Analysis of Electronic Payment Systems for Network Gaming

1
Analysis of Electronic Payment Systems for
Network Gaming

• Thesis written at Sulake Corporation in Helsinki
• Author Toni Saikkonen
• Supervisor Prof. Heikki Hämmäinen
• Instructors FM Hanna Rajatora, BBA Marko Orenius
• Presented 18.10.2005 at TKK

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Agenda

• Background, Research Problem and Methods
• History of Electronic Payments and Payment
  Cultures
• Electronic Payment Architectures and Roles in
  Payment Business
• A Framework for Evaluating Payment Systems
• Conclusions, Results and Future Considerations
• Questions

3
Background, Research Problem and Methods
4
Background

• Electronic payment systems are required to make
  the digital content business profitable for
  content providers.
• A single transaction is usually no more than 10
  Euros. These small value transactions are
  commonly referred to as micro payments (under
  10EUR).
• This is a problematic aspect because the share
  from actual payment that goes to parties other
  than the digital content provider itself can be
  enormous.
• That is why these digital content providers are
  constantly seeking cost-effective solutions for
  timely and low-risk processing of high-volume,
  time-sensitive transactions.

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Research Problem

• The market potential of highly profitable network
  games with thousands of simultaneous users is
  tremendous provided the total costs of electronic
  transactions can be lowered.
• The research problem investigated here revolves
  around an analysis of different electronic
  payment methods used in network gaming to better
  understand the cost structures, pricing
  principles, buying behaviors and their
  inter-relation to the relevant cultural context.
• It is intended that this analysis will provide a
  good ground theory and strategic framework for
  improving payment systems in network gaming.

6
Research Methods

• This study is conducted primarily through
  analyzing an existing business case, namely, the
  Habbo Hotel -network game.
• The game is analyzed first by comparing some
  Habbo Hotels in a country specific context and
  then introducing a new payment system for a
  specific country.
• Materials for the case study are collected from
  expert interviews and actual statistics available
  which contain information about payment culture,
  payment architectures, cost structures, pricing
  models, legal issues and other restrictions.
• Applied background theory is collected from
  literature, newspapers, Internet and other
  available sources.

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History of Electronic Payments and Payment
Cultures
8
Brief History of Electronic Payments

• The shift from physical to virtual payments has
  brought enormous benefits to consumers and
  merchants.
• This has placed extra pressure on payment service
  providers, including banks, card companies, and
  mobile operators, to provide robust security and
  interoperability.
• During the last 30 years electronic payment
  systems have evolved in many directions.
• The resulting variety and complexity of the
  systems has turned out to be one of the obstacles
  for broad acceptance of electronic payment.
• Solely for the Internet, more than 100 payment
  methods are available, some of which are still
  being used commercially.
• The advent of mobile payments has added another
  layer of complexity through the use of
  constrained devices with different capabilities
  and network limitations.
• History shows how problematic the concept of high
  volume electronic micro payments can be.

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Payment Cultures

• Countries can be divided to giro countries,
  cheque countries and cash countries.
• The use of the different instruments varies
  substantially from country to country.
• The overall preferred payment instrument of
  choice, mainly for international purchases, is
  the credit card.
• Credit transfers (giro), payment cards and
  cheques are the most important payment
  instruments for retail payments in the EU.
• Direct debit contracts are very popular in many
  countries when buying continuous services
  (subcribtion based).
• In 10 years, Payment Cards has gone from being
  one of the least used to being the most widely
  used form of payment. (substitute to cash for
  lower value everyday payments.)
• When examining the possibilities for Internet
  payments, we have to deal with a large number of
  different approaches in each country and between
  the countries.

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Payment Cultures - Examples

• Cashless transactions
• Debit Card vs. Other Cards
• Prepay vs. Postpay in mobile payments

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Electronic Payment Architectures and Roles in
Payment Business
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Roles in Payment Business

• Different Roles can be identified
• Consumer
• Content or Service Provider
• Merchant
• Payment System provider
• Acquirer
• Issuer
• Infrastructure Provider
• Support / Service Provider
• These 8 most common roles identify how the system
  works and how money amongst value network parties
  is divided

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Electronic Payment Architectures

• Telecom Payments (SMS/IVR)
• SMS Transaction cost micro level 50-75, macro
  level 30-50
• IVR Transaction cost 25-50
• Tight to usage volumes and price point (fixed and
  variable part)
• Credit Card Online Payments
• Transaction costs tight to to usage volumes
  (fixed and variable part)
• Typical online payment transaction cost 0,50EUR
  3-5 of purchase amount
• one-time micro payments problematic
• Stored Value Online Payments
• transaction cost (typic. 5- 30) based on
  providers transaction costs sources
  infrastructure, billing, marketing, maintenance,
  development and other external transaction costs.

