Will Credit Betting Survive?

What's in the future for credit betting in the online gambling business? Are we heading for a universal ban supported by all credit card companies, issuing banks, and acquiring banks? If so, will e-commerce merchants be able to finagle there way into disguising online gambling transactions? Questions are abound and answers scarce. Don't look now, but the bubble could be getting ready to burst.

Rumblings that the banning credit card transactions across the board have stirred for months, but really heated up when a new California lawsuit brought American Express and Discover into the fold a few weeks ago. For those keeping score, MasterCard, Visa, American Express, Discover and at least two issuing banks have been challenged on the enforceability of online gambling debts. As a result, Providian National Bank, First Union Visa have banned online gambling transactions and more institutions are expected to follow suit. Toss in the perceived ease of money laundering off-shore and the fact that the legality of online gambling has been challenged in the U.S., and the industry is looking less and less attractive to those involved in credit card processing.

But, is an all-out ban enforceable? If so, it would be in the hands of the acquiring banks. Visa recently instituted a policy in which online gambling transactions are flagged with a code (merchant category code 7995). It's up to the acquiring banks, not the merchant, to code the transactions. MasterCard is said to have a similar system in the works, although some speculate that the company will ban online gambling transactions altogether. American Express is reportedly opting for the latter policy. The wait is still on for Discover to make a move.

All institutions that ban online gambling transactions rely on the acquiring bank to shut the door on Internet casinos. Getting back to the issue of enforceability, the question persists: What's to stop the acquiring bank from labeling online gambling transactions as retail or business-to-business transactions? A third-party e-commerce provider could simply disguise an online casino as a cyber bookstore, right?

According to Stephen Fein of Signature Card Services, it's possible, but the steep risk in doing so will scare off most banks. With that in mind, it's important for the acquiring bank to scrutinize merchants and monitor exactly what types of transactions are transpiring. Thus, the "don't ask, don't tell" approach doesn't fly. "It's very unlikely that the acquiring bank would have not underwritten the merchant to determine its exact nature of business," says Fein.

As for online gambling operators with their sights on deceiving acquiring banks, Fein adds "It is my experience that merchants who try and disguise themselves without the acquiring bank having full knowledge of what they are doing are opening themselves up for criminal charges of credit card fraud."

Crown Management Services CEO Chuck Crawford points out, however, that a lot of acquiring banks, regardless of their intent, aren't using the specified code for Visa transactions. "There are no exceptions to the rules, however, acquirers obviously don't always provide the correct code, or enforce the rule," Crawford said. "Theoretically, an acquirer that does not apply the rules can be sanctioned, lighter or heavier depending upon many factors, including the willfulness of the transgressions.

"Moreover, we're not just talking about the Citibanks of the world who are fastidious, but many small Caribbean and other banks offshore, without the expertise or staff to jot every tittle and tittle every jot. The card associations do their best to audit and enforce all the rules, but it is pretty much a spot-check system. So, a wrongly coded transaction might make it through the system as classified as "Internet" (generic) rather than online gambling. Typically, the associations are pretty forgiving to their members who don't know the rules or don't apply them correctly or consistently."

"So, can it be done? Sure, I suspect only a minority of transactions now go through the system coded correctly. However, to do this with malice aforethought, rather than incidentally/accidentally, to me would be a risk most member banks probably do not wish to take."

Suffice to say, even if a few merchants or acquiring banks manage to sneak through the cracks, the industry as a whole would not be able to thrive under an all-out ban on credit card transactions unless an alternative method of e-commerce were universally accepted. Companies such as Signature Card Services are offering virtual check solutions to e-commerce merchants, however, they haven't achieved widespread usage. PIN-activated Internet debit cards seem like a feasible answer, but most banks aren't allowing them yet.

And despite the bleak future painted by events of late, don't count the credit card companies out yet either. It's not exactly easy to turn away from a billion-dollar industry with tremendous growth potential.

The future of the e-commerce sector of the online gambling industry is anything but clear, but most would strongly agree that an answer is out there and maybe even within reach. One thing's certain: Given the current state of credit betting, change--for better or for worse--is on the horizon.