Hot Times at the Virtual Trading Post

  In the beginning, Second Life was a computer-generated wilderness populated by a few thousand settlers raising homesteads and crafting worldly goods from the fat of the digital land. Three years later, Second Life is hot virtual real estate, claiming more than 1 million characters generated by individuals who move money from the real world into the virtual world and back out again.
  More social hangout than game, users throughout the real world can chat with each other online while they direct their Second Life characters, called avatars, to earn virtual assets by working, creating things to sell or begging for change from other avatars. Users spend those assets in the form of Linden Dollars, save them or draw them back into real-world PayPal or bank accounts. In November, users spent more than $12 million loading value into Second Life accounts and withdrew $1.1 million out of them, according to Second Life creator, San Francisco-based Linden Lab.
  Such virtual commerce is generating real transaction revenue for a growing number of real-world players, including card issuers and transaction processors. And the challenges-tax implications, chargebacks, fraud risks-mirror those of other Internet merchants.
  Mercator Advisory Group estimates consumers spent about $2.5 billion for online gaming services in 2006. MasterCard's TowerGroup research service estimates that 12 million consumers worldwide play online games, a number Tower forecasts by 2010 to reach 40 million consumers spending $9 billion annually on game subscriptions and virtual land, retail products and services.
  Massive multiplayer online role-playing games (called MMOGs or MMORGs) long have charged simple hourly or monthly access fees, which have generated steady transaction revenue for such payment providers as PayPal, ClickandBuy, BitPass, and credit, debit and closed-loop prepaid card issuers.
  Games such as World of Warcraft, with 8 million worldwide subscribers, do not allow players to buy better characters or such tools as magic swords and potions, at least not through official game channels. Players are supposed to earn those rewards by performing tasks, whether decoding clues, vanquishing dragons or committing various degrees of violent acts on other humanoids.
  But the in-game commerce of newer MMORGS, such as Second Life, and Entropia Universe owned by Sweden-based MindArk, requires additional transaction functionality and security from payment providers.
  ClickandBuy LLC, the U.S. unit of Switzerland-based Firstgate Internet AG, enables payments for online-game developers such as Electronic Arts and K2 Network Inc.
  Consumers set up ClickandBuy accounts to fund using credit or debit cards, automated clearinghouse money transfers, and other methods. ClickandBuy charges merchants a blended fee of 28 cents plus 2.9% of the transaction amount. RBS Lynk processes transactions in the U.S. and Citi Merchant Services processes those in Europe.
  Serving online-game merchants of all types has its pros and cons, says Fabien Siegel, ClickandBuy chief technology officer. "People are very loyal to those games, so you have less trouble with chargebacks," he says. "They will make sure their accounts are working well."
  Indeed, gaming-merchant demand was one reason ClickandBuy enhanced its digital-content platform, launched in December. The new platform enables person-to-person transactions and billing through three U.S. telephone companies (which Siegel says do not yet want to be named) that cover 75% of the U.S. market.
  Western Europe and the U.S. are ClickandBuy's strongest markets, but demand from consumers in places such as Eastern Europe, Latin America and Asia has brought pressure from game merchants for expanded acceptance, according to Siegel. "We were forced to go into 20 new markets last year because our providers require us to help them collect money in those markets," he says.
  On the downside, "There is quite a big fraud issue," Siegel says. "Many users will do anything they can to get more credit in the game. You have a huge crowd that tries to hack into the game and the payment providers."
  Tyler Hoffman, vice president of merchant services at PayPal, agrees that online games present fraud risks similar to payments for music downloads and other digital-content. "When you're shipping products, you've got physical addresses, it takes a few days and you're getting (delivery-service) signatures," Hoffman says. "When you get into the realm of digital goods, a lot of those checks and balances fall away."
  Enabling transfers of value from virtual into real-world accounts requires additional diligence over simply collecting payments for timed online-game access. Payment providers must comply with currency exchange anti-money-laundering rules of several countries-103 countries in PayPal's case.
  EBay employs many of the same fraud-prevention methods for online games and virtual-world trading as it does for commerce of other goods, whether digital or solid, Hoffman says. The company watches for certain red flags on both its eBay auction and PayPal payment sites, such as unusually large sales by first-time users.
  PayPal pitches its added layers of security to merchants wary of chargebacks and to customers wary of giving their credit card numbers to online merchants, Hoffman says.
  It may be a good pitch to Second Life users. Linden Lab announced in September a security breach in which a hacker accessed a database that stored the names, addresses, passwords and encrypted credit card data of 650,000 users. Linden Lab reassured customers their payment data were safe but required everyone to change passwords as a precaution.
