Are Credit Card Companies Prepared to Be the Internet Police?
By Rick Smith and Keith Furlong
There have been reports in Internet gaming circles that as many as 50-80 percent of gaming transactions are being rejected by credit card companies. This trend appears to have accelerated over the past three months or so, and involves a significant amount of transactions given that more than 1,400 web sites owned by approximately 250-300 online gaming operators offer gambling via the Internet.1 Online gaming has experienced estimated revenue growth of approximately one billion dollars just a few years ago to estimates topping six billion dollars by the year 2003. 2
A few years ago, investors were throwing money at dot.com companies that were nothing more than a business plan predicting future profits in correlation with the projected increased Internet access throughout the world. This dot.com euphoria had investors excited about anything and everything Internet. To date, however, there are only a few Internet industries that actually generate "real" profits; and, Internet gaming is in this group. These "profitable" e-gaming businesses are fueling a lot of the technological advancements necessary for Internet businesses in general. This growth has continued with limited, if any, support from many governments throughout the world in the form of effective regulatory schemes.
Governments are not the only obstacles facing this young industry: most major credit card companies have adopted policies that discourage the use of their credit cards for Internet gaming. American Express does not allow their credit cards to be used for Internet gaming purposes, while Visa and MasterCard enforce strict coding for Internet gaming transactions, identifying Internet gaming charges with the 7995 MCC code and other transaction flags. This coding identifies the charge as Internet gaming and often results in a denial of credit. The Visa and MasterCard policies were adopted as a result of either high chargeback rates (as players who lose monies may claim that the purchase was never made) or questions surrounding the legality of Internet gaming. There is doubt surrounding the composition of the chargeback figures being cited by banks. Additionally, there have been instances where banks in second phase checking have reversed transactions without any action on the part of the consumer. What appears to be even more interesting is that problems with the card associations may reach beyond the gaming sector.
Governments Debate Positions on Internet Gaming
As a truly global business, Internet gaming has had difficulty dealing with the varying gaming statutes in localized gaming jurisdictions throughout the world. It is encouraging, however, that some governments throughout the world are reevaluating their position on this new growth industry: The United Kingdom3, South Africa, Canada, U.S. Virgin Islands, Alderney, Isle of Man, Vanuatu, Antigua with their development of updated regulations, and Australia which is still struggling with the federal intervention into the state's rights issue of regulating gambling. (In Australia, initially viewed as an effective regulatory model for Internet gaming, the federal government, for mostly political reasons, attempted to introduce prohibition legislation, which resulted in a temporary moratorium. The effective result is that racing and lotteries are exempted from federal regulation, while virtual casinos can still be licensed by the states/territories to offer their product to overseas markets, but not to people with in Australia). On the other hand, some nations are determined to disrupt this growth industry for what appears to be mostly political reasons, most notably the United States.
A New Weapon for Prohibition in the U.S.: Credit Card Police
The new thinking with regard to the prohibition of Internet gambling involves deputizing the financial industry as the "Internet police." This is the case in the United States with the reintroduction of the Internet Gambling Funding Prohibition Act as drafted by Representative Jim Leach (R-IA). As of this writing the legislation was scheduled for consideration in the Financial Services Committee during the week of September 17, 2001. Given the recent terrorist events in the United States, the timing of committee consideration for this legislation is unknown. In simplistic terms, the theory is logical: Attack Internet gaming companies where it hurts -- in their "virtual" cash registers. Credit cards provide consumers with a convenient purchasing mechanism; this convenience becomes significantly more important with e-commerce transactions. Cut off the funding source and the growth of the Internet gaming industry will suffer. One of the downsides to this altruistic approach is that there will, most likely, be no differentiation between licensed operations and those that are not licensed or those that are licensed but offer their product in defiance of the public policy of certain markets.
What are the costs to the growth of e-commerce with prohibitions on Internet gaming?
Firstly, most prohibitions enacted throughout history have been very ineffective. Further, a prohibition enforced through financial instrument bans will most likely facilitate the growth of new payment alternatives; alternatives that will most likely not be available to legitimate big name casino companies exploring Internet gaming possibilities. The potential end result of an inconsistent financial instrument ban on Internet gaming: Unregulated Internet gaming operators will continue to thrive as large brand name entities who have proven their corporate responsibility, especially in answering regulator concerns with regard to the most vulnerable individuals (problem and underage gamblers), will be prevented from offering a responsible and safe alternative.4
To protect citizens, especially the most vulnerable, including children and compulsive gamblers, isn’t a regulated Internet gaming industry a better alternative? This is not a new argument for regulated Internet gambling. Going back five years, in 1996, Dennis Mills, a Canadian legislator, made the following comments while introducing legislation to regulate this new industry:
Internet gaming is going on right now with companies that do this totally on their own. There are absolutely no background investigations. There is no random process testing. There is no prize payment bonding. There is really no adequate consumer disclosure of game odds or expected value of the win of all games. There is no control of underage gambling.5
The Industry Response: The Interactive Gaming Council's6 Credit Card Working Group
The Interactive Gaming Council ("IGC") is a non-profit trade association that is an advocate for the adoption of strong government regulation of the Internet gaming industry throughout the World. Most recently, the IGC has received feedback from its members, and from other persons within the interactive gambling industry, in relation to increasing problems associated with the use of credit cards by consumers. In an effort to work with credit card associations toward a resolution of the uncertainty surrounding Internet gaming, the IGC created a working group to draft a white paper aimed at providing industry participants and key policy-makers within the credit card industry a summary and analysis of issues that have arisen as the cardholders increasingly use credit cards for direct or indirect purchase of online wagering entertainment. The idea is to provide background information on the industry, to outline particular areas of concern, and to clarify certain points of ambiguity. The information is intended to be educational, to provide clarification of the existing status involving the associations and the industry and, importantly, to promote an atmosphere of cooperation. The IGC points to the financial industry's potential adoption of the role of "Internet police" as establishing a bad precedent for any representative business association.
