This is First Atlantic Commerce's follow-up editorial
that takes a look at how payment solutions in the gaming industry differ from those in other industries, and what unique obstacles face this industry that aren’t apparent in others . . . and should be.
The UIGEA Scores a Touchdown
Congress dealt a massive blow to United States Internet gamblers in October 2006 when it passed legislation forcing banks and credit card companies to block electronic transactions to Internet gambling businesses with immediate effect.
Then Senate majority leader William H. Frist attached the measure to the Safe Port Act Conference Report, which had nothing whatsoever to do with this highly debated gambling legislation. The bill, which also prohibits the use of checks to fund Internet gambling accounts, passed 409 to two in the House of Representatives and on a voice vote in the Senate. According to Senator Frank R. Lautenberg of New Jersey, no one on the Senate-House conference committee had even seen the final language of the bill.
"Gambling is a serious addiction that undermines the family, dashes dreams, and frays the fabric of society," Mr. Frist said in a prepared statement after the Senate passed the bill. "Congress has grappled with this issue for 10 years, and during that time we've watched this shadow industry explode. For me as majority leader, the bottom line is simple: Internet gambling is illegal. Although we can't monitor every online gambler or regulate offshore gambling, we can police the financial institutions that disregard our laws.”
While we ponder what Mr.Frist’s opinions are with respect to Internet gambling, Washington State presses forward with defining what’s gambling and what is not. More specifically the Washington State Gambling Commission publication on Internet gambling states:
"[G]ambling involves three elements: prize, chance and consideration (entry fee, wager, or anything of value). If one of these elements is removed, the activity no longer comprises gambling. For example, if you pay a fee to a play a game of chance (such as poker, blackjack, bingo, roulette, craps, slots, etc.) for a prize, it is a gambling activity. However, if you play these games for free (no entry fee or wager) it is not a gambling activity and is okay to play on the Internet."
The commission further clarifies that “players gambling on the Internet, whether playing poker, slots or other gambling games, run a risk of a felony conviction.”
Indeed, gambling can become a serious addiction for some consumers, but there is nothing to prevent any consumer from buying hoards of Powerball tickets in hopes of winning big, or going to Atlantic City and using a credit card -- or even a check -- at one of the big casinos and losing their home. They are using the same credit card they would online, yet the irony is there are better and tighter controls with online gambling -- including spending limits, rigorous know-your-customer reviews, sophisticated fraud and spending behavior systems -- that do not exist at terrestrial casinos.
So, why is the online industry treated differently, both morally and legally, than the land-based industry? Why did Congress not pass the UIGEA for the brick-and-mortar casinos if they truly believed gambling is an addiction that, as Mr. Frist said, "undermined the family, dashed dreams and frayed the fabric of society?" Gambling addiction is clearly not just isolated to the Internet. That’s the absurdity of all of this.
The industry, I believe, that has been most impacted by the 7995 merchant category code and the UIGEA is bingo. There are many Wal Mart-sized bingo halls throughout the United States offering 24 hours of nonstop entertainment. Anyone can play bingo, and churches, hospitals -- even parent-teacher associations -- have regular bingo fund raisers, so why is bingo even classified as gambling and lumped into this plethora of regulation?
The answer lies squarely in the merchant category coding, of course.
If bingo was assigned its own merchant code, which was not blocked like 7995, the problem for bingo operators would largely be solved and the requirement to implement alternative payment solutions to receive payment from consumers would no longer be important.
E-Wallets, Neteller, FirePay, E-Checks and Alternative Payment Solutions
The year 2000 was the Chinese year of the Golden Dragon -- it was also the year of the golden e-wallet. This was the year the online gaming industry invented digital cash, acquirers were primarily coding the transactions under 6051 and issuers were happy to authorize them for the gaming industry. The industry term "uncoded" soon followed and became the popular reference for all resellers and merchants looking for payment solutions. E-wallet companies rose up by the hundreds trying to claim their stake in the booming online gambling and adult business -- and so did the acquiring banks. Processing volumes were staggering. Fraud became the largest problem with these solutions and further regulation, monitoring and compliance changes were implemented by Visa and MasterCard. Today, if you Google "Gambling E-Wallets," a list of 4,600 site links display. This clearly demonstrates the continued industry demand for alternative payment solutions for online gambling.
