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Friday, October 24, 2014

ISO lesson in PayPal's digital gaming domination

PayPal Inc. is the dominant payment provider for online gamers, according to SuperData Research LLC. With over a quarter of all digital gaming revenue worldwide flowing through PayPal's online payment engine, the question is why. The answer may be taken as a warning for ISOs and merchant level salespeople about complacency pertaining to the growing but still underdeveloped mobile payments realm.

In Payment Preferences of Online Gamers 2015, SuperData said PayPal represents 26.2 percent of digital gaming revenue, followed by Visa Inc. (20.1 percent), MasterCard Worldwide (9.8 percent), Google Wallet (3.6 percent) and paysafecard (1.1 percent). The results, based on the aggregation of transaction data from 38 million unique digital gamers in 40 countries worldwide, suggest that more gamers choose to pay with PayPal not only because the service works, but also because PayPal simply got there first.

"It's the type of payment method that grew up with the Internet," said Dr. Joost van Dreunen, Lead Analyst and Managing Director at New York-based SuperData. "And so a lot of people who grew up online or in this digital space use it. It makes a lot of sense."

Less than 20 percent of digital games do not employ PayPal as a payment option, according to van Dreunen. That dominance combined with the fact that approximately two-thirds of all gamers in developed markets like North America and Western Europe have PayPal accounts; that PayPal is easy for game developers to integrate into their games; and that gamers can easily turn to PayPal when they need to buy particular weapons or abilities in-game to boost the powers of their avatars, and PayPal's popularity becomes clear.

"You can integrate it pretty cleverly within a game," van Dreunen said. "It reduces a lot of the steps of paying. So that's why it's cool. And it has a degree of safety attached to it."

Compelling numbers

The digital gaming market continues to enjoy massive growth. SuperData pegged the total market at $48.8 billion in 2014, with the U.S. market contributing $12 to $13 billion, while the Asia-Pacific region works out to $18 billion.

Van Dreunen said Visa dominates over MasterCard as gamers' payment preference simply because of brand recognition. And Google Wallet lags far behind its competitors in digital gaming, even though Google Inc. operates its own Google Play app store, because Google Wallet has not provided gamers a compelling enough reason to change their payment preferences.

"There's no real incentive to change," van Dreunen said. "What Google Wallet is doing is saying, 'We're the same. We're just as reliable.' So they are always at a deficit and trying to catch up in terms of signing up vendors. As a gamer you are confronted with these options. If it really comes down to PayPal or Google Wallet, there's no strong incentive to jump ship."

Van Dreunen believes new payment players in digital gaming, namely Apple Inc. with Apple Pay and Alibaba Group Holding Ltd. with Alipay in the U.S. market, will find it hard to unseat the incumbents.

"I'm cautious when it comes to the potential for Apple Pay to really make a big dent in the gaming space per se," van Dreunen said. "And this is because there is no clear incentive. They can remove some obstacles. They can do in-app purchases and all that. But people are spending pretty healthily already. So, sure, it will move things up or down a few percentage points. But it's not going to be a game changer."

The same rationale applies to Alipay, with China-based Alibaba recently entering the U.S. market through its record breaking initial public offering. In China, Alipay is the payment mechanism used for one in every five digital game purchases, van Dreunen said; the online giant will not be able to generate those numbers in the U.S. market. However, Alibaba/Alipay will still gain gaming market share simply as the market continues to grow, van Dreunen noted.

The ISO choice

A parallel can be made between the solidified payments market in digital gaming and the choice ISOs are faced with today regarding mobile payments. With the mobile payments market still in flux, many players are vying to come up with the best solutions and trying to time the market correctly.

Apple Pay may succeed in that endeavor where Google Wallet has so far apparently failed. But one day the mobile market will find its equilibrium and a hierarchy of dominance will emerge, as it has in gaming. Where will ISOs be when that happens? Will they be PayPal or Google Wallet?

Van Dreunen agrees that it is difficult for companies to break into maturing markets. "Newcomers have to make sure they cover all their bases," he said. "Especially for a market as volatile as interactive entertainment, you'll need all the help you can get. Plus, providing a proficient payment system is a critical piece of the puzzle for smaller firms because the extra money makes all the difference for cash flow purposes and the initial proof of concept." end of article

Editor's Note:

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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