The virtual currency scam from China that’s costing iOS developers real cash

By Kim-Mai Cutler Comment

One of the many reasons iOS developers have switched from paid apps to the free-to-play model over the past year is that the service-oriented model of gaming is less vulnerable to piracy.

But it seems that in the Wild Wild East of China, even the freemium model can be circumvented with fraudulently-purchased virtual goods.

CocoaChina, which hosts the largest iOS developer community in China and raised $14 million from Sequoia China and other investors, discovered a scam that’s giving players deep discounts on virtual currency packs in games like Capcom’s Smurfs’ Village.

Basically, sellers go onto the eBay of China, or Taobao, to sell virtual currency at half-price or more. They create an Apple iTunes account attached to a fraudulent credit card number and then give the buyer the log-in and a tutorial on how to recharge their game with currency. Developers will see a discrepancy between their daily revenues with actual payments from Apple at the end of the month, once all of the fraudulent payments are skimmed out of their revenues.

These fake credit card numbers, sometimes called “black cards,” are often created for iTunes account outside of China. So developers won’t necessarily see a discrepancy in their Chinese revenues, but rather their European or North American revenues. The other key point is that this fraud works on legitimate iPhones, not just jailbroken ones.

The scam also works with paid apps too (see the image below with Disney’s Where My Water on sale for 3 yuan or $0.48, instead of $0.99). For paid apps, the seller will buy the app with a fraudulent credit card and then gift it to the buyer.

You can sometimes see the impact of “black cards” on the top grossing charts when a Chinese app — with no localization or English translation whatsoever — mysteriously climbs up the charts in the U.S. or U.K. This happened this week when an app from developer Shanghai Muhe reached No. 17 on the grossing charts in the U.S. even though the app is entirely in Mandarin. To get to that kind of ranking in the U.S., a game would need to be doing around $50,000 or so per day in revenue.

The game also only has 33 ratings compared to the other free apps around it, which have anywhere from more than 1,000 to more than 50,000 ratings. Many of the user reviews also say that the app somehow charged their iTunes account for between $30 and $100 without their consent even though the game has hundreds of positive reviews in Mandarin-speaking markets.

Ultimately, it’s hard to gauge the actual cost to developers since these consumers probably wouldn’t have paid full price for the virtual currency anyway. Still, developers have to handle the server and hosting costs of the gameplay from these false transactions.

To combat the fraud, CocoaChina has employees constantly watch Taobao for posts offering discounts on virtual currency for games from its studio Punchbox. It’s not really feasible for Taobao to preemptively stop these listings, they say.

They also started an Anti-Black Card Alliance with other top Chinese developers to watch for fraud around games from any of the alliance members. CocoaChina says since they’ve started monitoring Taobao for fraud regularly, the company has seen a 30 percent increase in revenue from purchases that would have otherwise been tied to the scam. They said alliance members have also seen an 80 to 90 percent reduction in fraudulent transactions overall.

Overall, the scam is yet another story about how difficult it is to monetize mobile apps in China. Even though the country has quickly emerged as Apple’s second largest market in terms of revenue, China poses all sorts of difficulties to mobile developers looking to build a business locally. About one-half of all iPhones are jailbroken, according to Innovation Works-backed Umeng, which is like the Flurry of China. The paid app model doesn’t really work because of this fact plus piracy, so many top developers there like EA PopCap are moving to more of a service-oriented model.

That said, Apple started offering local payment options that are denominated in yuan and are tied to debit cards from several of the country’s top banks. Before that, iPhone owners without credit cards would often turn to Taobao to buy iTunes gift cards.