Addressing the Regulatory Challenges Faced by Online Gaming Companies
Explore the implications of recent regulatory changes in the online gaming industry in India, including challenges in customer retention, the KYC process, and the threat of fraud.
The online gaming industry has recently faced a series of regulatory changes in India, including new rules from the Ministry of Electronics and Information Technology (MeitY), revised Tax Deduction at Source (TDS) policies, and updated regulations from Google. These changes have introduced uncertainty and challenges for gaming companies, affecting customer retention rates, clarity in the Know Your Customer (KYC) process, and the escalating threat of fraud. In this blog, we will explore the implications of these regulatory changes and discuss potential solutions and strategies for gaming companies to navigate these challenges effectively
Impact of Recent Regulatory Changes:
The online gaming industry has recently undergone a series of regulatory changes. However, these changes have brought about a lack of clarity, leaving gaming companies uncertain about how to comply with the new requirements.
One significant impact of these regulatory changes is the noticeable drop in customer retention rates throughout the gaming industry. From the moment a player downloads an app to the point of signing up, companies have witnessed a decline in customer engagement. The introduction of Google Play Store's mandatory Know Your Customer (KYC) verification has exacerbated this issue, resulting in an additional 4-5% drop-off rate. The effect is particularly pronounced during non-IPL seasons when user engagement tends to be lower.
To address these challenges, gaming companies are looking at MeitY to lay down the KYC process that is standardized for all. This standardized verification method would offer greater clarity and ease of navigation for customers, thus alleviating the burden on gaming companies.
Another regulatory change that has impacted the industry is the new TDS policy. Under this policy, a 30% income tax is calculated on a user's net winnings during withdrawal. Consequently, many players, especially casual gamers, have been deterred from participating in online gaming. Some players may not be fully aware of the tax implications or may simply be unwilling to go through the hassle of paying taxes on their winnings. As a result, the number of players has declined, affecting the overall growth and profitability of gaming companies.
Lack of clarity in the KYC process:
The lack of clarity surrounding the KYC (Know Your Customer) process is a significant challenge faced by the online gaming industry. While the government has clarified that RBI-level KYC, which involves Video KYC, is not expected, there is still ambiguity in defining the specific KYC compliance required for gaming companies. As a result, different companies have implemented varying levels of KYC verification, creating a competitive disadvantage for those following stricter guidelines. This situation allows customers to choose companies with the least amount of friction, even if compliance is in question, underscoring the need for standardized and clear KYC regulations to level the playing field and ensure customer trust and safety.
For small companies, particularly startups, the lack of clarity in KYC requirements poses a significant challenge. These companies may lack the necessary time and resources to conduct extensive research and develop effective KYC processes that both comply with regulatory requirements and provide a seamless user experience. Additionally, younger players who are primarily interested in sports may not find it necessary to complete the stringent KYC process, leading to a lower conversion rate and potentially hurting the growth of online gaming platforms.
Another concern related to the lack of clarity is the specific Officially Valid Documents (OVDs) required for KYC verification. While the Play Store mandates Aadhar verification, customers who don't possess an Aadhaar card handy but have alternative OVDs such as driver's licenses or voter IDs may face difficulties during onboarding. Additionally, MeitY's requirement for any document serving as Proof of Address (POA) during KYC verification adds to the confusion for gaming companies.
Impact of KYC on Customer Drop-Offs:
The KYC process has a significant impact on customer drop-offs, particularly during peak seasons like the Indian Premier League (IPL) and World Cup when online gaming platforms experience a substantial inflow of users. However, slow response times and technical glitches during the KYC process can hinder scalability and result in a poor user experience. This can cause users to abandon the platform and switch to alternative options, leading to lost revenue and damaging the reputation of online gaming platforms.
To comply with identity and address verification requirements, it is mandatory to collect Proof of Identity (POI) and Proof of Address (POA) documents. Commonly used documents for verification include PAN and Aadhaar. However, a challenge arises when attempting to verify if the PAN and Aadhaar belong to the same person by matching their names. Many individuals have long names that may be shortened or contain spelling errors, making it difficult to perform accurate name matching. In such cases, manual reviews become necessary, which not only increases operational costs but also extends the verification time. The back-and-forth communication between the manual review team and the customer can lead to customer drop-offs due to the prolonged process.
Another issue that arises is when outdated or expiring driver's licenses (DLs) cannot be read by the system. This situation results in an increased need for manual reviews, leading to longer onboarding turnaround times and contributing to customer drop-offs. The downtime of the UIDAI and the need for OTP verification during Aadhaar verification also add friction to the KYC process. Waiting for OTPs and experiencing UIDAI downtime can significantly impact the overall customer experience, potentially leading to customer dissatisfaction and drop-offs.
Escalating Threat of Fraud:
The rise in fraud is a significant concern in the gaming industry, prompting the government to introduce regulations aimed at combating identity theft and account takeover. However, it is essential to strike a balance between fraud prevention and customer convenience, as overly strict processes may result in customer drop-offs. Frauds in the gaming industry encompass a range of activities, including high-tech schemes like identity theft and account takeover, as well as more traditional forms of fraud such as multi-accounting, chip dumping, and collusion.