The card-issuing world has dramatically changed to accommodate issuer products and services that support virtual and prepaid-card payments over the past five years. Consumer applications can be completed online with scanned know-your-customer documents, and virtual debit and credit card numbers are generated and funded online instantly with another credit card. If you consider other online businesses -- including the adult industry -- alternative payment solutions are not as popular because they are not necessary. Anonymity in the adult industry drives consumers to reach out to alternative payment solutions like PayPal, not regulation and legislation. Card issuers still authorize payment transactions for the online adult industry, including illegal activities like child pornography, so why is Congress not looking at ways to prohibit online payments for child pornography like they do online gambling?
If anyone tuned into the Oprah Winfrey Show on July 17, 2008, they would have been shocked to learn a 13-year-old boy fell victim to online pedophile predators who watched him through a Web cam in his bedroom. By the time the victim was 16 he had more than 1,000 adult subscribers paying a monthly fee to watch him perform in live Web cam sex shows. The subscribers used PayPal to deposit funds into the victim’s account. PayPal is largely funded with credit cards and Automated Clearinghouse. It was that easy. The victim did not get caught, but he was saved by a New York Times investigative reporter who located him in Mexico and blew the case wide open. If he had never been able to open a PayPal account (as a minor) in the first place, chances are the extent of this illegal child pornography business may have ceased.
Telemarketing is another business where out-of-control fraud continues to occur. Hundreds of millions of dollars' worth of fraud and consumer deception has been perpetrated over the past eight years -- the Internet has made it too easy for telemarketers to peddle useless products like advance-fee loans, credit-repair services, and low-interest credit cards online. Even though the Federal Trade Commission presented the updated Telemarketing Sales Rule changes to Congress in 2007, telemarketing fraud continues to astonish everyone.
F.T.C. financial penalties, meanwhile, are reactive, not proactive, legal actions. Merchant acquiring banks still set up telemarketing merchants, even though the card associations classify them as very high risk with chargeback ratios reaching as high as 60 percent. Card issuers still authorize inbound and outbound telemarketing transactions, even those properly merchant-category coded. The United States' “zero cardholder liability” compliance policies protect issuers from chargeback losses, shifting the liability to the acquirer and by no means solving the problems in the telemarketing industry. The United States Department of Justice has a Web site dedicated to telemarketing and cross-border fraud, yet there is no legislation pending to "force" financial institutions into blocking online, mail-order or telephone-order credit-card payments, for telemarketing merchants, to reduce consumer financial losses.
The fundamental differences between all other online businesses and gambling is that consumers have the ability to earn “taxable” income from online gambling activities (as well as lose it!). They do not earn income from telemarketers who rip them off. They do not earn income from watching online porn. The merchant category coding is in place to identify, to issuers, the type of transactions consumers are performing (at least that’s the idea), and telemarketing and adult transactions have their own monitored, individual merchant category codes.
The fundamental difference in payment acceptance occurs at the card-issuer level. Online gambling credit card transactions are blocked because of tough, new government legislation, yet land-based casino transactions performed with the same credit card are not? Telemarketing merchants can happily continue to defraud low-income consumers out of billions of dollars a year, yet no one is writing legislation to tackle this problem industry. And unfortunately there is nothing to prevent someone using their MasterCard to pay for online child pornography because again there is no legislation to require issuers to block these transactions, nor acquirers from setting up the merchant accounts in the first place.
So, you can’t use your MasterCard online to play bingo . . . but predators can use their MasterCard online to access child pornography? Priceless.