They’re not playing games

It was obvious a few years ago that not only were virtual worlds going to be big business, but that they would have an impact on the payments market. I used put things like World of Warcraft into product and service roadmap discussions for our clients in the financial services space, and I’m sure that they thought I was doing it just for fun, just to get some discussion going. But having played around in the space, I could see it would lead to some new thinking. When you’re sending World of Warcraft gold pieces to a friend in Asia via an elven intermediary (quicker and cheaper than banks, by the way) you can’t help but wonder at the “real world” instruments to hand. This from three years ago…

Well it wouldn’t surprise anyone then, that most of our partners report they have a completion rate of 0.5-1% when they present a credit card payment page to their users for virtual goods…Mobile on the other hand… takes 15 seconds, and off goes the user to his virtual good or points that will enhance his game or app experience immediately without ever leaving the environment of the app.

[From Virtual Goods / Currency and Mobile Payments: the business model for Social Apps]

Note that figure: one in a hundred transactions complete. People playing at being virtual farmers want to buy some virtual cows, so they click to buy, but when they see a credit card payment screen, they can’t be bothered. So there was a demand for a new kind of payment instrument that was not being met by the banks. Look how much things have changed since then, with the incredible boom in app store and in-game payments. There’s no doubt that the retail payments roadmap is indeed being affected by the world of games.

Now I’m not implying that it’s only payments will be impacted, because in the longer run it will be many kinds of financial service, including banking.

The publisher of the online science-fiction game “Entropia Universe,” set on the planet Calypso, received a banking license from the Swedish Financial Supervisory Authority last week and plans to open a real bank within a year, albeit one without physical, walk-in branches.

Players of “Entropia” already exchange real money for a virtual currency that is used for their expenses on Calypso. And virtual money they make in the game, through hunting, mining, trading or other activities, can be cashed out into real money. The virtual currency, Project Entropia Dollars, has a fixed 10-to-1 exchange rate to the U.S. dollar.

By setting up a real-world bank, Sweden-based publisher MindArk PE AB gains the protection of the Swedish government’s deposit insurance for these accounts, up to about $60,000 for each customer.

[From The Associated Press: Online game gets real-world banking license]

A healthy development! My younger son spends a lot of time online with his friends at the moment, hanging out not at the mall but at the WoW auction house (this is where he learns about economics, I’m happy to say). That’s where our clients’ next generation of customers are learning about money, payments and financial services. This from two years ago…

Today, Facebook application developers monetize their games and other applications by accepting payment directly using PayPal, Google, Amazon FPS, or SocialGold. Or developers may opt to receive direct payment via mobile phone via Zong, Boku, or another mobile payment provider… game developers in particular, often accept payment via a prepaid card sold in retail establishments, such as the Ultimate Game Card. The social and gaming web is exploding with virtual currency offerings, yet thus far no one model or payment brand dominates.

[From Purchasing Facebook Credits with Zong Mobile Payments — Payments Views from Glenbrook Partners]

Now, forward-looking organisations could see what was going on and began to target R&D appropriately.

Google is developing a micropayment platform that will be “available to both Google and non-Google properties within the next year,”… The system, an extension of Google Checkout, would be a new and unexpected option for the news industry as it considers how to charge for content online.

[From Google developing a micropayment platform and pitching newspapers: “‘Open’ need not mean free” » Nieman Journalism Lab]

The idea was then that micropayments would be a payment vehicle available to both Google and non-Google properties within the year. The idea was to allow viable payments of a penny to several dollars by aggregating purchases across merchants and over time. Google planned to mitigate the risk of non-payment by assigning credit limits based on past purchasing behavior and having credit card instruments on file for those with higher credit limits and using proprietary risk engines to track abuse or fraud. Merchant integration through Checkout would be extremely simple. Google, in fact, subsequently decided to purchase an in-game payments company rather than build it themselves.

Facebook and Google are poised to challenge the banking industry in online payments.