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Case Study Habbo Hotel A Framework for
Evaluating Payment Systems
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Case Study - Habbo Hotel

• Habbo Hotel, a virtual multi user online
  community and game, is the main product of Sulake
  Corporation in 16 countries
• The basic business model is to selling virtual
  goods (furniture, pets etc.) to users.
• Customers can use various payment methods (SMS,
  IVR, Credit card etc.) to buy Habbo Credits (the
  currency of the Habbo Hotel).
• Habbo Credits are sold in bundles to lower
  transactions costs per Habbo Credit.
• GOAL A Framework for Evaluating Payment Systems
  and Finding Optimal Payment Systems for Habbo
  Hotels

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Payment System Evaluation Framework

• Payment System Evaluation Framework can be used
  to
• Identify weaknesses of current payment systems
  per method and per system.
• Tool to support strategy/priority making per
  system and with within all systems
• Measure effect of changes in payment methods and
  systems
• Finding optimal payment system for every Habbo
  Hotel
• Input values for a single payment method
  evaluation (criteria)
• Target group coverage percentage
• Revenue share percentage
• Response time value
• Usability value
• Uniqueness percentage
• Risk percentage
• Output values for a single payment method
  evaluation
• Primary Usage Likelihood Percentage
• Method Viability Score

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Payment System Evaluation Framework (2)

• Primary Usage Likelihood Percentage for a
  payment SYSTEM tells how many methods a single
  user on average can and will use from available
  methods.
• Method Viability Score for payment SYSTEM tells
  how good the whole system is for generating
  profit to a company.
• In order to support multiple user buying
  behaviors we need micro and macro level payment
  methods in both online and offline environment.
  This is why SYSTEMs Usage Likelihood can and
  should be over 100
• To have this mix of methods we need for example
• Micro level telecom payments (micro below
  10/5)
• This type of payment methods generates usage
  VOLUME
• Macro level online payments (macro above 10)
• This type of payment methods generate good PROFIT
• Micro/Macro level offline payments
• This type of payment methods have access to users
  pocket money e.g. Cash

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Payment System Evaluation Framework - Example
SYSTEM Target group Coverage Profit Share Realtime Usability Primary Usage likelyhood Unique method Profit after Risk issues SYSTEM Viability Score
A1 sms 70 45 80 90 60 100 95 0,25
A2 ivr 50 70 75 70 36 100 95 0,24
A3 cc 25 95 75 70 18 100 95 0,16
B1 ebank 40 80 80 80 32 100 99 0,25
B2 moneyorder 75 100 0 10 4 100 99 0,04
B3 prepaidcard 80 70 5 80 34 100 99 0,24
System A 126 74
System B 58 44
A B 184 119

• Comparison table of systems A, B and AB that
  contains methods (A1,A2,A3,B1,B2 and B3)
• Example output values of systems A, B and AB in
  XY-chart

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Conclusions, Results and Future Considerations
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Conclusions and Results

• Internet purchase behavior is a mix of existing
  purchase behavior, set by surrounding culture,
  and a more global Internet purchase behavior,
  established by other cultures.
• The roles in different payment method
  architectures are fairly similar throughout the
  global scale and are currently quite stabile in
  nature.
• It is hard to find alternative architectures or
  bypass roles to have easy cost savings on
  transaction costs.
• In Network gaming, users normally do not want to
  be tied to one game for a long period of time
  which is why a transaction based model functions
  best here. Subscription only to support business.
• When there are several competing methods for
  buying single product or service over the
  internet, the purchase is made based on methods
  availability to user, usability and response
  time.

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Conclusions and Results (2)

• The payment system evaluation framework may be
  used for planning and evaluating payment systems
  for transaction based online gaming and other
  similar services. The framework illustrates how
  viable the system is not only from a users point
  of view but also from a merchants point of view.
  
• The near future of electronic payment for network
  gaming systems will still be divided to
  subscription based and transaction based models
  in both micro and macro level. These models are
  more frequently being divided into 3 categories
  Telecom payments, online payments and offline
  payments, where Offline methods are much more
  used than they currently are.
• To define the future trend for payment systems in
  network gaming and similar services, one may see
  that having different viable options for payments
  to cover the real target groups needs is a key
  future success factor.

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Further Studies

• The primary subject for future study in this area
  is to find a model illustrating how the impact of
  pricing affects a payment systems ability to
  generate revenue.
• It would also be useful to study more deeply how
  the subscription based model differs from the
  transaction based model, advantages and
  disadvantages of both methods, where they work
  better and possible options to combine them
  successfully.
• Finally, analyzing and uncovering how limiting
  telecommunication billing for this target group
  effects to actual revenue holds intriguing
  potential.

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Thank You!

• Toni Saikkonen toni.saikkonen_at_hut.fi