The good thing is that nothing in this article is anything you’ll ever need to manage yourself - unless you’re building payments infrastructure in-house and staffing up a payments operations team. But, in the spirit of transparency as a premium gaming payments partner, the Stash team wanted to thoroughly break down what an online gaming payment is and how it works.
Global differences in online payments
The interesting thing about online gaming payments is that they’re completely cultural and can greatly differ per country - depending on history, laws, behavior, and even technology. In Germany, for example, most people choose direct debit payment methods over credit cards. That’s because after the fallout of World War I, Germany suffered from runaway inflation. Impacting generations since, most people today still don’t use credit.
Meanwhile, up North in the Nordic countries, which are smaller and more culturally homogeneous, people trusted neighbors to pay them after a product or service was rendered. That’s why Buy Now Pay Later, like Klarna, are popular. Japan, a country focused on quality, speed and convenience, is fascinating too - where stores like 7-Eleven make up 11% of the country’s payment methods.
That said, credit cards are still the most widely used online gaming payment method in the world. So this article will be largely focusing on how online gaming payment processing works for credit cards.
Who are the parties involved?
Let’s start with some quick definitions of the relevant parties involved in an online gaming payment transaction:
- Consumer: your player, who’s purchasing an item from your web shop
- Issuing bank: the player’s bank, which is the entity that issues credit like Wells Fargo or Chase in the US
- Merchant: the business selling the player items (ie, you, the game developer)
- Acquiring bank: the merchant’s bank, which is the entity that acquires funds for them
- Network: the company that transfers the funds between banks, like Visa or Mastercard
- Processor: technical entity that processes the payments on behalf of banks and networks, like FIS, Jack Henry, Stripe and others
- Regulators: international, national, state, and local bodies that govern how funds can flow, like OFAC
Each party is concerned about something a bit different. For example, the issuing bank cares most about consumers carrying a balance to generate interest because that’s how they largely make money. At the same time, they’re equally as concerned about the ability to pay back the balance and overall credit losses because that eats into margins. Meanwhile, the acquiring bank cares more about costs, scale, and merchant losses and bankruptcies. The credit card networks care most about their brand,reputation, and safety of the ecosystem. They are constantly expanding their reach to ensure global interoperability.
So how do all the parties fit together to make online gaming payment processing? The consumer (or player) has a relationship with the issuing bank - and the issuing and acquiring banks have a legal relationship with the credit card networks. That means, the consumer isn’t contractually bound to the network - their bank is. But since their bank has a relationship with the network, they get access to that network and are also bound by their rules - for example, they can’t use the network to purchase illegal drugs or gamble. But they can use it to buy in-app purchases on the web from your web shop. Let’s talk about how that happens.
How do online gaming payment transactions work?
A credit card charge is a “pull transaction” - meaning the merchant instructs their acquiring bank to pull funds from the consumer’s issuing bank. The network facilitates that transaction and charges both banks a fee once the funds are settled. And it happens in milliseconds.
- Purchase: First, the consumer initiates a transaction with the merchant, who needs to have an acquiring bank and an ability to accept payments. For example, your player hops onto your web shop, choose products, and proceeds to checkout. You know the amount, taxes, date, currency, etc.
- Enter card info: Then the player enters their credit card information. The Payment Account Number (PAN) is the most sensitive card data here. CVC and AVS (zip code) are additional data security requirements that can help reduce fraud.
- Tokenization: To make sure the transaction is as secure as possible, the bank, processor, or network tokenizes, or encrypts, the PAN.
- Authorization: The player’s issuing bank either approves or rejects the transaction. This happens in milliseconds, and depends whether the bank knows if you have enough credit, consumer ability to pay and if the merchant or product seems distrustful.
- Capture: After a successful authorization, funds are captured and money begins moving.
- Clear: Behind the scenes, banks exchange payment information and reconcile funds between the customer's and the merchant's bank.
- Settlement: The network moves money between the banks, but never directly touches the funds.
- Payout: The acquiring bank transfers funds to the merchant bank and the merchant finally receives their money. Usually, there’s quite a delay between the point of purchase and the payout.
How much are online gaming payment processing fees?
For each credit card transaction, the merchant has to pay an “interchange”. This is when the consumer’s issuing bank takes a fee from the merchant by charging their acquiring bank. In some places, these fees are capped - however, they’re not capped in the US.
In a typical $100 credit card purchase, $97.25 goes to the merchant. So what happens to the remaining $2.75? Each party takes a cut:
- The issuing bank takes $2.20
- The payment processor takes $0.23
- The acquiring bank takes $0.19
- The card network takes $0.13
That credit card interchange fee totals to about 3% and is what we call the “channel cost” or the payment method fee - meaning it’s the cost of using the online gaming payment method, in this case, a credit card.
If you’re selling items directly to your players, with your own payments infrastructure in-house, that channel cost, or online gaming payment method cost, is all you’d need to pay. However, that does not take into account the overhead of setting up payment rails on the backend, and managing customer support, fraud, compliance, and refunds, that payment provider also charges a fee for their services. Typically, an online gaming payment gateway charges about 5%. (Like Stash).
So far then, we have the channel cost and the payment provider fee.
On top of that, there’s also sales tax and foreign transaction fees, depending on where the transaction took place.
So the reason why you may see your studio’s bank statement fluctuate is because you’re not just paying the 5% online gaming payment gateway fee, you also have these other deductions. In fact, it’s the channel cost that tends to increase your bank statement the most - since you never know which online gaming payment method your players will use or which country they’ll pay from.
In the end, your online gaming payment transaction report might look like this:
- Gateway fee - 5%
- Channel cost - 3%
- Sales tax - 2%
- Foreign transaction fee - 2%
You’ll see that it totals out to about 10-12%. That’s nearly a third of Apple and Google’s 30% commission. That means, if you sell a battle pass in-app for $100, you’d get $70 in your pocket, but if you sold it on your web shop, directly to your player, you’d keep about $90. That’s 28% more profit. Plus you get all the data about your player, where they’re from, and additional metadata you might be extracting during the transaction. In addition to more money in your pocket, you’re now armed with more data to build future products and flows that resonate with your players.
Get a more in-depth breakdown on how online gaming payment processing fees work - as well as tips for how to keep them low.