While the credit card associations may be uncomfortable with the increasing popularity of this form of entertainment, especially when the legal framework is only just being established, the IGC contends that by taking a proactive role in working cooperatively to achieve best industry practice and protecting the interests of consumers is far preferable a course of action than adopting the approach of attempting to prohibit these forms of transactions and potentially creating uncertainty in the market and depriving consumers of their freedom to exercise choice. The card associations' policy historically appears to have been a logical one - if an activity is lawful at its point of origin then the activity would be acceptable to the associations.
The IGC contends, for the most part, that opposition to online gambling has not been based upon empirical data, i.e. measurements of the actual social impact of interactive gambling. Rather, most opposition has been rationalized by political postulations and speculative data. However well meaning some opponents may be, opponents tend to use theories about unique problems that will arise as online gambling expands. This is not unlike some of the unfounded hysteria accompanying the emergence of Internet commerce, or the Internet in general. Other opponents challenge any form of gambling activity on moral grounds. They are drawing an easy line in the sand. Still other opponents are driven by economic self-interest to keep another form of presumed competition from entering the market.
Whatever the motivation of opposing arguments, online gambling obviously remains a politically charged issue; and, in response, the IGC has taken the following positions as to its future:
- We believe online gambling is merely a manifestation of gambling, and there is no basis for total prohibition.
- We believe it is unlikely any attempted ban could be enforced effectively, due to the nature of global Internet technology.
- We believe any attempt to criminalize online wagering by individuals would prove ineffective and unacceptable to people used to freedom of activity within their homes.
- We believe self-regulation will work only to a certain extent. Although the IGC sets standards of conduct for its members, the IGC recognizes that no association, or other self-appointed body, can have effective-enough enforcement power. It supports regulation by governments and does not want to usurp such power.
- We believe the industry’s long-term interests are best served by prudent public policies and proper government regulation.
- We believe the most important “regulation” of the industry will not come from the application of exotic technologies or the heavy hand of regulation, but rather from the surest control of all: the Market. As was the pattern with the evolution of legalized land-based gambling in Nevada, New Jersey and other jurisdictions in the U.S. and around the world – players are naturally attracted to REGULATED gambling venues -- environments where they know the games are fair and they will be paid their winnings.
Despite its bumpy start, there are signs that the industry is maturing and entering a phase where more serious policymaking might occur. In the last session of Congress, a much watered-down comprehensive ban on Internet gambling failed to pass (the "Goodlatte" bill). The one thing that Congress did pass in the last hours of the session was actually an expansion of gambling, legalizing online gambling for the pari-mutuel racing industry in certain circumstances.
The legislatures of both Nevada and New Jersey have proposed legislation to legalize online gambling by allowing licensed land-based gambling businesses to potentially operate online. The online gambling industry is attracting interest from some of the most respectable names in gambling and business: William Hill, Harrahs, Playboy (which just announced a venture with Ladbrokes and Penn National), MGM, Sun International, Victor Chandler and many others.
Conclusion-
1 According to a research report prepared by The River City Group, LLC, the leading provider of information, research, analysis and software services for operators and game developers in the online gambling industry, in cooperation with Christiansen Capital Advisors, Inc., the online gambling industry is estimated to include at least 1,400 for-pay web sites, operated by more than 300 separate businesses and generating a total turnover of more than $3 billion by this year-end 2001. The industry’s volume is expected to rise to more than $4.5 billion by 2002 and increase to $6.3 billion in 2003.
2 Ibid
3See the U.K. gaming report
4See letter of Mr. Peter Bridges, Managing Director of Lasseters Holdings Limited, in response to proposed Australian moratorium on Internet gaming (August 2000)
5See Canada House of Commons Debates, 134 Parl. Deb, H.C., (2nd Ses.) 129 (1997), at 8119
6The Interactive Gaming Council Canada (“IGC”) is a Canadian-incorporated non-profit trade association representing more than 100 business member companies involved or interested in the online gambling industry. IGC membership includes some of the largest providers of online gambling services who collectively are believed to account for the majority of the industry's overall revenue.
The Interactive Gaming Council (IGC) is the leading trade association for the international interactive gaming industry, with its membership operating or supplying services to, most of the reputable gaming and wagering sites on the World Wide Web. Additional information about the IGC, including membership details, can be found at the association's Web site, www.igcouncil.org.
Rick Smith is the Executive Director of the Interactive Gaming Council. He is a former regulator with the Queensland Office of Gaming Regulation in Australia and a former New Zealand gaming regulator.
Keith Furlong serves as the Deputy Executive Director of the IGC, and is the vice-president of the Catania Consulting Group, Inc., a New Jersey-based gaming consultancy and lobbying firm. He is a former Public Information Officer and Legislative Liaison with the New Jersey Division of Gaming Enforcement.