[From Facebook and Google Encroach on Banks Turf – US Banker Article]

Is this really true? I think the answer is yes and no, in the sense that I can’t see any reason why Facebook or Google would want to be a bank, unless it’s to get some sort of government handout, but I can see why they might want to get involved in payments in order to make money (not from the payments, where margins are thin, but from new products and services that have payments integral to them). This is why the news that Facebook had also begun experimenting with a payment system was hardly unexpected, but was notable nonetheless. There was an expectation that the existence of a secure and convenient micropayment scheme for Facebook users (of which there now more than 600 million) would stimulate the development of a new marketplace within Facebook’s “barbed wire”. This seemed plausible to me — if it had been up to me, I would have added a spurious green element to the proposition somehow (getting merchants and other organisations to give out Facebook credits to reward environmentally desirable behaviour) — and I was sure it would do well. I wondered in a number of forums as to who else might enter this more competitive currency market?

In the coming months, facebook users will be able to obtain facebook Credits using MOL points purchased through MOL’s network of more than 500,000 outlets, which are mainly in Malaysia, Singapore, Indonesia, Philippines, Thailand, India, Australia and New Zealand. In addition to outlets such as 7-Eleven stores and cybercafes, customers will be able to purchase Credits through MOL’s network of online banks in these countries.

[From Finextra: Facebook moves virtual currency offline]

I gave a talk last year when I mentioned that I thought that Facebook credits would become the biggest virtual currency in the world fairly quickly. Unusually for my glib and sweeping predictions from the conference platform, this one appears to have come true, and even more quickly than I had imagined.

By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network… Through Credits, Facebook will take a 30 percent cut… To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month.

[From Facebook Promotes Its Credits as Path to Dollars – NYTimes.com]

Now this will one day become a standard business school case study. Talking of which, a few years ago, as part of a course I was teaching at Visa’s Bank Card Business School, a colleague and I mocked up a future Visa card that drew on a World of Warcraft account rather than a fiat currency account. This was photoshopped up to make a point, and at the time it was supposed to be a totally out-of-the-box crazy picture of the future. About two weeks after we made it up, I read that a US bank was issuing a Visa card with cashback in World of Warcraft gold. Oh well. It did help to make one of the points that I was trying to get across, which is that the future of payments will extend beyond the “traditional” bank, consumer, merchant and acquirer for 4-party model.

Vegetable company Green Giant is offering an unlikely reward for purchasing their products: virtual currency in Zynga’s hit social game FarmVille.

[From Wacky: Zynga Gives Away Free FarmVille Cash With Purchases Of Real Life Vegetables]

That was bad timing, coming just as Zynga (the people behind Farmville) caved in to Facebook and agreed to replace Farmville cash with Facebook credits, but it was an interesting development nonetheless, showing that virtual money is just as valuable as “real” money. Facebook’s tactics show they undoubtedly have a strategy in this field.

First Facebook turned off notifications for applications, taking away the primary mechanism for social games to go viral. Now if a company wants a massive audience for a new game, they almost certainly have to buy it through Facebook advertising.

Now Facebook is rolling out Credits as the preferred method of payment for games on their Platform, and taking a 30 per cent cut of the transactions. That’s a much larger percentage than the social games companies were handing over to the small payment companies that had sprung up to fill this niche, and higher than the fees charged by PayPal and credit card companies.

[From Zynga says it’s not leaving Facebook | Tech Blog | FT.com]

Now there’s something to be said for the creation of a single currency area as a way to encourage trade and therefore prosperity.

Besides leading the creation of a more people-centric web, it could also end up having the dominant virtual currency, according to an early adopter of Facebook Credits. PopCap Games has been using the service, which is still in the beta testing phase, as the sole payment method for Bejeweled Blitz on Facebook.

The game is free to play and attracts 11m monthly players, 3m of them playing it daily. PopCap sells extra power-ups, which boost players’ capabilities, and is moving onto sales of virtual items. It has decided to ignore offering other virtual currency options and only accepts Facebook Credits. Users can buy them with credit cards, Paypal or through their mobile phones in $5, $10 and $20 increments for 50, 100 or 200 Credits.

[From Facebook’s Credits Bank of the Web | Tech Blog | FT.com]

These are all useful case studies, showing how a new currency can develop and evolve.

