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Kevin Smith

Visa and MasterCard Make Things Tough on I-gaming Operators

17 August 2001

Stricter enforcement of policy by the world's two leading credit card networks have many online gaming operators scurrying for ways to better manage their credit card customers.

Visa and MasterCard are coming down hard on the use of credits among online gaming merchants and are demanding that third-party payment solutions which cater to the online gaming business be coded as gambling transactions.

Officials with Visa and MasterCard deny any recent change in enforcing their policies in the I-gaming sector, but sources have confirmed to IGN that MasterCard International, in an effort to lessen some of the blow from chargebacks, has tightened the strings on operators who facilitate credit-card transactions.

If a player wins or chooses to cash out with a balance owed to him, the operator can issue the player a credit. Many gaming operators run 40 percent to 50 percent credits a month.

MasterCard, though, has recommended that operators instead pay any winnings or extra balances due to players through checks or wire transfers instead of using the credit card.

The exact reason for the recent crackdown is unclear. Overall, Visa and MasterCard have told processing companies that the effort is to curb high amounts of fraud and chargeback costs.

Some operators feel that the recommendation to use other transaction methods to pay out winnings is a way for the credit card companies to make even more money.

"Think about it," one operator who wished to remain anonymous said. "If you gamble $1,000 with me initially, the credit card company is going to make its 5 or 6 percent of the transaction. If you then win another $1,000, and I credit it to your account, then it is as if that first transaction never happened and they don't get their percentage. It may only be a little bit each time, but that can add up to an awful lot."

"The industry is facing the darkest times we have had to face to date. We are having to use alternative payment methods such as NETeller, ClearPay, PayPal and Firepay which are acceptable but are not as easy to use by our customers."
- Baron Menzel, Bingo

Operators can also make credits to a player's account who disputes charges. Instead of fussing with chargeback claims, it is easier to just credit the account. A chargeback occurs when a customer makes a deposit and disputes the charge. His issuing bank notifies the credit card processor of the dispute, and the processing company then debits the operator's account with the amount of the disputed charge plus a hefty fee.

Savvy operators realized that, to bypass chargeback fees (which start at $15 each, plus a percentage of monthly business) instead of processing chargebacks as chargebacks, they could instead credit the consumer's account.

MasterCard started cracking down on the practice in April of this year by sending out letters and imposing fines for operators who were too generous with the credit option.

According to processing sources, the company laid off of the issue during the May billing cycle, but again put the clamps down on the practice for June and July.

Steve Fein, the head of Signature Card Services, a company specializing in credit card transactions, said Mastercard has decided to start viewing credits in the same light as chargebacks.

The fine structure for chargebacks can be very unforgiving to operators. Once chargebacks reach a high level (1 percent) over two straight months and the trend continues, Fein explains, operators can get hit hard.

MasterCard starts to levy a monthly fee of $25,000 plus $25 per chargeback. After five months that monthly fee is increased to $50,000 and the per-chargeback penalty goes to $50. In months eight and nine, the per-month fine goes to $75,000 and the chargeback fee is $75. If an operator still has high chargebacks for 10 months in a row, the monthly fee jumps to $100,000 and the chargeback fee remains at $75 per chargeback.

In an industry where every dollar counts, Fein says that chargeback penalties can start to eat away at a company's bottom line quickly.

"When you're hitting month 10, that means $1 million plus $75 a chargeback," he said. "That is a pretty hefty cost."

Avoiding the stiff penalties has become a fine art for operators, especially those in the gaming sector. Crediting a consumer's account when a disputed charge arose was easier for an operator than filing the claim under an actual chargeback.

But not anymore, says MasterCard.

"If, in the opinion of MasterCard, the merchant is issuing credits as a substitute for chargebacks, to avoid the applicability of this program, then MasterCard may treat the credits as chargebacks to compute the applicable percentages," the company's policy reads. "In addition, MasterCard may assess the merchant a $15 fine for each credit processed."

Chuck Crawford, a spokesperson with credit card consulting firm Crown Services, says that many in the gaming industry consider themselves targets of the new enforcement, but that isn't the case.

MasterCard is trying to cut back on fraud and chargebacks, and both Crawford and Fein agree that the online gaming business lends itself to a great number of chargebacks.

An even bigger issue for gaming operators, says Crawford, is the crackdown on e-cash companies that cater to the gaming industry.

As he points out, unlike more mainstream e-cash systems like PayPal (and the now defunct Flooze), a lot of e-cash companies have no clients outside the gaming industry.

