Interview: Vindicia's Hoffman On The Science Of MMO Fraud

As MMOGs increase in size and become more like real economies, fraud, either in-world theft or simple credit card chargebacks, become a larger issue. In fact, chargebacks are a relatively little-known but fascinating part of the MMO world. As recently explained, fraudulent chargeback "...occurs when a credit card transaction is refuted by the cardholder.", and can occur both with stolen credit cards and even when "...the actual cardholder makes the transaction and then decides to refute the transaction after the fact." For major MMO firms, these fees can stretch into millions of dollars every month, making managing them key. Gamasutra talks to Gene Hoffman, CEO of billing and fraud management company Vindicia about the issues MMOG publishers such as Blizzard face, and what they can do to avoid fraud. What are the types of fraud MMOGs could face via credit card payment? GH: The first question about MMO fraud is whether there is a real currency resale market. If there is a way to create cash directly or over on eBay, there will be real fraud attempts to use stolen credit cards to create cash. If that's less of an issue, then the main type of fraud on the front end will be card thieves using payment method-required free trials or micropayments to test their list of stolen cards. Because MMO's feel they are immune to real fraud (and it doesn't cost them much) they don't institute any protection up front and the fraudsters then do a $1 or $0 authorization or a sub $5 transaction. Those transactions don't show up well or quickly to the actual card holder leaving the card thief time to go commit actual high value fraud at an online retailer or in the physical world. On the back end, many MMOs have a very hard time tying their chargebacks to the actual accounts and shutting those accounts off. That means that customers have learned that they can chargeback their transactions to get credit or money back and often still play next month. We actually see this happen around Thanksgiving as chargeback volume spikes so that people have more Christmas spending money. I believe you've previously worked with companies such like Blizzard on World of Warcraft. Can you talk, even abstractly, about its issues with fraud? GH: While we can't comment on our merchants' specific cases without explicit permission, what we have noticed across all our gaming clients when it comes to fraud is that the 1% chargeback rate is really a marketing budget. Having your chargebacks too low often means you aren't being aggressive enough on the customer acquisition side. One of the real side benefits of a large customer base is that the denominator in your chargeback rate is quite large and offset by very safe and trustworthy transactions. Those two processes create a virtuous cycle that allows you to push hard to sign new customers up if you have someone like Vindicia really watching the chargebacks on the back end. What do you think about the evolving online marketplace, with new emphasis on micro-transactions and other forms of payment? GH: We have always liked using micro-transactions on top of a base subscription service but we remain somewhat skeptical of micro-transactions without that base. The "penny gap" looms large and the cost of most any transaction medium makes it hard to run a model whose average ticket is less than $5. That said, there are lots of commerce models that will allow you to get the same average yearly customer value while having the customer feel that he's paying even less per transaction. On the fraud side, a lot of the other forms of payment do have one potential downside. They separate you a bit further from who your customer actually is and that can have unpleasant social value consequences. Knowing that your customer trusts you enough to share his data with you leads you to a lot more confidence that he's not going to cause grief in game to the rest of your paying customers. Well, micro-transactions do seem to work fine in, say, Korea! GH: Americans love "all you can eat". Even the mobile phone companies have really evolved to all you can eat. We always challenge people to name the bill they get every month or year that isn't in actuality all you can eat. Outside of government granted monopolies, most people know what they are going to pay. That said, using a base plus metering can make a lot of sense. It allows you to then offer more subscription tiers that allow your best customers to pay you a higher base and less variable - again much like the plans and pricing that the mobile industry has evolved. Item sales and in-world theft are becoming bigger legal issues - what's your take? GH: Over the long haul this is going to be the hardest problem to solve for the virtual world and in many ways, one of the most important. Virtual worlds create a much easier fraud and theft scenario as there is no drop box or re-mailer needed to extract cold hard cash from credit card and auction fraud based on virtual goods or currencies. But how important are virtual world economies to the real world economy? GH: These are real economies. In fact, they get much closer to the raw creation of economic growth than many national economies as these "virtual" economies prove quite convincingly that wealth isn't capital or labor but instead knowledge and creativity. Building a working infrastructure to support capital inflows and outflows in a trustworthy manner is very much a core problem we want to address. In many ways we're facing the merging of intellectual property and "cash" into one entangled entity. When someone steals a virtual thing they've stolen real value. Cash was created in many ways because barter was hard, and cash creates prices. However if prices are now known in some exchange rate, the virtual good that was stolen is a bill denominated in the exchange value of that good in the first place. All that doesn't even begin to get into the downstream effects of an initial chargeback creating a "false" good sold to a legitimate seller that was an input to some other new good or service or further resold or broken down to others. Luckily in many cases the world designer can eat the "cost" as there really wasn't an underlying cost (giving away what's free to them here and there) to be able to support the downstream goods and services but as these economies get more complex, even that assumption doesn't hold. What is your advice for developers who are working on games where they're going to use some form of online billing? GH: Don't focus on price when choosing a merchant acquirer. There are really only 3 domestic merchant acquirers and 2-3 foreign ones that are good at intangible goods or recurring billing. Be very careful to make sure you own your own customer data so that you aren't at a third party's mercy when you want to evolve your billing and marketing. Finally, don't wait until you're already successful to worry about customer retention. The most profitable part of your business is ensuring that you do everything to keep a happily paying customer even if his card was stolen, expired, or over its limit. Do you see future legal legislation and perhaps taxing of these games as a result? GH: We don't see near term legislation to tax these sorts of entities, but it would not surprise us at all to see the IRS take the position in the next 10 years that any amount you flow out of a virtual world above the amount you paid in should be reported as income on your income taxes. Arguably that's already the law and something some gamers should keep in mind. The legislative realm that worries us the most for MMOs and virtual worlds is more around the regulation of banking, investing, and prediction markets. Virtual worlds are going to start having (and already have had) real woes in banking and securities and that could mean that MMOs would have to start complying with thick and painful SEC, OCC, and the Commodity Futures Trading Commision regulatory schemes. Finally, do you have any response to the MMOG Business Models: Cancel That Subscription! article we recently ran? Gene Hoffman: Business model flexibility is the key issue for all the various games, and the dynamics of the game itself should drive pricing strategies. When game developers are approaching a more casual market it certainly makes sense to give more access and time to get buy-in and adoption. It follows something we tell lots of our clients, which is "don't be afraid of giving away what is free to you to acquire more customers and keep them longer." That said, we think that it is better to give people larger doses of time to create a base subscription service using tools like "payment method required free trials" and then stack additional micro-payments on a base of something more like a $5 per time period price. We see a lot of game developers and other merchants being too shy about the value of their game which leads them to under-price.