Bracing for the PayPal Freeze

Online gaming operators' payment processing woes are about to get a lot worse after Nov. 24, when PayPal stops processing Internet gambling transactions.

Person-to-person auction site eBay announced its intentions to acquire the e-cash system on July 8. At that time it also announced that once the takeover was complete, PayPal would no longer allow consumers to use its network to pay for online gambling. eBay completed its purchase of PayPal on Oct. 7, when shareholders representing 65 percent of PayPal's stock voted in favor of the $1.5 billion sale.

"... The biggest impact will come over the course of the next three to six months."

-Brian Abboud
Global Entertainment

One industry insider, who spoke on the condition of anonymity, said the end of the popular payment option is sending a lot of I-gaming operators into a tailspin.

"I think a lot of people just never really took it seriously that PayPal was really going to follow through with this," the source said. "And a lot of people just left it to the last minute to find an alternative source. Also, there were a lot of people who last spring could see the handwriting on the wall and did start making plans... for merchants who have had a pretty heavy reliance on it, it is going to hurt them if they haven't found an alternative or replacement."

The issue doesn't just affect operators. CryptoLogic, the gaming software provider, warned last week that the end of PayPal's service could pose a risk to fourth-quarter results. PayPal processes 15 percent of CryptoLogic's licensees' gaming transactions.

Nancy Chan-Palmateer, a spokeswoman for CryptoLogic, said that even before eBay's announcement about PayPal, her company was trying to come up with alternative payment solutions. In its third quarter, which ended recently, the company debuted two options, a telephone billing application and an e-wallet system that is similar to PayPal. Chan-Palmateer said so far the alternative methods have gotten good responses from players.

"We've seen good traction with some of the new ones coming on board, and I think as people... see that they need to migrate over from PayPal, we'll see more traction," she said. "The objective is to offer licensees and players the broadest range of options so that whatever their payment choice is, they have something easy to use and they can get online quickly."

eBay is not keeping track of how many of PayPal's merchants will be affected by the ban on online gaming transactions, said an eBay spokesman.

"We don't really know because the actual connection between the user and the organization takes place... obviously it takes place through us, but we don't catalog the information in that matter," he said.

One way PayPal helped the I-gaming industry--beyond its facilitation of gaming transactions in the wake of U.S. credit card processing problems--is that it taught consumers how to use e-cash systems. One source in the payment processing industry said that even though it hurts to see PayPal leave, at least the path has been cleared for other e-cash payment mechanisms.

"The positive thing about PayPal, even though they're going away now, is it did establish a consumer base that is now openly accepting to buy online, and so, in that context, they really did the industry a great service. Now it's a lot easier to switch people over to a non-credit card-based solution than it was before," said the source, who did not want to be named. "We had e-cash systems before that nobody would touch, because people didn't understand where their money was."

Now that PayPal will no longer accept Internet gambling payments, however, players will have to adopt new methods of payment. Bryan Abboud, the CEO of Global Entertainment Holdings/Equities Inc., said that could be a major stumbling block.

"I think the biggest impact will come over the course of the next three to six months," he said. "It forces operators in the industry to switch from their current provider, which is PayPal in this particular case, and they have to convert their clients to other providers. The players have to relearn how to process their funds, and my experience so far says this is not an easy task. Typically players get used to what they're doing, they like what they're doing, and if you change it on them, you're going to lose business as an operator in the industry."

As for whether other e-cash companies will easily fill the void left by PayPal, IGN's source said that's not likely to happen. Players who try some of the systems will have just as hard of a time as if they were trying to gamble with U.S. credit cards. The source said that is a particular problem with NETeller, an e-cash service used by numerous I-gaming operators.

"It's popular, but it's also coded gaming," the source said. "It's an alternative method to transfer funds and it is very similar in its functionality to PayPal, and the consumer is very comfortable with it, but it's still coded 7995. What it comes down to is the consumer can usually use their credit card just as easily as they can use NETeller."

Abboud is more optimistic about the possibility of companies like NETeller taking some of PayPal's I-gaming business.

"Right now the field's pretty open," he said. "It's a lucrative business to be in, and I'm sure there are many people waiting in line to be the next PayPal-type of company for the online gaming operators."