Virtual goods will drive mobile banking to success in the US.

According to NPD, consumers now spend a third of their disposable income on video games, on average about $50 per month [1]. 12% of US consumers have purchased virtual goods in the past year [2]. Worldwide the market is growing at 38% and is valued at $3.8B [3].

In fact, virtual goods are so large, they are a threat to the stability Chinese yuan. As a result, the government has started to regulate the exchange of this currency into yuan [3].

Virtual goods and online games tend to be popular in two demographics in particular: teens and middle-aged women. There are about 1.1B teens globally, according to the census [4]. Effectively, all of them are unbanked – that is, they have no bank account.

To pay for these virtual items, middle-aged women use credit cards. But for teenagers this represents a significant problem which is being solved in three ways:

  1. Pay using your mobile phone
  2. Buy a prepaid card
  3. Fill out a co-registration form or advertising

Ultimately, the first and the second will converge. There’s no reason top up minutes couldn’t be used to pay for things online. And the mobile phone is a great way to uniquely identify a user.

By converting cash into virtual currency that can purchase things online, payment processors will become banks to millions of teenagers.

This convergence of prepaid cards and mobile phones for payments has occured in Kenya with M-Pesa, a payment system tied to mobile phones. M-Pesa is replacing ATMs by using top up minute distributors as the means to convert cash into electronic currency.

Adoption of mobile banking and person to person payments has been slow in the US. PayPal is the clear leader, but the market is nascent. Nevertheless, having millions of teenagers paying for virtual goods with virtual dollars tied to mobile phones will revolutionize the banking system first by replacing the need for ATMs, second by providing a new payment mechanism online and third by providing a more effective person to person payment infrastructure.