A California-based start-up that enables children to manage and spend funds within a parent-controlled environment has updated its system to support monthly subscriptions to games, music and other digital media.

Until now, Hermosa Beach-based Virtual Piggy has supported only individual payments to play, transact and socialize online.

Virtual Piggy, a public company, launched in January. Today it has about 30 merchant contracts, of which four or five are active, says Jo Webber, the company's CEO and co-founder.

Subscriptions have become an increasingly targeted market in the payments industry. Even Facebook has taken an interest. On June 19, the social media giant said it is allowing developers to set subscription-based pricing as part of its shift away from its Facebook Credits virtual currency.

Virtual Piggy's target audience of children younger than 18 represents an estimated influence of more than $50 billion in annual spending that "offers significant opportunity, but transacting with children online also presents its challenges," the company notes on its website. Website developers face significant penalties if they fail comply with rules stipulated by the Children's Only Privacy Protection Act, for example.

To address such issues, Virtual Piggy requires parents to set up an account by providing their personal and payment data, such as credit card or checking account information. Parents have the choice to draw from their personal account for each transaction or to set up a stored-value account, Webber says.

Parents then set up a spending profile for each child, including a user ID and password, and they provide Virtual Piggy with their consent to release address, payment and other information to approved online merchants to fulfill purchase requests.

"Merchants remain COPPA compliant because they do not collect any information from the child except their Virtual Piggy ID," the website notes. "The parent does not need to be present to effect a payment. Virtual Piggy fulfills the payment on behalf of the parent for the child, reducing the possibility of friendly fraud associated with these transactions."

When children use the free Virtual Piggy service to initiate purchases from a participating merchant, they select the Virtual Piggy icon at checkout and enter their user name and ID and the information about the purchase. Virtual Piggy approves or denies the transaction based on the conditions the parent set up in the child's profile. If approved, the transactions proceed for settlement.

One of the first companies to use Virtual Piggy's expanded system for subscriptions is Fanlala, a social entertainment and lifestyle destination for "tweens" and teens. Fanlala, which reaches some 34 million digital cable subscribers, provides focused digital content for its targeted age group, including music streaming and the broadcasting of new and original series and specials, according to a June 21 press release.

Virtual Piggy connects with merchants' existing processors, including First Data Corp., Cybersource/Authorize.net, Total System Services Inc. and Chase Paymentech, Webber says. It is charging merchants an introductory rate of 1.5% of the sale, which would be in addition to the merchant's processor's discount rate. The company will increase the rate over time as it builds and will provide volume discounting to larger merchants, Webber says.

Also, some merchants conduct their own layer of "forechecking" to ensure the legitimacy of transactions, and Virtual Piggy works within those requirements as well, she says.

Parents have the option to receive any selected transactions electronically for final approval before processing. If required, Virtual Piggy also sends shipping instructions to the merchant.

As for its growth strategy, Virtual Piggy initially is targeting merchants that cater to its target audience and that it can illustrate to parents a level of trust that they would fit safely within a child's environment. It will use those merchants to help build consumer participation, Webber says.

"We're close to getting a couple big household names," she says. "That will give us enough weight to go after the consumer market."

The start-up's first customer was K'Nex, the brand name of a construction toy company whose products include Lincoln Logs. Virtual Piggy just completed a marketing initiative with a "mommy blog" in which it K'Nex gave away a Super Mario Bros. construction toy kit to the first 100 parents who signed their kids up for a Virtual Piggy account, Webber says.

"We're looking at these kinds of things with other merchants, too," she says, noting some merchants are viewing the cost to participate in Virtual Piggy as a marketing expense.

Kids also can set up wish lists in their Virtual Piggy account, and parents can permit specific individuals access to those lists, Webber says.

"It's kind of like a bridal registry," she says. "There are 17 million grandparents out there who spend $50 billion a year on their grandchildren. The wish list gives them an idea of what they want."

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry