of acquired traffic as the potential player begins to be confronted with credit card ultimatums.

Fear and apprehension of depositing money via a credit card transaction over the web is high. Even for traditional E-commerce businesses establishing trust is necessary before a person will relinquish funds from their credit card and commit to a transaction. In the case of a gaming operation this apprehension is even greater because there are no physical goods associated with a transaction and there is no guarantee that the money deposited and the experience provided will result in an equal amount of value being returned. This psychological chasm requires a business strategy that builds player confidence in the operator’s property to the extent that the player will become convinced that a deposit will be reimbursed in the the event that no play is executed or the game experience is fun and fair leading to the prospect that the player can win cash.

I learned this lesson the hard way when I launched a subscription gaming model in the UK, without a Free Play option. The fall off due to a credit card requirement was on average 50%. That means that 50% of all people that made it through the initial introduction steps got to the credit card page and then dropped off. This part of the funnel drop off was the most dramatic of any other drop off through the funnel. To avoid this part of funnel drop off an operator should create an intermediary state that lets a player experience the gaming proposition before they must commit to a credit card transaction.

A Free Play offering is a great way to improve the funnel drop off and to introduce the player to the game property. It provides a non-committal step that gives a potential Pay for Play player play time without pressure to transact immediately. It gives the player a low risk opportunity to enjoy game play and to build trust in the operator’s ability to handle transactions properly.

The Free Play pool is much larger than the credit card pool without free play. This is very important because it provides a Pay for Play operator more opportunity to convert a higher number of players into Pay for Play players. A well integrated Free Play and for Pay for Play environment is critical for a “high” conversion rate. Players should be able to see the benefits of playing for money while playing for free. The Free Play and Pay for Play should be tightly integrated giving players the opportunity to move back and forth from Free Play to Pay For Play. The ability to move freely between the two models should be easily understood. The marketing department should leverage the Free Play option by promoting it in marketing programs.

Free Play also becomes a great retention tool allowing Pay For Play Players to stay on an operator’s property when they do not have the money to transact, they get fatigued or they are unavailable to play regularly. When they do have money and time to transact they can move back into Pay For Play Status. This way the operator does not lose the player when they are not able to Pay For Play.

Free Play is a great way for new players to learn the game and for all players to play more casually and with less stress. It can become fun and give the player an opportunity to try out strategies that they would not attempt in a Pay for Play environment.

The Free Play option should be engaging, have lots of players participating and be fun. Retaining Free Players in important. It is difficult to determine a general rule for when someone might become a Pay for Play player. This means that a Pay for Play operator should not trivialize the Free Play experience. It should be taken as seriously as the Pay for Play option. You never know when a Free Play is going to convert.

You can generate revenue from Free Players through Advertizing and potentially by selling Free Play leads that are not likely to convert to the operators Pay for Play business models. This revenue source can be used to embellish the Free Play experience to make it good enough to play frequently but not so good that is competes with the Pay for Play experience.

In conclusion, Free Play allows a Pay for Play operator to acquire more customers that a pure Pay For Play property. Free Play can also be used to retain players extending the lifetime value a player.