On Tuesday February 25, 2014 Nevada and Delaware lawmakers signed a landmark agreement to join the states together in online poker ventures, potentially increasing payouts for residents who gamble online. The Multi-State Internet Gaming Agreement signed by Gov. Brian Sandoval of Nevada and Gov. Jack Markell of Delaware established a legal framework for the first authorized interstate Internet gambling.
The legislation opened up a landmark new initiative for the two states. Delaware officials supported this venture in the hope that revenues from online poker, blackjack and slots will help boost revenue in the state’s three brick-and-mortar casinos. Competition in those real world casinos has risen significantly because of the appearance of new facilities in surrounding states. This increased competition has affected overall state revenues from gambling, and prompted Delaware lawmakers to seek out other revenue streams like online gambling.
Nevada has three online poker websites: Ultimate Poker, which is owned by a subsidiary of Station Casinos; WSOP.com, which is aligned with the World Series of Poker; and Real Gaming, which is owned by South Point. Delaware’s websites are controlled by the state’s three racetrack casinos and run on 888’s platform.
The potential boost to Delaware’s economy from this move is unclear. Delaware officials predicted that online gambling would generate up to $5 million in state tax revenue in its first year. Those officials have since scaled back that forecast after some technical difficulties and slow take-up online.
Eilers Research gaming analyst Adam Krejcik told investors that Delaware’s current numbers “have been nothing short of a disaster.”
According to the Delaware Lottery, the state brought in $145,200 in revenue from online gaming in January, following $140,000 in December and $111,000 in November.
Nevada hasn’t broken out online poker revenues in the state’s monthly figures, but Union Gaming Group estimated the revenues were between $200,000 and $750,000 each month.
On top of the consternation over the economic impact of this patnership is mounting opposition to the law. On March 26, 2014 members of both parties in Congress supported a ban on online gambling. This bipartisan ban comes just mere months after Delaware’s online gambling system went live and a few short weeks after Delaware and Nevada signed The Multi-State Internet Gaming Agreement.
Both Republican and Democrat lawmakers introduced legislation in the House and Senate aimed at banning online gambling, setting the stage for a two-pronged battle in Congress. The measures are aimed at reversing a 2011 decision by Attorney General Eric Holder that a 1961 law used in recent years to curb Internet gaming only barred sports betting. The bills would broaden the prohibition to where it stood before Holder’s ruling.
The Other Shoe Drops
So after Delaware, New Jersey and Nevada leaped into the space created by the Holder ruling, creating online gambling systems, both Delaware and Nevada teamed-up to allow their customers to play against each other in a virtual environment. But before this entire endeavor really gets going, Congress is looking to ban it outright. And one key component to why the customer interest is lackluster has to do with something extremely basic (and relevant to The Official Merchant Services Blog): Credit Card Acceptance!
According to uspoker.com, the lack of credit card acceptance is one of the biggest complaints about regulated online poker in Delaware, Nevada and New Jersey. The Mastercard acceptance rate at regulated sites is higher than Visa, however, neither are high enough to be considered adequate for players and operators.
While this is all still new and getting off the ground, the trend in behavior shows at least one of the obstacles online gambling in Delaware faces. Regulated sites have higher fees, and that is there to help offset the risk from fraud. Essentially what happens with these kinds of sites is that they suffer from a much higher rate of chargebacks.
A chargeback typically refers to the act of returning funds to a consumer. The action is forcibly initiated by the issuing bank of the card used by a consumer to settle a debt. Essentially what happens is a consumer disputes a transaction, and the credit card company’s bank responds by taking the money back from the merchant and returning it to the consumer. Customers dispute charges to their credit card usually when goods or services are not delivered within the specified time frame, goods received are damaged, or the purchase was not authorized by the credit card holder — the latter being the most common reason for a chargeback. The chargeback mechanism exists primarily for consumer protection.
Now in online gambling the risk of a chargeback happening is much higher. Customers who lose money will oftentimes initiate the chargeback instead of taking the loss.
Card issuers have the right to block any transaction that the company does not consider legitimate. Online gaming transactions, even if explicitly legal, sometimes fall into this category. Chargebacks are expensive for banks. These costs are passed onto merchants and processors in the form of penalties and higher processing fees. Banks loathe chargebacks and online gaming has been associated with too many of them over the years. This is one reason credit card companies are not quick to approve these transactions.
But regulation steps in and alleviates these fraud issues. All of the concern related to abusive chargebacks is resolved in regulated markets because players cannot easily chargeback a credit card transaction. The transaction is coded as a legitimate, regulated purchase. Many are considered cash advances. The poker site can prove where the player was located at the time of the transaction and that the chips were received. Proper player verification also provides evidence that a charge was proper.
The allure of online gambling is still high and Delaware is one of the states diving headfirst into the industry. But there’s already obstacles facing the First State. A ban from Congress, and all of the problems with chargebacks and fraud create a daunting road ahead for Delaware’s online gambling future. Teaming up with Nevada in a partnership to expand the competition was a good first step. But more states need to be involved if the fledgling endeavor is to really get going. That also helps with the fraud issues as it will take more states regulating online gaming to help make banks more comfortable with the industry. This will also help the profitability of processing these transactions.