Some players exploit deposit codes and freebies offered by gaming platforms to deposit funds and quickly withdraw all the money, leading to financial losses for the platforms. Chargebacks also pose a significant issue that needs to be addressed to improve customer trust. Fraudulent activities are often observed to be more prevalent during early morning withdrawals, while new accounts have a higher tendency to exhibit fraudulent behavior compared to older accounts. Surprisingly, even accounts with previously impeccable records can suddenly display suspicious activities, emphasizing the critical importance of maintaining constant vigilance throughout the entire customer lifecycle.
Given the complexity and scale of the issue, manual fraud prevention is nearly impossible. Therefore, investing in AI/ML (Artificial Intelligence/Machine Learning) solutions with high accuracy becomes essential to effectively curb fraud in the industry.
Solutions & Strategies:
- To streamline the KYC verification process and reduce manual effort, the platform should integrate with KYC solutions that offer high accuracy and pass rates with minimal cases requiring manual review. By automating the verification process using these solutions, the platform can significantly reduce the time and cost needed to review submitted documents.
- To improve the user experience and minimize drop-offs caused by downtime or unavailability of required OVDs, the platform should offer multiple options for customers to perform KYC during the deposit process. This can include different types of OVDs, such as PAN, Aadhar, driver's license, and voter ID, among others. By providing customers with a range of options and automatically switching between them when one option is unavailable, the platform can increase the likelihood of customers successfully completing the KYC process.
- It is important to view the KYC process as a continuous and ongoing task rather than a one-time event. This requires a well-defined roadmap that outlines all necessary tasks and timelines to ensure that KYC data is up-to-date and accurate at all times.
- An idea was proposed to create a decentralized network for gaming companies to share data on blacklisted players in order to minimize fraud and protect the industry. While sharing good customer data may not seem appealing to gaming companies at first, implementing a system similar to CKYC where player KYC data is stored in a centralized database could speed up the verification process for players registering on multiple platforms. This would ultimately reduce drop-offs and improve the overall user experience.
- Linking Aadhaar with their bank accounts could help minimize the spelling mistakes in the long Indian names.
- By educating users on the tangible benefits of completing KYC verification, gaming companies can help users understand the importance of the process and reduce drop-off rates in the long run.
- According to statistics, high-intent users are generally willing to go through the verification process, so it is important to emphasize the benefits of KYC in order to encourage completion rates.
- The lifetime value of customers can vary significantly across different games in the online gaming industry. Therefore, it is essential to define the KYC process based on factors such as the game type like poker and fantasy games, and the expected lifetime value of customers.
- Offering an opt-out option for KYC verification to players making small deposits can reduce friction and minimize drop-off rates. However, the current compliance requirements do not include this option. The government should reconsider this to strike a balance between customer convenience and regulatory compliance.
- To ensure that the KYC process is effective and efficient, gaming companies should consider testing the process with a small segment of users before implementing it on a larger scale. This can help identify potential issues or challenges and make necessary adjustments before rolling out the process to a broader user base. Testing can also help to ensure that the KYC process meets regulatory requirements while providing a good user experience.
- To combat the occurrence of fraud, it is important to take proactive measures to identify and prevent them. Identifying patterns of fraud can be helpful in this regard. This can be achieved by creating a roadmap that outlines the tasks that need to be performed over a long-term period.
- One important step in preventing fraud is to segment users based on their withdrawal activities. By identifying users who should be prevented from withdrawing, the platform can reduce the risk of fraudulent activities.
- KYC and name-based deduplication done at the core can also help reduce identity theft and multiple account fraud. This is because it allows the platform to verify the identity of the customer and ensure that they are not creating multiple accounts.
- Technological solutions can also be utilized to prevent fraud. For example, device history, IP addresses, and play data can be used to create a fraud profile. Statistical methods can then be applied to identify potential fraudsters.
- An alert system with AI can also be implemented to flag potential fraud. This can be done by marking users with red, yellow, or green based on their behavior. The platform can then take appropriate action based on the marking.
- Maintaining separate ledgers for accounting can also help prevent fraud. This includes using different colored currencies for different purposes (e.g. yellow money for offers/freebies and green money for deposits).
- Additionally, implementing face matching and passive liveness can further reduce the risk of fraud.
- Finally, tracking multiple accounts linked to the same credit card can also be helpful in identifying fraudulent activities.
- By taking these proactive measures, the platform can reduce the risk of fraud and improve customer trust.
The recent regulatory changes in the online gaming industry have brought about challenges related to customer retention rates, clarity in the KYC process, and the escalating threat of fraud. By adopting appropriate solutions and strategies, gaming companies can navigate these challenges effectively. Standardizing the KYC process, leveraging automation and AI/ML solutions, and implementing proactive fraud prevention measures are crucial steps toward ensuring regulatory compliance, enhancing customer trust, and driving sustainable growth in the online gaming industry.