Mr. Chargeback Rears His Ugly Head beside the Kyl Bil

8 September 1999
If I hear the name "Kyl" again, I swear I'm headed offshore to open a casino called Of course, it would be open only to Americans since the last time I checked, we were free to do whatever we wanted on our computers in our homes, including spend money. Initially, I was going to address the fact that credit card fraud, mainly chargebacks, are costing the industry millions and there is very little being done about it. However, Kyl stole my thunder with this discussion of this bill, despite the enormous difficulty of ever enforcing it. Why, even the Justice Department admitted they would encounter many barriers while attempting to enforce it.

Starting this week, most online operators have realized that the Kyl bill will eventually pass this year. The bill has been gaining support and the online industry has made little headway with its lobbying or lack of support. The majority of the larger companies already have contingency plans in place, in case certain parts of the bill are actually enforced, and to be quite frank, even these operations feel that this bill will be a harmless, unenforceable piece of legislation.

When the National Gaming Impact Study Commission made their recommendations to the President, Congress and the Department of Justice, those operators were thrown a curve. Most industry experts expected that the only enforcement would pertain to Internet Service Providers, but they were sadly mistaken. The committee recommended that the President and Congress direct the Department of Justice to develop enforcement strategies that would include credit card providers, ISPs, money transfer agencies, and producers of wireless communications systems. Like most industry insiders, I was shaking my head in disbelief but they kept on like the energizer bunny, with their ludicrous ideas on how they can stop this billion-dollar industry.

I've read this twice now, and am still baffled over the lengths being taken to prohibit gaming. The Commission recommends the pages of legislation stating that any credit card debts incurred while gambling on the Internet are unrecoverable. This is big-time, scary legislation regarding both gaming and credit card laws.

The acceptance of credit cards by Internet Casinos is an integral part of both the current operation and the determinant for how colossal this industry can become. Credit cards provide players with the ability to sign up and begin wagering in less than 15 minutes. They also allow winning to be charged back to their own credit card, a more than understated convenience.

The other side of the coin is not as favorable, as operators are seeing a significant increase in chargebacks and credit card fraud. This is identical to the type of fraud that plagued 900# services in the eighties. Internet sportsbook and casino credit card transactions are called CNP (cardholder not present) transactions, and most credit card merchant account agreements leave the merchant 100 percent liable for these types of transactions in addition to paying a $15.00 chargeback fee.

Recent research and interviews have shown a tidal wave of credit card fraud crashing throughout the industry. What's difficult to believe is that casinos and sports books have very little repercussion. Many times they have evidence that would be sufficient to land the chargebacker in jail in the states, however it is important to realize that these operators will receive much if any, support from the authorities. Can you imagine an online operator pressing charges against a player for fraud? Odds are they'd be sharing a cell.

One would think that in the age of technology, we would have some form of electronic or computer methods to prevent chargeback fraud, but unfortunately, there is not. You can only check to see if the customer has sufficient funds, a good credit history and any bankruptcies but you cannot check for chargebacks. This places the companies in a precarious position, some would say "with their pants down," as they want the business regardless of having no protection. If Electronic Commerce continually gains momentum as a billion-dollar industry, why haven't the credit card companies tried to alleviate these huge financial problems? Experts say this is still a minute percentage of ALL the credit card transactions the world, but what can we do then for prevention?

Most books have opted for some type of automated checking tool that performs a series of checks on the user's card. The most popular one I've run across is called CyberSource IVS, which is a relatively expensive system at $1,495 to set up and an additional $.43 per transaction, not to mention a monthly minimum fee of $195. So, what exactly does all this buy the company? CyberSource claims that it's IVS systems has reduced fraud levels to just .05 percent of sales for most of its merchants. IVS works by having an artificial intelligence engine and analyzes numerous factors of each transaction. This includes shipping and billing addresses, network address and time when order was placed. IVS then assigns weighted scores and compares these placed against a merchants predefined limits before deciding whether or not it will accept the charge. Innovative yes, guaranteed no.