Facebook has certainly tried to guide the development of its online economy, almost in the way that governments seek to influence economic activity in the real world, through fiscal and monetary policy. Earlier this year the firm said it wanted applications running on its platform to accept its virtual currency, known as Facebook Credits. It argued that this was in the interests of Facebook users, who would no longer have to use different online currencies for different applications.

[From Social networks and statehood | The future is another country | Economist.com]

I think I’ve seen the playbook before.

That means all Facebook game developers will be able to start using Credits as their payment system for virtual goods — in fact, Facebook is requiring them to make the switch by July

[From All Facebook Games Will Have To Use Facebook Credits Starting In July]

This comes from the Great Khan’s playbook for monetary and fiscal policy. Not Genghis Khan. His fiscal policy was confused: when he took control of China in 1215, his pacification plan was to kill everyone in China, no small undertaking since China was then, as now, the world’s most populous country. Fortunately, one of his advisors, a man who ought to be the patron saint of Finance Ministers everywhere, Yeliu Ch’uts’ai, pointed out (presumably via a primitive Treasury model of some sort) that dead peasants paid considerably less tax than live ones, and the plan was halted. In 1260, Genghis’ grandson Kublai Khan became Emporer of China. He decided, much as Mark Zuckerberg has, that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper “cash” to iron bars, to pearls to salt to specie, so he decided to implement a paper currency.

Here’s what Marco Polo had to say about it…

[From Digital Money: Lucky, for me anyway]

His monetary policy was refreshingly straightforward and more robust, even, than Mr. Zukerberg’s: if you didn’t accept his money, he would kill you. Naturally, in a short time, the new single currency was established and paper money began to circulate instead of gold, jewels, copper coins and metal bars. If you think talking about a new currency is crazy, take a look at Facebook Deals. According to Facebook, at launch, you will not be able to buy physical goods with Facebook Credits. Rather you will be able to get things like vouchers that you can redeem at events: now this is, frankly, a paper-thin distinction. I can’t use Facebook Credits to pay for, say, a Coke at a pop concert but I can use them to pay for a voucher for a Coke at a pop concert. I am not an economist, but…

When beloved national retailers start offering goods and lower prices to customers who pay with a new, virtual currency – that’s when said virtual currency becomes a force to reckon with. Somebody call Congress and the Federal Reserve – it’s time to start having some serious conversations.

[From Facebook Deals Launches Tonight & Groupon Doesn’t Stand a Chance (Updated)]

There’s a warning from history here! Unfortunately, the Khan’s paper money ended in disaster because the money supply was not managed: it collapsed in hyperinflation, because in the days after Yeliu Ch’uts’ai, the temptation to print money was just too great for the monetary authorities too resist. Let’s hope that the Emperor of Facebook finds an advisor of the calibre of Yeliu Ch’uts’ai.

One possible future might be that, just as China turned in on itself and stagnated, leaving technological and commercial progress to other people, Facebook will become an inward-looking economy while others take up the torch! Perhaps competition in currency, not only in payment methods, is need to keep an economic space vital.

The new program, announced today at SXSW, is called RewardVille, which will give players zPoints and zCoins in CityVille, FrontierVille, FarmVille, Mafia Wars, Zynga Poker, Café World, Treasure Isle, YoVille, PetVille and Vampire Wars.

[From Zynga Rolls Out New Virtual Currency in Addition to Facebook Credits | Tricia Duryee | eMoney | AllThingsD]

Competition. This is the American way, not going complaining to Senator Durbin.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Waiting for ages

A few years ago, I was thinking about how to relate the changing technology of money to changes in money, and I thought it would be useful to have some rough categorisation to organise thoughts. At the time, I wrote this:

The era of Money 3.0 is just beginning. Its central dynamic is no longer connectivity (since everything is connected to everything else) but community.

[From Digital Money: Money 3.0]

After a while, I realised that my initial categorisation was insufficiently granular to organise all of the thoughts I had on the topic and all of the information I had gathered on the topic. (I’m thinking of writing a book about it, which is why I have been gathering a lot of material on the specific topic of the technology of money.) A little while ago I posted a more sophisticated idea for a categorisation of the ages of money, or money eras. This extended the framework from three to five “eras”.

