Earlier this week, the US Department of Justice Office of Legal Counsel updated its interpretation of the 1961 Wire Act. The new opinion reverses the one issued in 2011, which narrowed the prohibitions to sports betting alone.
You can read the full opinion alongside some immediate reactions here.
Given the outdated language — the Wire Act became law decades before the internet was conceived — it’s tough to determine the real-world, long-term implications for online gambling. Some immediate questions come to mind, though:
And what about payment processing, which remains problematic even in legal, regulated US markets? As this story broke on Monday, Dustin Gouker wondered about this very thing:
“With a more unfavorable landscape with the new OLC opinion, could some banks and payment processors be spooked out of serving the market?”
Online Poker Report searched for answers from Jerry Rau, who’s an emerging markets consultant focused on the gaming industry.
To make a long story short, yes. The payment industry is spooked, and transactions related to legal online gambling are very much in jeopardy in light of the OLC reversal.
“Payment processing has been a struggle since the beginning because of the high decline rate for cards,” Rau told OPR. “So most issuers of credit and debit cards do not approve gaming transactions now. The vast majority of transactions that are attempted [are] declined.”
To restate the obvious, many US jurisdictions have some form of legal online gambling at this point — some combination of poker, casino, sports betting and lottery. Repeat: it’s legal. But even in states like Nevada and New Jersey, related transactions are still declined at a prohibitive rate.
“The issue is revenue versus risk for them,” Rau said. “It’s a pure equation. There’s not enough revenue in this for the risk.”
For the majority of processors, iGaming payments represent just a small fraction of their total business. Associated revenue is negligible, especially when facing concerns over legality.
Rau sees transactional issues continuing for as long as the discord between state and federal law remains.
“Quite honestly, if they had safe harbor from the federal government, they would process these transactions. But they don’t want to put the rest of the business at risk for a small amount of revenue.”
The updated OLC opinion only serves to widen the gap between the two sets of policy.
“And then you have the banking aspect of it,” Rau continued.
Payment processors have become a crucial link in the chain, but their business still hinges on relationships with banks and other financial institutions. And those transactions could be in jeopardy at their points of origin.
Banks have been historically cautious with gambling payments in the past, including those not involving casino-style gaming. Few would argue that lottery sales are illegal under the Wire Act, but some banks are even unwilling to dabble there.
Chase has been blocking credit card funding of online lottery accounts in Illinois for more than 2 years. Am wondering if more companies will do the same after the DOJ opinion.
— Steve Brubaker (@SteveBrubaker) January 16, 2019
Financial logistics offer a direct parallel between state-level efforts to regulate online gambling and cannabis. Companies looking at cannabis as a business opportunity have often found FDIC-insured banks unwilling to hold their money. The financial world is simply not interested in transacting with an industry that operates in the gap between state and federal law.
Such could be the case with online gambling, too, particularly in light of the OLC shift.
“If this extrapolates over payments,” Rau said, “it could be cannabis times two.”
Companies involved in online gambling transactions will accept varying levels of risk depending on their exposure to the industry.
Rau cited PayPal as the “highest-risk payment option” due to its size and its history of timidness. “They’re the most skittish of all the processors at this point in time,” he said.
That skittishness is justified. PayPal has already been the subject of one gambling investigation in the US, paying a $10 million fine to settle a 2002 federal lawsuit. The largest e-wallet in the world has little incentive to serve an industry facing any amount of legal ambiguity.
The revenue doesn’t justify the risk.
Apart from PayPal, however, Rau believes most processors will “ride out the storm” in the US. In his estimation, companies like WorldPay and SightLine are too dedicated to online gaming to exit the market quietly.
“SightLine’s revenue is so entrenched in gaming that I see them kind of going down with the ship. They’d have to make a very, very critical business decision to leave this. They’re the stickiest right now.
“WorldPay has been in this since the beginning as Vantiv, and they do gaming across the world. So they’re probably sticky, but they could make a tactical decision [to exit]. I think that would ruin their long-term opportunity, because there are others that would come right in.”
Therein lies the problem.
Depending on the breadth of the OLC opinion, Rau sees an interesting conundrum brewing for policymakers in states with legal online gambling.
“If these long-standing domestic processing partners start exiting the market, regulators will have to make a decision on whether or not they want to allow offshore transactions. That will be a tough one. They’d have to preserve their revenue by going offshore. And that would not have a very good taste.”
Any restriction on moving fiat money also increases the likelihood that cryptocurrency gambling could find a foothold in the US. Rau doesn’t think that’s the most likely outcome, but there will be other options.
“It creates an opening, not just for cryptocurrency — and I don’t think we’re truly there from a regulatory standpoint — but it does open things up for those operators that are in the gray market… These recovering alternative payment methods are looking at this market as an opportunity, the more gray types of processors.”
Those who’ve spent time playing online poker in the past understand this possibility.
During the gray market period surrounding Black Friday, processors often used underhanded methods and fake companies to fulfill withdrawals. Payout checks might be issued by a mattress distributor in Canada, for example, or a services provider in Asia. Deposits were often padded by a few cents, apparently an attempt to mask a string of rounded transactions.
Needless to say, driving gaming transactions back to the gray market is not in anyone’s best interest. Should the OLC press its new opinion, it could come at the expense of regulated transactions, significant state tax revenue, and critical consumer protections.