While the number of internet users continues to grow in both established and emerging markets, billions of dollars across all industry sectors are spent online each year. These figures are set to explode as we move towards the end of the decade, with some research firms predicting levels as high as $100 billion a year by 2010.
In the UK alone, consumer spending on online gambling will increase from £660m in 2005 to £1.6bn in 2010. At the same time, the number of active UK gaming clients will grow from 1.1m in 2005 to 2.1m in 2010, according to international market research group, Research and Markets.
Of course, these figures were predicted prior to the recent doom and gloom in world markets. Given the economic crisis, we should, perhaps, assume a drop in the rate of growth. The resilience of the online gaming market to the global credit crisis, however, is still debatable. While it may be softening, there is no doubt that this industry is unique and I think, still well poised for short-term development, and most certainly, long-term growth.
To stay competitive in today’s market place, merchants need to offer a range of online payment options, localize payments around the world, and ultimately, quickly and securely process real-time, multi currency payment transactions.
But in addition to these more obvious requisites, there are special requirements specific to each industry that should be addressed when looking at payment solutions. Gaming merchants, in particular, face unique obstacles and requirements for payment processing (a number of which we covered in our last editorial contributions to iGaming Business), from marketing and target audience differentials to bank risk issues, regulatory issues, and MCC coding, to name a few.
Regulatory and Bank issues
The Internet opened up the gambling industry immensely, and in the beginning, it was all about growth as it transcended global borders and with it, rules and regulations within each border. Even now, well into the Digital Age, regulators struggle with enforcement and jurisdiction.
While the USA Patriot Act, for example, was enforced to deter and punish terrorist acts in the United States and around the world, the effect on financial institutions across the globe has been far reaching and ultimately detrimental to the gaming industry. In its effort to “prevent, detect and prosecute” international money laundering and the financing of terrorism, the bill has changed the laws associated with due diligence and secrecy – especially for financial institutions that maintain correspondent accounts for foreign financial institutions or private banking accounts for non US persons.
Clearly, a monumental affect on the gaming industry since billions of dollars in gaming revenue leaves the US for offshore jurisdictions, which can only be seen as a “money laundering vulnerability”.
Similarly, of major consequence to the gaming industry is the Unlawful Internet Gambling Enforcement Act (UIGEA), which was passed in the United States in 2006, and prohibits the transfer of funds from a financial institution to an Internet gambling site, with notable exceptions such as in horse racing and online lotteries.
Even though it is a US law, it served to change the economy and security of the international gaming environment as it suspended all gaming business for US residents. And Americans contributed to more than half of the gaming industry’s billions of dollars in annual revenue!
The ambiguous nature of the Act together with the costly burden imposed on banks in trying to police the gaming industry seems to have backed financial institutions into a corner.
Louise Roseman, Director of the Division of Federal Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System, said financial institutions will face challenges since most payment systems are not designed to comply with the law. “It will be very difficult to shut off payment systems for use of Internet gambling transactions… The implementing statute will not be iron clad at all.”
At the time of writing this article, the US Treasury and Federal Reserve issued final regulations for UIGEA and implemented rules that required “US financial firms that participate in designated payment systems to establish and implement policies that are reasonably designed to prevent payments to businesses in connection with unlawful Internet gambling.”
First Atlantic Commerce participated in a conference call on the 17th of November, 2008 with MasterCard’s Global Public Policy Team, who summarized the final regulations. According to MasterCard, Congress has intended for the law to be enabled by the current payment system infrastructure. The payment system is not required to police the industry. Rather, it is required to establish policies to “reasonably identify and block transactions that are restricted.”
Restricted transactions include “credit or debit payments knowingly accepted by an Internet casino or other business of betting or wagering” associated with illegal gaming.
We asked MasterCard questions on how the Act would impact US residents with non-US credit cards and it was suggested that compliance defers to the bank Issuer. If the credit cards are issued by a non-US bank, regardless of the customer’s country of residence, and the gaming merchant is outside of the US, then the transaction can be processed, in accordance with published compliance, including proper MCC coding.
This of course, opens up new business opportunities for non-US banks to issue credit cards to US residents, who may wish to use their cards at gaming sites located and hosted outside of the USA.
We also learned that whether you are an acquirer, issuer or processor, as long as you comply with the written policies of MasterCard, then you are in compliance with the UIGEA Rule. The UIGEA Rule states that a “participant in a card system shall be considered to be in compliance with the requirement to have reasonable policies and procedures if it relies on, and complies with, the written policies and procedures of the card system (MasterCard) that are reasonably designed to identify and block restricted transactions and such policies and procedures comply with the Rule.”
The gaming industry, of course, is still trying to ascertain exactly what constitutes “unlawful Internet gambling”. The Act does not spell out which activities are legal and which are illegal, but rather relies on the underlying Federal and State laws.
According to the final Rule, “Agencies have determined that a single, regulatory definition of ‘unlawful Internet gambling’ would not be practical. The Act’s definition… relies on underlying Federal and State gambling laws. The States have taken different approaches to the regulation of gambling within their jurisdictions and the structure of State gambling law varies widely, as do the activities that are permitted in each State. Accordingly the underlying patchwork legal framework does not lend itself to a single regulatory definition of ‘unlawful Internet gambling’.”
The Rule is effective on January 19, 2009, but compliance is not mandatory until December 1, 2009, a saving grace according to columnist, Rick Alm on the Kansas City Star’s Gambling blog since “by or before then, Frank (House Financial Service Committee Chairman Barney Frank) and pro-gambling allies in Congress and the new administration may have repealed the ill-conceived UIGEA with a more reasoned national policy.”
In the meantime, as Mr. Alm wrote in his blog entitled ‘Oops, Did Congress accidentally legalize cyber gambling’, “the states and tribes appear to be quite free under these new rules to let the cyber dice roll.”
No doubt, there is a great deal of ambiguity in the industry today. While the Internet initially opened up the floodgates to online gambling, legislators are now attempting to adjust the industry and return it to a regulated sector of the economy – just as when it was confined to the jurisdiction in which the company resided.
The saga will continue, but in the meantime, there are commercial and processing strategies available for internationally based gaming companies as well as banks and other financial institutions to work within the compliant fringe of the UIGEA legislation, Mastercard and VISA regulations and other pending worldwide legislation without adverse potential liability to business and operations. Play it smart.