The question still remains though, regarding these pesky chargebacks. Unfortunately, a chargeback is not recorded on a person's credit record. Checking the site, I could not find a definitive answer and called CyberSource. I asked, "If a person who has great credit but has committed several chargebacks and wants to charge $1,000, will those prior chargebacks show up?" The cyber "source" informed me that, no, they would have no way of knowing an individual's chargeback history. This clearly sums up how certain individuals have been able to chargeback to over 15 sportsbooks and casinos, an incident which would never happen in Nevada since casinos freely share information relating to cheats. In the islands and over the Internet, it is more private. There is some sharing of information according to some managers out of Antigua, but one manager stated that when you have operators across the hallway, it is pretty easy to walk over with the information of someone who just cheated you.

What is the industry to do? If 85 percent of the business is coming from credit cards, yet anyone can charge back without recourse, it seems like that is, and will continue to be, a huge financial problem for operators. Permit me to reintroduce the NGISC's recommendations regarding the banning of credit cards altogether. Yes, that might hurt business but it would also force people to wire or transfer money, thus eliminating possible fraud. I'll speak for the operators here, and say that they will take the chance with fraud and continue to give the player the convenience of using his credit card.

Taking my research one final step, I did a search on chargebacks and an interesting article appeared regarding negative database screening. Written by Christine Bednar, the warns of a potential disaster waiting to happen to online casinos. negative database technology screens each and every credit card transaction, matching cards that have performed chargebacks before. One study stated that most people who commit chargebacks are repeat offenders. So while casinos and sportsbooks pay for services that do nothing to eliminate the chargebacks, she mentions something that actually worked for the 900# industry. Bednar wrote that article back in June of last year, so I decided that since the industry has more than doubled there must be several such negative database screening services out there.

My findings were surprisingly minimal, but l did find a site called the Stop Chargeback Coalition (, which seemed inventive enough by the name alone. It is an industry-driven site that collects and processes chargebacks and credit card fraud. How does it work? Each participating sportsbook or casino enters their list of chargeback information into the database. Once their data is entered anonymously, they are allowed to view the entire database and decide whether to process potential wagers' bets. I thought it was an excellent idea, but figured there was a catch, since it seemed to easy of a solution. The administrator of the site told me the annual fee was $2,400, but that the average chargeback loss is at least $3,000. As an industry employee who wished to remain anonymous, he simply said "I am fed up with the same people taking advantage of us. Most of the customers are honest people and it's just those rare 5 to 6 percent that really hurt everybody including the player." He hopes that by mid-July the Chargeback Coalition will have over 75 members and a database of over 60,000 names. "We already have over 7,000 names, and we just started. With plans to eventually offer real-time checking of a player, this service could save every book and casino hundreds of thousands of dollars."

Is this the solution to the problem of chargebacks? Perhaps. Will it completely eliminate chargebacks? No, but it will help put an end to the dramatic rise in credit card fraud. The best solution is to take multiple measures and limit your risk the best you can.

"Changing the Future of Gaming and Marketing"
David A. Freemon Consulting

David Albert Freemon is president of David Freemon and Company, a Los Angeles-based marketing consulting firm specializing in online gaming. His firm has represented companies in Europe, Mexico, the Caribbean, Central America and Australia concerning all gaming aspects. Mr. Freemon is currently studying International gaming law while attending Loyola Law School of Los Angeles. He is also working directly with one of the country's best gaming attorneys, I. Nelson Rose, author of "Gambling and the Law." He has provided development consulting to numerous projects from Hollywood Park Racetrack and Casino to Arizona Indian casinos. He was one of the founders of Chargeback Coalition, a service that provides a credit card database exclusively for the use of sportsbook and casino operators throughout the world. It is a co-operative service among online gaming operators to counter credit card fraud. He has also taken on projects regarding future gaming projects in Mexico. His firm also is known for its niche marketing regarding the Generation X marketing. He also was a consultant involved with the development of Internet gaming software for use in the Australian Capital Territory. This was the first Internet software approved for use in the ACT territory. Mr. Freemon is a frequent speaker at international conferences and symposiums.

David A. Freemon can be reached at