Paying the piper: Does the industry need a new solution for payment blocking?
An influx of new blocking measures around the globe has prompted some gambling firms to rethink their payment procedures
The history of online gaming is the history of payment blocking. Governments have attempted to stop the supply of online gambling to their citizens through the ‘weak link’ of payments for decades. Just ask the US federal government whose crackdown on online gambling via UIGEA in 2006 sent shockwaves rippling through the industry.
Far from eradicating online gambling however, UIGEA just sent the industry even more underground, taking US customers from listed companies like Sportingbet to a host of shady Caribbean sportsbooks and online casinos. That type of outcome is hardly a one-off, but the historical failure of payment blocking has not precluded modern day governments from trying to wield it in 2019.
In a recent Stars Group results briefing, the operator said around 16% of its international business was now being disrupted by some form of blocking on payments or products. In the last couple of months alone, Kenya has ordered blocking on its own former licensees for failing to pay sufficient taxes, while Norway has ratcheted up pressure on payments providers with new laws that clarify it is illegal for banks to process gambling-related transactions, in a bid to protect local monopoly Norsk Tipping.
Elsewhere in Europe, the German state of Lower Saxony cranked up the pressure on payments providers in June, issuing a cease and desist letter to a then-unnamed international payments provider, warning that the letter should send a message to all processors to stop facilitating online casino transactions.
Local pressure
EGR understands that provider was PayPal, chosen in part because of its physical presence in Germany, including an operations site in Berlin and a technology campus in Dreilinden. A total of 17 other payments providers have also since received communications from Lower Saxony – the relevant authority for payment for illegal gambling in Germany.
The Ministry requested information from the providers as to their support of ‘illegal’ gaming in Germany and asked how they planned to stop the activity. The letters also threatened further enforcement if no action was taken, which could include escalation to more cease and desist letters.
PayPal received a cease and desist letter from Lower Saxony to stop facilitating online casino transactions. Pic credit: pressureUA/iStock
Some of these companies are understood to have responded to the Ministry and tried to comply with the directive, while others are waiting for PayPal’s response to the letter. The provider could choose to comply with the cease and desist order – a major win for Lower Saxony – or choose to mount a legal challenge against the country’s online casino ban.
However, the legal base for the online casino ban was strengthened in July by a Schleswig-Holstein court ruling that held Germany’s ban on online casino gaming was compatible with European Union law. The ban only applies to online casino transactions – not sports betting – but a payments processor only receives a request from an operator with a 7995 code, which designates it as a gambling transaction.
“It’s impossible to know whether the deposit will be used for betting or casino after that,” one source with knowledge of the situation said. EGR understands PayPal has been telling operators it is looking at ways around this particular issue. The situation is clouded by the fact that when a provider receives a request for a deposit from an operator, it doesn’t know whether that deposit will be used for casino or sports betting, which is permissible.
No way
While the German situation is still unfolding, Norway is the more immediate focus with blocking up and running and backed by a clear law, even if operators and payment providers argue they are not subject to that law. They claim it is incompatible with the EU principle of freedom of movement and right to provide goods and services.
So what sort of impact have the Norway measures had? According to Jens Bader, co-founder of payments wallet MuchBetter, the rules have made payments transactions in Norway “a little dirtier”.
“It drives payment processing into the murky waters of offshore setups,” Bader says. “There will be providers who stay in the market and do whatever they can, but their conversion rates and authorisation rates just go down.”
Some of these murkier solutions can include things like prepaid cards and prepaid wallets or cash vouchers. Some firms will also take credit card numbers over the phone, making it an offline transaction rather than an online one. There are also rumours of a return to miscoding, where operators ask processors to label the transaction with a different code from the 7995 designation that labels it as a gambling transaction. The transaction might be tagged as a retail purchase instead, for example, and subsequently sails through bank processing.
“These solutions all work to a certain extent but they’re obviously not optimal,” says Bader. “And it’s usually at the expense of the customer. Customers have difficulty even realising what the transaction was because they don’t recognise the descriptor they see on the card statement. It might have been converted into a foreign currency on the way and they might have lost money in foreign exchange. And that all leads to lost money and customer dissatisfaction.”
