CyberSource Exec Comments on Back-End Issues

9 July 2002

For years now, Jeff King has been monitoring the interactive gaming industry with a close eye. He has seen operators struggle to acquire new players in a cost-effective manner while battling credit card companies who continually block their cards for use at Internet casinos and sports books.

King is the director of product management for CyberSource, a company that cut its teeth providing e-commerce solutions for some of the biggest retailers in the world. Its portfolio includes the likes of Wal-Mart, Nike, Harley Davidson, The Home Depot and a host of others.

CyberSource has launched a gaming-specific product in light of the unique demands and challenges facing gaming operators. During the research and development of the eGaming Compliance Solution, King was able to get a pulse on the industry and feels operators still have challenges ahead of them but admits many have done well to cope with the current situations.

In addition to dealing with credit card acceptance issues, King said it is hard for legitimate operators to effectively monitor their operations without going out of business.

"Operators are having to put together an extremely complex system," he said. "They need tools that manage their compliance rules, different banking relationships for credit cards, checks and alternative payments and they have a huge fraud problem to deal with as well."

With so many facets to be concerned with, CyberSource created a one-stop shop for operators, and King is hopeful that the gaming industry will give the system serious consideration.

"Tying all of that together in a system is a very complex thing to have to do," he said. "This is a great opportunity for us to approach these operators and have them handle these situations efficiently, rather than the way they are doing it today."

Although charge backs have plagued many operators, King said most of them fail to see the bigger picture with their business plan.

He said he had many conversations with operators who told him that they have a 3 percent charge-back rate. In addition to that charge back rate costing the operator upwards of $50,000 a month, King said the customer service team that is hired by the operators can cost an additional $320,000 a month.

If an operator can put automated systems in place to streamline as many operations as possible, the cost of running a customer service department can be decreased enormously.

The current dilemma for many gaming operators isn't lost on King. He sees many of the same struggles today in the gaming sector that giant retailers were faced with two or three years ago when they tried to make money off of the Internet.

Although gaming operators don't have the same overhead issues, King feels their customer acquisition challenges are very similar to what retailers dealt with. He gives the analogy of an operator who has 1,000 potential regulars sign up on his site a month. Eight hundred of them will be accepted players while another 100 will be denied and another 100 will be converted to regular players.

"The operator should be able to spend his time on all of his valid players," he said. "The more energy and resources they have to put into acquiring them, the less can be devoted to keeping them."

While he sees many similarities with the retail industry of two years ago and the gaming sector of today, King said a big difference is that many gaming operators who aren't on the up-and-up won't survive the evolution of the industry.

"I think at the end of the day they tend to weed themselves out," he said. "Two years ago in retail you could lose as much money as you wanted and it didn't matter. When I look at the gaming industry, you are basically almost able to make money just by having a casino site. In the next 12 months it is going to be increasingly difficult to just do that."

"A lot of the operators are starting to take the money and run," King continued. "They are either selling their organizations or just closing up shop. That is a sign of competitive pressure and competition in this area."

King feels that Internet gaming operators will continue to battle with the credit card issues for at least the next six months. He also has little sympathy for the industry though, feeling that the tightened regulations were brought on due to the high amount of fraud in the early stages of the industry.

Had operators been more careful in the way they conducted their business, King feels things wouldn't be where they are today. On the other hand, though, he admits that many operators have done a good job in showing governments and banking institutions that they can police themselves.

"The good news is that a lot of operators, while they are concerned about the rise in credit card declines, many of them have handled the problem pretty well," he said. "By communicating with those customers that have been declined and following up with the information that has been collected, often times they have been able to eventually get them signed up."

Online debit cards aren't the answer. King said the industry has to solve the problem, an effort that has been ongoing for years.

"That isn't coming to save the day anytime soon," he said. "It is checks and alternative payments that are ultimately driving this in the next 12 months."

King finds it ironic that in an area where traditional credit cards have a larger market share than anywhere else, they would indirectly help their competitors.

He said only 15 percent of the transactions conducted in the physical world are done so with credit cards. In e-commerce those figures are more than reversed with nearly 95 percent of transactions being paid for via a traditional credit card.

"I think Visa and MasterCard are really driving the alternative payment industry," he said. "That is the last thing they want. They love the Internet, it has been a huge boom for them."

At the end of the day, King feels the credit card companies might be shooting themselves in the foot.

"By being aggressive about declining these massive amounts of transactions, we aren't talking about a small number of transactions, they are driving to creation a whole new industry," he said. "An industry that will directly compete with them. It is really silly."

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