Our current era, Money 4.0, can be dated in retrospect to 1971 when Richard Nixon finally ended the gold standard and Visa introduced the Base 1 network for authenticating card payments based on the magnetic stripe. Money 4.0 is bits about bits, but we still apply the wrong mental model, and imagine it to be bits about atoms.

[From Digital Money: Another go at categorising money technologies]

This led me to describe the future as a new age of money, Money 5.0 I suppose, where the abstraction becomes complete and there are wholly new kinds of money that are not based on debt (or, indeed, anything else ultimately tangible) or secured in some conventional way but on relationships. Having had a bit of feedback on this, I think it serves its purpose. Obviously, some aspects are a little arbitrary — starting the information revolution in 1871 — but I think I can support the dating of the communications revolution to 1971, since this is roughly when company size peaked in the UK (actually it was in 1973), and anyway it fits nicely with the narrative of the 100 year interlude that I contend still constrains our mental models of what money is and how it works.

Money Eras

This categorisation leads me to think that we should be looking for Money 5.0 where we see private bits, not bits about anything, becoming a means of exchange. Why private bits? Well, at this year’s Digital Money Forum, we had a wonderful session on private currency, chaired by the economist Diane Coyle.

This morning I had the privilege of chairing a fascinating session at the Digital Money Forum run each year by Dave Birch of Consult Hyperion. The speakers were Professor George Selgin of the University of Georgia, and James Turk of the Gold Money Foundation. Both were arguing, from different perspectives, for private money as a competitor to government money.

[From The Enlightened Economist :: Good money, digital or analogue]

George gave a superb talk on the way in which the industrial revolution in England was hampered by a lack of circulating means of exchange, so private companies stepped in to develop new forms of industrial means of exchange (copper tokens) that help commerce and trade to grow to the great benefit of the nation. It strikes me that we are now in a similar position: we have had the post-industrial revolution but we are still using industrial money and it is holding us back. This is why the virtual empires, such as Facebook, have gone on to produce wholly private currencies — everything from the Everquest Platinum Pieces of old to the Facebook Credits of today — just as the giants of the industrial revolution (eg, Boulton’s Factory) did 200 years ago. If you think that sounds fanciful, remember that the wholly virtual economy — that has no industrial analogue — is already of significant size and growing strongly.

more than 100,000 people in countries such as China and India earn a living by performing ‘micro-tasks’ in the virtual economy. Jobs include categorising products in online shops, moderating content posted to social media sites, or even playing online games on behalf of wealthier players who are too busy to tend to their characters themselves.

[From Finextra: Three billion dollar virtual economy to fuel developed world – World Bank]

As the World Bank report notes, this economy is already worth several billion dollars. With better money, it could be worth several billion more.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

US savings

What would a rational US policy on the circulating medium of exchange look like? What notes and coins should be in circulation? I think it’s time to start thinking about narrowing the range in order to reduce costs (and increase convenience).

One obvious way to reduce costs would be to follow countries including Australia and Canada and in replacing paper banknotes with plastic (polymer) banknotes. In a paper on this called “Production Costs, Seigniorage and Counterfeiting: Central Banks’ Incentives for Improving their Banknote Technology” from October last year, Forum friend Leo van Hove, together with co-authors Bouhdaoui and Bounie, calculates that the adoption of such notes would entail a drop in seigniorage revenue of roughly 0.1% (because of higher initial production costs) but would halve the annual replacement costs for banknotes, resulting in net savings of $374m per annum.

Using data from 1998, they find that the biggest cost saving would come from moving to a plastic $20, whereas the replacement of the $100 bill only becomes profitable after accounting for counterfeiting because without the reduction in counterfeiting the decrease in seigniorage revenue exceeds the savings in replacement costs. It’s easy to see why: $100 bills are not used to support commerce, so they don’t circulate in the US (I’m sure the majority are outside the US and will never be repatriated) and therefore don’t get worn and returned for replacement, whereas $20s are still used in retail.

We

In fact, I’ve noticed that more and more places in the US will no longer accept bills greater than $20 anyway, so if the US government could be persuaded to give up the seigniorage income from the $100 (in return for much reduced tax evasion and such like) then it would surely be sensible to move the $5, $10 and $20 to plastic and abolish the $50 and $100.