The exact impact in Norway is hard to pin down. According to tracking from GameIntel.com, the official source of PokerScout data, The Stars Group saw a more than 30% drop in traffic coming from Norway between Q1 2018 and Q1 2019.
However, according to Kindred’s head of payment solutions, Mickael Marceau, the new measures have had a relatively small impact on the firm’s operations. “I’m not going to lie and say it’s easy, breezy every day, but we have found sustainable, safe and secure payment methods for all our users, including Norway,” Marceau says. The firm declined to share the exact impact on Norway revenues.
Remove the weak link
The influx of new blocking issues, however, prompted The Stars Group last year to suggest it might look at ways to bring the payments function in-house by building or acquiring its own processor. After all, if governments are hurting operators by leaning on third parties, why not take those third parties out of the mix via some vertical integration?
The idea is not completely novel in the industry. Bwin for years had a payments subsidiary called Kalixa that handled its own payments and others, before Kenny Alexander sold it off in late 2016. So, is it feasible for modern operators to cut out some of the payments headache by running its own payments arm? Unfortunately, it might not be straightforward, says Sam Barrett, director of gaming at payments firm Trustly.
Sam Barrett, director of gaming at Trustly
Not in the near term. Cryptocurrency is definitely of huge interest to the industry. It’s another form of currency with great benefits for offering the user more choice and you’re more likely to convert more. The issue with crypto is it’s still not highly adopted. So, people may be purchasing it but the availability or use of it, of actually putting it onto operator sites and getting it back out as a fiat currency, is not common. It’s a catch-22 because the only way the currency is going to become less volatile is if more people use it, and the only way people can use it is if it’s adopted and integrated onto sites.
It mainly comes down to the fact that it’s still quite new in terms of its adoption. For us, as a layer between the bank and the operator, the banks are against it for now. Because it’s decentralised, we are almost restricted in working with it because we rely on the banks to give us our product and if the banks start seeing us using cryptocurrency or being a loading mechanism for cryptocurrency for operator sites, they may not be happy about that. Although we see crypto as a fantastic opportunity for our business model of the future, right now we’ve got bigger things to concentrate on.
“It’s a fair suggestion for operators to want to take control of their supply chain, but it’s not as simple as building your own games or platform,” says Barrett. “First of all, payments providers must be licensed and actually have relationships with the banking connection. And, obviously, they need the technical capacity and know-how to manage a complex flow of funds.
“Secondly, a lot of payment methods already have a following and a portfolio of clients and partners. PayPal, for example, doesn’t just service the gambling industry or one company within the gambling industry. So, if an operator decided to do its own payment method in-house, it would not be able to leverage the current success from an already active user database, and it would not be able to utilise the rates and infrastructure that it had previously set up.”
Barrett adds: “At the end of the day, gambling companies are gambling companies; they’re not payment businesses. An operator just venturing into this doesn’t have the same experience, so it’s going to take a long time to get anywhere near a successful, optimised conversion product.”
A new way
Kindred’s payments chief Marceau says the vertical integration idea is something the operator would have considered a couple of years ago, but the recent payment services directive 2 (PSD2) has actually negated the need. The EU directive, which was initially rolled out in 2018, is designed to increase pan-European competition in the payments industry, particularly from non-banks.
“If we chatted one or two years ago, I would probably have said yes, we should definitely do that [buy or build a payments arm],” Marceau says. “Third parties are sometimes unreliable or vulnerable and it can be tough. Now, with PSD2, it opens up a lot of opportunity. There are so many fintech companies looking to fill this gap. They are growing like strawberries in summer.
“It’s insane. I mean every day, new fintechs are using open banking APIs and trying to build something new to collect payment, process payments, verify users, etc. It means the choice of new partnerships or exclusive partnerships is huge today. Operators really need to assess the situation and really need to follow banking and the payments directive because it’s going to change the game big time, I believe.”
Indeed, as Bader suggests, many of these newer fintechs see blocking regimes like Norway as an opportunity to be exploited rather than hindrances. More broadly, the groundswell of technology looks like it can only reduce the impact of payments blocking going forward, rendering it even less effective. Now if only someone would tell governments that…
Pic credit: pressureUA/iStock