What’s Next for Betting in the U.S. – Payment Processing
Welcome to the first in a series of my posts about what’s going to happen in the United States in the wake of the PASPA being repealed by the Supreme Court. There will be a lot of moving parts to get sports betting (and potentially other forms of online gambling) regulated across the states, so I am going to focus each post on a different section of the industry. Today, it’s the dreaded payment processing industry, which has been at the center of this story for over a decade.
A Brief History of Gambling Payment Processing in the U.S.
For those of you who don’t know where things stand in the United States when it comes to payment processing for the gambling world, suffice it to say that the government has not seen online gambling in a favorable light. In the early days of online gambling, American players were able to use credit and debit cards to make deposits at their favorite gambling sites. VISA and Mastercard have authorization categories for gambling transactions, which alert banks that their users are trying to use a card for that purpose.
When the industry got so big in the U.S. but all outside the reach of the law, the government looked at ways to control the offshore business without shutting down the business entirely. What they settled upon was a bill making it illegal for U.S. banks to process online gambling transactions. The Unlawful Internet Gaming Enforcement Act (UIGEA) was passed in late 2006, and with that, the American gambling industry was shaken to its core.
Now, there were still ways for players to use their cards, but they were increasingly difficult, and it was uncertain if transactions would be approved. Third’party solutions like Neteller came along, allowing players to create a digital account number that could be used to fund gambling accounts, but the government indicted the company’s founders on money laundering charges, sending them to prison. Alternatively, operators could find payment processors from other countries willing to take the U.S. cards, but those came with high costs (up to 14% on each transaction). Ultimately, the industry to a major hit and most of the operators simply stopped taking American action.
Where Things Stand Today
With the repeal of PASPA by the Supreme Court, the decision has been left to individual states as to whether or not to allow regulated sports gambling. This is likely to take years to unfold as each state weighs the pros and cons of adding regulated sports betting. Now, while much of this sports betting will be accessible via land-based means (racetracks, casinos, etc.), there will definitely be an online component to the business. This means that there will have to be some adjustment to the terms of UIGEA. This is, however, far more complicated than it may seem.
First, there will need to be some discussion between the banks and the credit card providers (VISA, MasterCard, American Express) to create new category codes that reflect the changes in the laws. This means that there will have to be codes specific to sports gambling, as the current law refers to all forms of online gambling.
Next, there will have to be some sort of ringfencing on a state level. Not every state will make sports betting legal (only 44 states currently offer lottery games as a point of reference), so the banks and the credit card companies will have to find a way to ensure that a player residing in a state without sports betting cannot access or play at a site. This has already started to take shape as states like New Jersey, Delaware and Nevada allow online gambling in some form. These states use companies like GeoComply to confirm a player’s location before allowing access to real money games.
This is a lot of heavy lifting, but the most important piece of the puzzle is unwinding the UIGEA bill in the first place. This is no easy task and will require a significant amount of writing and editing on a government level to get the language to a place where it will be passed. Add in the general objection by many politicians to the Supreme Court ruling, and I expect this may take the longest of all the hurdles.
One final issue that will inevitably come up is that of chargebacks. A chargeback, for those of you who don’t know, occurs when someone calls their bank or credit card company to assert that a transaction that took place was not performed by them. In the case of online gambling, the responsibility has always been on the part of the operator to ensure that players provided enough information to confirm it was them using the card. Chargebacks are costly, and both the credit card companies and the banks will have to work to find a solution that limits this expense in a regulated environment. Fortunately, with so many legal gambling markets around the world, there should be some sort of precedent that can be used as a starting point.
What About the Other Online Games?
It was really online poker that caught the ire of the government all the way back in the mid-2000s, causing the response of UIGEA. Now, with the repeal of PASPA and the way cleared for regulated online sports betting, many believe the other forms of online gambling can’t be too far behind. However, there is nothing currently in place from a federal level to mandate this, and at the state level adding online casino or poker is in direct competition with land-based products. This will no doubt cause far more debate, so my guess is that the initial regulation in most states will be for sports betting only. This is why the payment issue is so complex.
So, What Does This All Mean?
Well, if I had a short answer to this, then I suppose I wouldn’t be writing this page. Here’s the deal: assuming there is no response from Congress to continue to block sports wagering in the United States, I think we will see up to 20 states implement regulations for the market by 2020. However, this will all be stalled, especially from a growth perspective, if the credit card companies and banks can’t find a solution in time. I guess that they will, as the business is too valuable to walk away from, and the banks would love to have those revenues back in their pockets. I’ll probably have to update this page a couple of times along the way as the news comes out, but this is where payment processing currently stands in the United States.
Stay tuned for more installments of What’s Next for Betting in the United States.
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