The $1 is another case entirely. The US is crazy to continue producing $1 bills as well as pennies that cost nearly two cents to make. I say scrap both. Give up on the penny and make the $1 coin work (which it would do if there were a deadline for withdrawing the bills). Leo and the chaps note that the “golden dollar” coin costs six times more to produce than the $1 bill (but lasts 14 times longer) ). If the government were to completely replace the $1 bill with the coin then it would save $116m per annum. This is interestingly slightly less than the estimate of $119m per annum it would save by going to plastic $1 bills.

The coin still makes more sense. Personally, I would much prefer to use a contactless card or mobile phone in the luggage cart machine at the airport, at the parking meter and in the Coke machine then mess about with coins or bills, but at least coins work in vending machines whereas bills drive you crazy being rejected again and again. I did notice, though, that the airport cart people have found an imaginative alternative solution: now they charge $4 instead of coins they take cards…

Maybe we need a new, technology-neutral Durbin-like amendement to reduce the cost of payments in the US, but this time one that doesn’t discriminate in favour of cash at the expense of more efficient alternatives and imposes cost-reduction targets on the currency. Incidentally, just to show how up-to-date I am with my finger on the pulse of money, after typing in the above, I settled down and found myself reading this…

In American, the questions are still more pressing, involving the return to specie payments, the future regulation of paper currency, its partial replacement by coin, and the exact size and character of the American dollar.

What hip and trendy blog did I find this on? Actually, it’s from “Money and the Mechanism of Exchange” by William Stanley Jevons, published in 1875. Money’s a conservative topic.

Another go at categorising money technologies

The idea of the talk is to reflect on the impact of technology on the various functions of money: that is, as a unit of account, mechanism for exchange, store of value and means of deferred payment. We tend to jumble these functions together, but if we want to understand how money might develop in the future, we need to pull them apart and then look at what technology might do to each of them. I’ll therefore look at how the evolution technology has changed these in the past, leading to the evolution of money.

For the purposes of the talk, I will having another go at categorising money technologies, this time by dividing the evolution of the technology of money into four eras:

Money 1.0 was atoms: grain, gold, stone discs, wampun, whatever. Guildford had a mint making silver pennies (the only coin of the day) by the time Edward the Martyr (975-979) so I like to think that at Consult Hyperion we are part of a tradition of new money technology by the River Wey!

Money 2.0 was atoms about atoms. From the tally sticks of Norman England to the private “tokens” (ie, coins worth more than their base metal content), these items were convenient than the commodities they represented.

Money 3.0 was bits about atoms: that is, fiat currency banknotes, electronic transfers and accounts. Once these bits could move faster than a galloping horse, our relationship with money changed.

Our current era, Money 4.0, can be dated in retrospect to 1971 when Richard Nixon finally ended the gold standard and Visa introduced the Base 1 network for authenticating card payments based on the magnetic stripe. Money 4.0 is bits about bits, but we still apply the wrong mental model, and imagine it to be bits about atoms.

So what does this mean for the future? Well, we can look at three distinct sources of pressure for change:

The first of all there are the technology pressures. These are actually the easiest to understand, at least in the short to medium term. All of the technologies that will impact the world of money, payments and banking over the next generation already exist, it’s just a question of looking around the world to see which of them will have disruptive impact. We don’t need to look much beyond the mobile phone to understand the key platform, since the mobile phone (or, I suppose, more properly, the device formerly known as the mobile phone) will be the most disruptive technology across many sectors. The addition of the short range, zero configuration, medium-speed wireless Near Field Communication (NFC) interface to the mobile handset changes the handset from being the very edge of the network to a pivot between local and global environments that it can integrate in a secure uncontrolled way. A credit card replaces cash if you want to pay a shop, the mobile phone replaces cash if you want to get paid.

