Changes To ACH Processes Would Benefit US Regulated iGaming

Fixing The ACH System Would Go A Long Way To Improving U.S. Regulated Online Gambling Markets

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There are a number of issues creating revenue shortfalls for regulated iGaming in the United States.

They include regulatory naivety, poker liquidity, marketing shortcomings, the presence of unregulated sites, and poor payment options. For payments, it is well known that card denial rates are the major contributor to poor performance.

In this article I will concentrate on another poor performer, ACH (Automatic Clearance House) payments. These are also known as direct bank transfers.

How ACH payments work

An ACH request from an online gaming operator is created on behalf of a player to retrieve funds directly from a bank account.

Unlike the card network, there is no significant infrastructure set up to validate funds and authenticate the requestor. That lack of validation creates risk for the operator.

The operators must either mitigate their risk by limiting deposits, or use a third party to guarantee the funds. These third parties make an authorization decision using secret algorithms that are based on assumed risk from brick and mortar models.

Even after they have history, the algorithms are not tuned to handle the behavior of an online gaming player. Transactions get denied sometimes for reasons no one can understand.

Why hasn’t a verification system been put in place?

So why does a highly advanced society that can track almost every activity we undertake not have a simple authentication and authorization process for ACH?

It’s simple. Banks do not have a vested interest in doing so.

They are protecting a revenue source of overdraft fees. If funds validation were robust enough to deny a transaction, that would also deny the bank the upcoming overdraft fee. These punitive fees account for billions in revenue ($37.1 billion in 2009).

Banks are resistant to change

If ACH transactions could be authorized and authenticated in real time, the iGaming industry could easily direct players to use this superior method. iGaming would increase revenues, and there would be a great multitude of other economic benefits for consumers and other industries.

So how is this addressed?

There is a little known secret that most banks hire third parties to keep track of real time balances in checking accounts. There are just a few “core processors” that account for the vast majority of financial institutions’ data warehousing.

It seems simple to me, but I have a tendency to not care about details like competition between processors and banks protecting revenue.

How is it fixed? In my simple way of looking at complex situations, it’s easy.

Some smart people need set up a protocol and trafficking for authorization and authentication of ACH transactions. The banks’ processors would set up temporary holds on the funds that have been authorized.

This new ACH process would involve a cooperative clearing infrastructure, but it’s a simple repetitive process. Assuming this could be done for just pennies per transaction, this could also create a new market for ACH-based debit cards.

But, this is like having the oil industry create small fusion reactors for cars. It will never happen unless they have no other choice. The only difference is real time ACH is possible.

The upside of ACH authentication for  regulated iGaming

Why is payment innovation so important?

If you can’t get money on the site, nothing else matters. Cards are problematic due to very few issuers allowing iGaming transactions.

The irony is that the unregulated sites use processors that disguise the transaction types from Visa and MasterCard, and get much higher approval rates. There is supposed to be some relief of this later this year from Visa for regulated iGaming, but unless federal legislation allowing safe harbor protection for online gaming transactions passes, I do not see much uptake in the approval rates.

Even though I took you through how to fix this, there is little possibility that it will happen soon. Payments will be a patchwork of consumers throwing the spaghetti on the wall, until a transaction sticks.

Until someone makes a better mousetrap to enhance or replace an antiquated payment system, spaghetti it is.

Payments will only show marginal improvements since the financial services industry and the current regulatory pressures create friction due to interests other than making this work.

If the right conditions present themselves, eWallets will become the payment method of choice for iGaming, but that’s another conversation. So is Bitcoin…and let’s not forget that other mousetrap.

- Jerry Rau is the President of Rau and Associates ( providing guidance in payments, fraud and compliance in regulated iGaming Previously he initiated and managed the payments and fraud group at Ultimate Poker / Ultimate Casino. Prior to Ultimate he his 13 years with a multi billion dollar company as VP of operations, providing electronic money movement for thousands of financial institutions.
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