KreditFly launches mobile payments system with credit guarantees (exclusive)

Online games have seen huge windfalls thanks to the free-to-play business model, where a user plays for free and then pays money for virtual goods. But getting more people to pay could make the business even bigger.

That’s where mobile payments start-up KreditFly comes in. KreditFly is launching a mobile payments system that makes it much easier for gamers to get off the fence and pay for virtual items. And it carries little risk for merchants, who won’t get stuck with the tab so easily when users fail to pay. In doing so, KreditFly attacks the problem of friction, which is the No. 1 obstacle to the growth of online game revenues. While free-to-play games have become very popular in Europe and Asia, they are only starting to become popular in the U.S.

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“We’re different from any other mobile payments system today,” said Paul Kim, chief executive of KreditFly.

Santa Clara, Calif.-based KreditFly is Kim’s brainchild. Kim also started BilltoMobile, which is now the U.S. arm of Korean payments company Danal and is bringing lower fees to mobile transactions when users make virtual goods payments that appear on a consumer’s mobile phone bill. KreditFly competes with BilltoMobile, Zong and Boku. But it does not execute its transactions through mobile carriers.

Here’s how it works: When a user wants to buy something in a game, they can choose KreditFly’s payment system as one of the options alongside credit card payments or PayPal. When they do so, the user enters a mobile phone number. KreditFly sends a text message with a four-digit code back to the user, who enters it to verify the transaction.

KreditFly runs a credit check on the name associated with the phone number and issues a “Micro-credit,” which can be used to purchase goods. The user has to pay that bill within seven days, using cash, credit cards, prepaid cards, or paper-based money orders. If they don’t pay, they won’t be able to keep on buying things. Kim said in an interview that the friction-free part is that the user does not have to fill out a registration form for the first payment. They can thus execute the transaction in as little as 15 seconds.

KreditFly only requires a user to register once they’ve made a payment. After the user establishes himself or herself as credit worthy, they can then make bigger and bigger transactions online. Kim says that merchants don’t have to worry about getting stiffed because KreditFly guarantees 100 percent of its Micro-credits. It can do so because it uses the mobile phone information and other data to verify the user’s identity; by contrast, other payments firms use email, which can easily be used to set up a false identity. Kim said that the company’s focus on reliable collections of unpaid bills is one of its advantages. The system should be attractive to gamers who don’t have credit cards.

“We can create a zero risk environment for merchants,” Kim said.

The fee for mobile payments will also be a lot lower than the 50 percent charged by carriers. Kim said it will be under 20 percent of the total transaction price. The results should be high conversion of free players to paid players and zero risk for bad debt, Kim said. Lower friction, lower fees. That should help the company take off.

“No company has really cracked this nut,” Kim said.

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KreditFly has already successfully processed several thousand virtual goods transactions for three online games through partners such as with Aeria Games, which has 15 million users. Of those tested, more than 70 percent of the users had never paid at the merchant site before. On top of that, the users who had paid before had previously used high-fee alternatives. About 50 percent of the transactions were from repeat purchasers. The average transaction size was $27, and the average user purchasing through KreditFly is now spending $75 per month. Needless to say, those are outstanding numbers when it comes to mobile payments. Non-paying users are blacklisted from the service and reported to the merchant, who can block the user from the service.

Kim started the company in the spring of 2010 after he left BilltoMobile, which was purchased by Danal. His goal is to help reduce friction in mobile payments and raise the level of the free-to-play game business — and other electronic commerce businesses — to the same kinds of numbers that exist in Asia and Europe. KreditFly works with all mobile carriers in the U.S. Kim said that KreditFly has applied for patents on the Micro-credit system. Over time, the company will expand beyond game merchants.

The company has raised a round of funding from Altos Ventures and ATA Ventures. KreditFly has 20 employees.