  A Linden Lab spokesperson answered questions for this article but said he could not provide interviews with company employees.
  BIG EARNERS
  The money flowing out of games into the accounts of single-player entrepreneurs is no small change. Jon Jacobs of Miami Beach, Fla., has widely publicized that he spent his $100,000 real-world nest egg to buy a desolate asteroid in Entropia. He developed a resort on the rock that now draws a bevy of spenders.
  Jacobs claims to withdraw thousands of dollars from the game, sometimes from ATMs using the Entropia Cash Card. The card is issued by North York Credit Union, an Ontario, Canada-based bank (not a credit union) that issues prepaid cards on MasterCard's Maestro network. Entropia also allows direct bank transfers.
  MindArk guarantees Project Entropia Dollars are fixed to the U.S. dollar. While the game accepts credit cards, players can use the Cash Card and MindArk's own payment service, rather than third parties, to move funds back into real-world accounts.
  "This means we can counter inflation" by avoiding exchange-rate-based trading, says Marco Behrmann, MindArk chief information officer. "And MindArk has a highly secure and safe [method] from beginning to end concerning money transfers."
  Second Life and Entropia report growing numbers of users earning real money from in-game businesses.
  PayPal users can withdraw game earnings on personal-use PayPal accounts. But once transactions reach a certain volume or dollar amount, PayPal requires more-detailed information to set up merchant accounts.
  ClickandBuy allows users to stick with personal accounts at any volume or transaction size, but its merchant accounts offer more features useful to professionals, Siegel says. He adds that many account holders move money out of one game only to pay for access to another.
  Large corporations also have set up cybershop. Automakers such as General Motors have opened Second Life dealerships, and virtual versions of real couture abound.
  As reported recently by Reuters' Second Life bureau, Dutch bank ABN AMRO NV opened a Second Life branch in December. It provides information and seminars, in Dutch, about the bank, and meeting space, a beach bar and third-party sales of virtual merchandise.
  "We believe the 3D virtual world can become very important in the future, and we want to learn from the beginning what was can do with and in this world," says Daan Jitta, ABN AMRO senior vice president of direct channels and innovation. Asked if the bank plans to offer links to Web banking or real-world payments from its Second Life branch, Jitta declines to elaborate but says "This is definitely one of the things we are looking at."
  Even old-school games that officially prohibit player-to-player commerce cannot completely stop the vigorous trade of virtual stuff.
  Players buy and sell through eBay and online brokers such as IGE Ltd., which lists goods of several games and accepts payments by Visa, MasterCard, PayPal and Western Union. Many items brokers offer are from "gold farms" in China and Mexico, where workers play games to earn virtual prizes and higher-level characters. The companies sell what they win to players with more money but less time. Critics call gold farms sweat shops and their buyers cheaters.
  UNOFFICIAL TRADING
  In his book, Play Money, Julian Dibbell recounts how he earned $11,000 in a year trading virtual goods he gained playing Ultima Online. The game allows, but does not encourage, trading between players, he says.
  Users advertise virtual items on eBay and elsewhere. Sellers arrange times and virtual places for transfers with winning bidders.
  Conversing via a chat room provided by the games or third parties, the two players talk through the transfer. "I would log on to the game, get on my little pony, maybe die on the way, and ride up to the bank," Dibbell says. "I would say (to the other player), 'Is that you riding the ostrich? Ok, here you go." One player's character hands the other the negotiated item, and the deal is done.
  Such intersections of virtual economies with real ones are creating tax, money-laundering and consumer-protection questions for lawmakers. Property-spat lawsuits already have been filed, though most companies, including Linden Lab, explicitly state that residents do not own any data on Second Life servers.
  The U.S. congressional Joint Economic Committee plans to study such issues beginning early this year. One staffer for a Republican member of the committee, who is also a Warcraft aficionado, says his boss is not eager to find another activity to tax but wants to study a number of implications of online-game commerce.
  "We think it makes sense to look at it now before it gets too far down the road," he says. "Congress can regulate electronic transactions, but the issue becomes a little stickier if the company is based offshore."
  Hoffman concurs that enabling transactions to fund this new virtual economy is a new frontier for payment providers. "It's a market that didn't exist a couple of years ago," he says.
  Back in Second Life, some of the world's first avatars have organized protests against what they consider an overload of new immigrants contributing to overcrowding and urban sprawl. And occasional system overloads cause avatars to appear naked and hairless.
  Whatever debates and difficulties virtual characters face in their worlds, payment providers will keep enabling transactions to and from the real one.
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