Update: How to use Banks for Internet Gambling
Yesterday’s Bank Talk entry examined how NetSpend once served as a retail storefront for internet gambling sites. Online gambling requires some kind of access to the payments system. The rulers that be in our financial world are thrust into a new role of deciding how to best respond to the age old issue of addiction to gambling.
The means through which gamblers can utilize the banking system for their gambling is evolving. US regulatory agencies (Office of Thrift Supervision, Federal Deposit Insurance Corporation, Treasury, Federal Reserve) have remained quiet on this topic. In the fall of 2009, Treasury and the Federal Reserve issued a joint statement, in response to outside concern. They took the dramatic step of announcing that they would delay any action on this issue until 2010.
Congress appears to be the likely location for any new reforms.
How online gambling is changing
My research tells me that banks are still an agent for deposits on gambling accounts. US banks have largely left this market. They have been replaced by willing European banks. The Financial Services Authority (FSA), a UK bank regulator, appears to oversee some of the new institutions that are working with those gambling firms.
Gambling sites such as PokerStars.Com or FullTiltPoker.Com need a way for their customers to bring money to the game. Until the US established the Unlawful Internet Gambling Enforcement Act (UIGEA), consumers could use NetSpend to put money on debit cards at US banks, with the benefit of FDIC insurance.
The new account of choice is the “internet wallet”. As far as I can tell, these are vehicles that utilize ACH withdrawals to transfer money from a consumer’s bank account to another account. It is no different than any other electronic payment. The key difference, from a regulatory perspective, is that the gambler is not establishing an account in his or her own name. Rather, they are paying the online firm to purchase gambling tokens. Banks are still involved. They handle the ACH transfer and act as the processor to withdraw the funds from the account.
- JP Morgan Chase and CIBC (a Canadian bank) do the transfers for E-wallets express.
- Fortis provides the banking for QuickTender.
- UKash offers its UKash Mobile Wallet. It is regulated by the FSA.
These are not wire transfers. They can handle small transaction amounts. Typically, this procedure means that gamblers have to wait one or two days for their transactions to appear in their electronic wallet.
Canadian gamblers who want to play online still have the benefit of deposit insurance. InterAC Money Transfers works with Canadian banks. The rules have not changed in Canada. Those payments are handled by BMO (Bank of Montreal), RBC, Scotia Bank, or TD Canada Trust. Their deposits are insured by the Canadian Deposit Insurance Corporation. Three of these banks, RBC, BMO and TD Canada Trust, have substantial bank presences in the United States. BMO purchased Harris Bank, and TD Canada Trust purchased Commerce Bank (New Jersey) in 2007. In all, InterAC serves 20 different Canadian banks.
Some of these wallets are organized under a new financial agent: the Electronic Money Institution. European bank regulation puts these institutions under a different and less restrictive oversight schedule. They still must conform to money laundering rules, and they have to redeem the funds of their customers at par value. Funds transferred to these accounts are not accorded the rights of deposits, provided that they are immediately transferred into electronic currency.
The second rule appears to be the reason behind inflated currency. It is not unusual for an online site to give new “depositors” a $50 bonus, or to offer to match an additional portion of any new deposit with a fractional bonus.
At the same time, gambler pay some hefty fees, in real dollars. Here is the fee schedule at e-wallets. I am not clear if those fees are picked up by the ACH-facilitating institution (JP Morgan Chase) of by the gambling firm.
Future Concerns and Policy Issues
I think that this issue is far from settled. Internet users in the US are still placing deposits in banks to establish their stakes. Going forward, mobile phones would seem to be the next spot. As one person told the Manchester Guardian, “I find it a lot more convenient to gamble with my mobile phone because I travel a lot and can take it anywhere.” Juniper Research suggested that mobile phone gambling would account for almost $20 billion in business by 2009, mostly through lotteries and sports wagers. It is hard to know if that estimate turned out to be true. Mobile phones aren’t the only portal. U-Kash is developing a system through VOIP.
There is an age-old debate about how to regulate any kind of vice. Some argue for rules that restrict or eliminate the targeted activity (Prohibition), while others feel like a system where the vice is both legal and well-regulated works better (drug use in Amsterdam).
That debate seems to playing out in Congress. The House Financial Services Committee brought up the idea of updating the UIGEA this fall. Barney Frank (D-Ma) argued for establishing a permissive and well-supervised system akin to the FSA’s approach in England. His position was supported by testimony from Perry Aftab of Wired Safety and Keith Whyte of the National Council on Problem Gambling. Whyte pointed to studies that show that permissive gambling regimes in England have not led to increase rates of gambling addiction. Spencer Bachus (R-Al) countered with just the opposite and sought to reaffirm the current policy. The issue remains unresolved.