While MasterCard has come down hard on the charges that try to cover up chargebacks, Visa has tightened the reigns on e-cash companies.

"Many of the e-cash companies didn't have anything else you could purchase with it," Crawford said. "The only place you could use the e-cash was at a gaming site."

Many e-cash companies are set up to get around credit-card regulations that prohibit consumers from using their cards for gambling purposes. If they use their cards to buy the e-cash, the company has no control over what the e-cash is being spent on. If the e-cash company focuses on only one area of the Internet economy, it's easy for the credit card company to monitor where that e-cash is going.

"The preponderance of transactions--sometimes 90 percent--were gaming," Crawford said. "Visa took a look at that and said, under their interpretation, that probably should be properly categorized as a gaming transaction. And the e-cash company should be identified as a merchant that’s in gaming and therefore using the merchant category code of 7995."

The 7995 code gives the credit card company and the processing company a red flag that the transaction is being used for gaming purposes. E-cash companies were able to get around the coding since they weren't a direct gambling interest.

"What they've done is come up with an interpretation that says, 'If the e-cash is primarily used for gaming, and there is not much else that can be purchased with e-cash, then those transactions should be coded properly MCC7995,'" Crawford said.

Operators in many unregulated jurisdictions try to avoid using the proper coding, an activity that Crawford says only raises more eyebrows.

"Long before this industry started, acquirers submitting transactions were required to code them correctly," he said. "Member banks were often audited to be sure the coding was correct. With the online gaming industry and others being so controversial, both associations are making special efforts to assure that coding is correct. There's a loss of face if they don't enforce their own rules."

So where does all this leave online gaming and credit card processing companies?

Ideas vary on what card the industry should play next. Some say a class-action lawsuit needs to be filed, while others say a legitimate third-party payment plan needs to be introduced for the industry. And then there are those who think operators just have to monitor activity more closely.

"We don't want to poke the dragon in the eye," Crawford said referring to the major credit card companies.

Baron Menzel with says that taking the dragon head on could be the best approach.

"Something has to give soon," he said. "Either a class-action lawsuit by players who are sick of being told where they can spend their money or a new payment method that is easy to use and obtainable to creditworthy people at an affordable rate."

BingoHour was informed by its credit card processor, Surefire, earlier in the year that taking MasterCard would probably open the site up to more liability than it was worth.

The site didn't take MasterCard for about a month after that. It has since reneged, but with limitations.

"We are limiting the deposit amounts made by this payment method and also requesting copies of all credit cards players wish to use and accompanying identification," Menzel said. "Fortunately, honest clients have been more than happy to comply with this request."

He admits, though, that the system is not the most convenient and instant-gratification-friendly way of doing things.

Menzel says the site, like many others, is trying to promote other payment methods.

"The industry is facing the darkest times we have had to face to date," he said. "We are having to use alternative payment methods such as NETeller, ClearPay, PayPal and Firepay which are acceptable but are not as easy to use by our customers."

The lack of a system that's easy to set up and can have players playing on sites within minutes instead of days has driven some of Menzel's longtime players away.

"We have had customers who have played with us for almost three years that cannot cash in with the conventional cashier method," he said. "They do not have the patience to open a new account online and disclose their personal details yet again, and as such, they are not playing with us."

Players are leaving the site despite massive efforts to retain them using other payment options.

"Our customer service reps have done a wonderful job in dealing with players who have had problems cashing in and have introduced players to these new methods," he said. "I feel that we are now concentrating as heavily on selling alternative payment methods to our customers as much as we have ever done providing a responsible trustworthy gaming product."

Although Menzel may be one of the many gaming operators who feel persecuted by credit card companies, Fein says their feelings are misguided.

"They (the credit card companies) are enforcing it across the board for all merchants," he said. "They haven't singled out one merchant. They got adult (entertainment) merchants that are also getting hammered with this kind of stuff."

Lawsuit or not, the only safe assumption right now is that the credit card giants are not going to let e-retailers cover up chargebacks with credits. The reinforced coding issues have added to already strained relationships between the credit card companies and the gaming sector.

Menzel did ponder an interesting solution to the problem from an operator's standpoint, if even somewhat off the cuff: "I wonder, if I went to a bank and said I want to lend my money to my players on a credit card at a reasonable rate to play my Internet gaming sites without any types of restrictions on the player's ability to use his card or me as the merchant accepting his transaction, what the response would be?" he asked. "I would want to pay the bank and Visa or MasterCard fees on every transaction. I wonder what they would say about that."

Visa and MasterCard Make Things Tough on I-gaming Operators is republished from
Kevin Smith
Kevin Smith