Next there are the business pressures. It’s interesting to reflect within the UK, cash accounts for less than 3% of the “money” in use but still accounts for nearly 2/3 of retail transactions by volume, which makes for cost, cost, cost. And when it comes to the dynamic new channels for online business, we’ve got by shoehorning the cards and so forth into the new technology, but we haven’t yet seen the new money for the Internet emerge: perhaps Facebook Credits will take over! Over the coming generation, the payment business and the banking business will become more distinct and as a result more dynamic and efficient payment businesses will find new ways to replace cash. Cheque clearing is scheduled to end in the UK in 2018, so Internet and mobile phone-based alternatives will need to be operational fairly soon.

Finally and most importantly, there are the social pressures. Right now, the retail payments sector is a deadweight of around half a percent of GDP (in Europe). This is largely due to the continuing high use of cash and cheques rather than more efficient electronic alternatives. Clearly, replacing cash would reduce this total social cost and make the economy more efficient but this by itself won’t be enough to trigger action. However, there are growing pressures for governments to reduce the use of cash because it is used to facilitate crime and tax evasion more than because it is inefficient. In if we just focus on Europe we can see that these pressures take different forms in different regions. There are streets in Amsterdam but no longer take cash because the city council has subsidised the retailers electronic terminals in order to reduce crime and lower the costs for smaller retailers. In Sweden, a broad alliance of retail and banking trade unions wants to see the use of cash reduced in order to protect their staff. Post-crunch, these pressures will grow as governments and citizens alike demand action. And since no-one other than tax evaders or drug dealers actually wants the stuff, perhaps change will be quicker than many people think.

I’ll be reflecting on these issues, and more, in my talk and looking forward to being put on the spot in an informed question and answer session afterwards.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Virtual, like dollars

[Dave Birch] I keep coming back to the topic of virtual worlds, because I’m convinced that they contain some pointers about the future of our “real” economy, even thought the real/virtual boundary is getting rather blurred. Why are US Dollars called “real” when they are backed by nothing, whereas World of Warcraft gold pieces are called “virtual” because they are backed by nothing?

One of these days, this sort of thing will get me into trouble

[Dave Birch] I very much enjoyed my day chairing the Next Generation Cards and Payments conference (tag #ngcp) in Brussels. I have to say that our friends at Clarion did a fantastic job: the speaker line-up was outstanding and the room was packed (mainly with banks but there were telcos, retailers and others too).

Why now?

[Dave Birch] What accounts for the apparent resurgence of interest in the future of money? I saw yet another book about this at the airport yesterday (it’s called “The Future of Money“) and when I got home and searched for it on Amazon I found yet another book with the same title just released. So I ordered both of them, naturally, and will read them on upcoming plane rides. So why now?

On the technology side, we have the Internet, mobile phones and contactless infrastructure. The last time that the banking sector had a real go at revolutionising the means of exchange, back in the early 1990s, none of them were mass market. In fact, it could be argued that, in hindsight, efforts such as Mondex and Proton, Danmont and VisaCash, were optimally wrong. A bit like chip and PIN, they were designed to succeed in an environment that was on the verge of vanishing, luxury ski runs down a melting glacier. They were designed to flourish in an offline world, and none of us knew that the world was just about to go online. Now we understand that the technology that is changing money forever is not the smart card — not even the Internet — but the mobile phone. It is personal connectivity that is the currency catalysts, the transforming element. Yes the industry, it has to be said, tried many experiments around mobile payments we well. Mobile payment systems have changed the landscape forever in Kenya and the Philippines, but they haven’t yet got traction in Western Europe. There was an X-factor missing. Consumers consistently said that they would like us to use their phone for payments, but they constantly rejected what they were offered. It just wasn’t convenient to send and receive text messages with codes in at the counter in W.H. Smith, even when it did work.

Meanwhile, another big industry — transit — was already rolling out contactless cards and consumers in London, Hong Kong and Tokyo were enthusiastic adopters. Combining the “tap ‘n go” convenience of short range “proximity” interfaces with the power of the mobile phone and the flexibility of the Internet looks like a winning recipe. Even before the first commercial Near-Field Communication (NFC) payment service was rolled-out in Malaysia last year, pilots and trials around the world had already shown an astonishing customer reaction to the mixture.

The social drivers are all in place: people sort of expect mobile phones to handle payments. They don’t need convincing. We have the technology and we have consumers.


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