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Kevin Smith

Q&A: Melody Wigdah

9 September 2002

Online gaming operators' long struggle to find a secure, reliable and easy payment system for their customers hit a low on Aug. 28 when Internet sports books were cut off from using the PayPal payment system. With Visa and MasterCard virtually shutting the door on I-gaming, PayPal had been the best (and arguably the last) option for many operators, so the need for a breakthrough solution has been upgraded from serious to urgent. A handful of products are being hailed by their creators as the answer, but for various reasons none have caught on.

Melody Wigdahl is consultant to the industry and helps find payment systems for a variety of operators. IGN talked to Wigdahl about the PayPal situation, the long-term effects it will have on the interactive gaming industry and why no one has come through with a solution.

"There are products out there that have some good features, but there really isn't one that is going to serve the industry as a whole."

IGN: PayPal said it was cutting off gaming sites late last month. Are you finding that the system is no longer an option or is there any loophole around what they are doing?

Melody Wigdahl: The sports books have been shut off completely, and for the most part, any casinos that have sports book affiliations have also been shut off. Obviously it is easy to route things through a casino if they are coming from a sports book.

It has just complicated things for a lot of people right now. Here it is the beginning of the football season and a lot of operators are scrambling to find new services. But I am sure that is why they shut down the sports books first. They didn't want all that money running through their system when they are being investigated and on the verge of being sold.

IGN: There have always been other payment alternatives out there targeting the interactive gaming industry, but many of them seemed to be overlooked in the past because PayPal was working for the operators. Will the demand for those alternative services increase now?

MW: It's a little more complicated than that. PayPal has been coded (by MasterCard and Visa) as a gaming transaction for a while now, so to a larger extent even that wasn't working all that well for operators.

It was working if people were using alternate methods of funding their account, but if they were using a credit card to fund it, it wasn't helping them much because it was being coded as gaming.

Many operators continued to use the system though because even the credit card transactions that would go through were running at a transaction rate that was significantly lower than what the SureFires and Gateways were able to do. So even though it was coded as gaming, what was going through was getting approved at a lower rate so the profit margin was better. So if you were getting fewer approved transactions, but were making more money on those that were getting approved, you dealt with it because it helped the bottom line.

IGN: Is there an easy answer to why there hasn't yet been a system to answer all the needs of the online gaming industry?

MW: The main problem with all the systems out there, to be perfectly blunt, is that there isn't a single one that has been really functional.

IGN: Is this because at some point in time they all rely on a credit card to fund the system?

MW: Yes, but it goes even deeper than that. It isn't just the funding mechanism that makes them almost impossible; it is also the fact that globally, the banking systems don't communicate with each other.

For example, if you try to do something that is a direct debit to a consumers bank account, which is trying to be done with the debit card processing side of things, that isn't always going to work. Some countries have approved the use of their ATM cards online, unfortunately the networks that control that industry in the U.S. have never approved an online PIN-based access system yet.

IGN: Is that something that being worked on?

MW: There is a lot of speculation on that, and we have been deeply involved with some of these products. We have had systems go for approval that have met all their previous standards and regulations, but then not get approved. We have yet to get an answer on why they aren't approving us, but some people speculate that it is for political reasons. A lot of people feel that until the big networks have a product of their own to launch they aren't going to approve anyone else's.

IGN: So you don't see an ATM-based system making major inroads anytime soon?

"... We have a lot of cockroaches that have crawled out of the woodwork."

MW: If you look at debit products, which is the main focus right now, when you get outside the U.S., country-by-country, some of them have approved online access to their accounts, but some of them haven't. So as a provider you have to go through the networks and legal issues in each individual country just to get approval for your product and that can be a nightmare. But that is why Visa and MasterCard are so successful at what they do. They laid their network out decades ago so it is already in place.

IGN: A lot of systems based on stored-value cards have also popped up recently. Where do you see that movement going?

MW: That situation has been complicated deeply by money laundering issues. Stored-value cards have to be funded somehow too, and many of them rely on credit cards, so you are right back where you started. It is difficult to work around those funding options.

There are products out there that have some good features, but there really isn't one that is going to serve the industry as a whole. Some of the systems are operating out of regions that make it difficult to do business in the U.S. due to the Patriot Act.

There is one system that is operating in Caribbean, and thanks to the Patriot Act, they are coming under a lot of scrutiny. That complicates it.

IGN: Do you get the sense that the industry is ripe for being taken advantage of by some of these payment solution providers?

MW: A number of the (suppliers of) products out there seem to want to make all their money up front. There is a new product that was about a $5,000 set-up fee, and we have heard of some clients who have had to buy 1,000 CDs up front, because it is a CD-based product, at $9.95 a piece, plus the setup fee.

There are a lot of products out there, too, that are based on hardware pieces, and they are not cost effective for operators. A lot of the systems sound great, but can't get the price down to a manageable level.

So my thinking is, and I am sorry to say this, but we have a lot of cockroaches that have crawled out of the woodwork.

IGN: Do you find it ironic that here is an industry that is one of oldest sectors in e-commerce, and one of the most successful, having to go through this "re-evolution," if you will, in trying to find a payment solution?

MW: That is exactly what I see happening. When I first started doing this in 1996 and in early in 1997, one of the reasons I was successful was because I wasn't charging a $10,000 non-refundable application fee, and that is what a lot of people were doing back then. We came out and treated [operators] like real merchants and we treated them fairly and expected them to come up with fees based on any other high-risk business.

Now, unfortunately, we are back to the people who are crawling out and saying 'you don't know who we are and whether or not our product works, but you are desperate so you cough up the money.' That is not a good spot to be in, and it isn't a good attitude, but the scary part is that some of the people in our industry are so desperate now that they are going to do it and it is going to get ugly.

IGN: Looking into your crystal ball then, were do you see this whole situation going in the next three months?

MW: Of all the products that we have looked at, even over the next 90 to 120 days, I am not sure that there is one out there that will have a real universal appeal. We get a lot of calls from people who have great ideas, but most of the products coming out are hardware based, which makes them expensive and hard to get into the consumers'1 hands. Maybe there is something out there that we haven't tripped over yet, but I doubt that.

IGN: Long-term then, how do you see this shaking out?

MW: I think it will be in the six-to-12-month range before we really see a full-feature product. And what it is going to take is a big player to step to the table and do it. That is really what it comes down to. It is going to take someone that has the money to put together international bank relationships. It will have to be a company that has the call center functionality and the back office support functionality. There are a lot of products that are temporary fixes or address a small segment of the market place, but there isn't anything yet that is a broad-based product that is going to replace the need for Visa and MasterCard. In the next six months I think we are going to be safe, but the next six months are going to be pretty tough. We are fighting the technical issues of communications between international banking systems and trying to find ways to load products that don't necessarily use Visa or MasterCard.

Q&A: Melody Wigdah is republished from
Kevin Smith
Kevin Smith