Nine Months to Figure It Out

When the U.S. Congress clamped down on Internet gambling last weekend, the waters became particularly muddy for payment processors, resulting in the emergence of a double-sided issue:

(i) the question of whether (and how) processors like Neteller and FireOne will continue processing online gambling transactions originating from the United States.

(ii) the reach of U.S. law with respect to processors based overseas.

"It's a very complex issue politically," said Steve Mott, who heads BetterBuyDesign, an electronic-payments consultancy in Stamford, Conn.

With the Unlawful Internet Gambling Enforcement Act of 2006, lawmakers hope to sever the symbiotic connection between payment processors and Internet gambling sites. Having passed the Senate as a rider on the Safe Ports Act, summarily, the amendment will prevent online gaming sites from receiving fund transfers of any kind for bets meeting the criteria for illegal gambling and direct the U.S. Treasury Department (TD) and Federal Reserve Board (FRB) to generate regulations that would in turn direct banks and third-party institutions to block payments to these sites.

The TD and FRB have a period of nine months (ending July 2007) to effect the regulations.

Can Payment Processors Still Process US-Based Online Gambling Payments?

Some observers have theorized that payment processors could handle certain payment types falling outside the scope of the legislation.

A source in Washington, D.C., indicated that the legislation contains a provision that allows the TD and FRB to exempt transactions that are difficult to identify as bets or other gambling-related payments. The source said that transactions completed on the automated clearing house (ACH) system, for example, are difficult to identify because they are non-coded, meaning the ACH system lacks an automated method to identify Internet gambling merchants by code. Credit card processors, on the other hand, have protocols in place that automatically identify Internet gambling merchants by a code, "7995," which appears on all online gambling credit card transactions.

"The TD may write some regs forcing people to cut off (FireOne) and Neteller, though they may not even go that far," the source said. "It's not my opinion that the TD is going to tell the banks they have to start coding ACH. In fact, the black letter language of the bill that passed tells the TD they can't do that."

How Far Does the US Legislative Hand Reach?

While many observers suggest the prohibition will prevent U.S.-based banks and third-party institutions from processing online gambling payments, overseas payment processors remain, de facto--perhaps not de jure--beyond the reach of U.S. regulation. Just how the legislation will affect overseas processors like Neteller and FireOne, again, is far from certain, experts say.

"The great unknown is how far into the Internet commerce stream federal regulators are willing to go," I. Nelson Rose, a gaming-law authority and professor at Whittier Law School, Costa Mesa, Calif., said in his analysis of the legislation.

It is unclear whether U.S. regulators would prohibit U.S. banks from transferring funds to processors based overseas, as the foreign entities are "beyond regular U.S. regulatory control," Rose said.

As a result, processors may find ways to sidestep the law, Mott suggested.

"The history of the (gaming transaction) business has very few precipitous drops based on legislation," he said. "They'll figure out a way to get (payments) into the system."

The Legislative Litmus Test

Since business commenced post-prohibition, Neteller and FireOne, both publicly traded companies, have suffered greatly on the London Stock Exchange. After Monday's plunge, Neteller shares on Tuesday gained 3p (1.82 percent), closing at 168. FireOne shares matched Tuesday's close, staying even at 66.

Neteller has so far maintained a cautious stance, saying it "will continue to monitor the progress of this legislation to energetically plan and adapt (its) business to minimize any potential adverse impact."

FireOne said in a prepared statement that the U.S. legislation "will have a significant negative impact" on its results.