The online gambling and casino industry has been experiencing severe tailwinds over the past few years, resulting in tremendous growth for the sector. Factors such as improving technologies such as smartphones, tablets, and fast internet connections, secure payment processing, people generally spending more time confined indoors and glued to their devices, and recent legal rulings in favor of online gambling have grown the market size of the industry to nearly $59 billion today. By the end of next year, it is expected to balloon to almost $93 billion, according to Statista, a market, and consumer data firm.
The gambling industry is a profitable business, and intelligent operators have shrewdly pivoted towards online operations. One problem the online gambling and casino industry faces is obtaining a merchant account, as acquirers are seldom willing to work with them, given the high-risk nature of their business. Below, we explore how a merchant account for online gambling and casinos differs from a regular merchant account and what makes online gambling high risk. We also look at what merchants will need to apply for a merchant account for their gambling and casino business.
How does a merchant account for Online Gambling and Casinos differ from a regular merchant account?
Online transactions are risky enough, but the risk accompanying online gambling and casinos is much higher. It is a sector that the banking industry shuns and believes that the risk-reward tradeoff is just not worth the effort. As a result, online gambling merchants are pushed further into the fringes.
The main difference between online gambling and casino businesses and other businesses such as brick-and-mortar retail stores is how risky these businesses are to acquirers.
An acquirer makes money by offering merchant accounts to businesses, allowing them to accept credit cards. Once a merchant is set up, the payment processing involves the acquirer electronically verifying from the Issuing bank that the credit card presented to one of their merchants is valid and has sufficient funds to pay for the amount requested. Once a transaction is authenticated, the acquirer risks that amount of money until the time limit of filing disputes of charges seen by a cardholder on their account, known as a chargeback, has lapsed.
Of course, the acquirer may require merchants to set up a reserve fund, and they still have recourse through fund holds on other transactions. Nonetheless, until the chargeback time limit expires, the acquirer has extended the merchant a line of credit.
The likelihood of chargebacks for online gambling sites is higher than for a traditional retailer, thereby the difference in acquirer attitudes towards the industry.
As a result of these differences in risk profiles, the types of merchant accounts available to online gambling businesses are also different. Some of these differences include:
Reserves – high-risk accounts are subject to rolling reserves, where the acquirer withholds a percent of the sales to offset any chargebacks the acquirer may incur.
Pricing: The costs for high-risk merchants are higher since the card networks generally charge more for the entire application process for a merchant account to be registered with them. Furthermore, all the fees and per transactions rates are higher at various payment lifecycle levels.
For example, the issuing bank charges an interchange fee, the payment networks charge an assessment fee, and the payment processor charges a fee for its services. All these operators have higher fees for high-risk businesses.
The main driver for these higher fees is the higher likelihood of losses associated with high-risk merchants. Sure, there are fund reserves to offset the losses, but that may not be sufficient to cover all potential losses. This problem amplifies if a legal battle ensues to recoup losses stemming from chargebacks.
There is also more administrative work associated with managing high-risk merchant accounts. Card networks require additional monitoring and reporting of transactions of high-risk merchants.
What makes Online Gaming and Casinos high risk?
There are specific industries that have a higher tendency of disputed transactions. For example, an eCommerce business may experience chargebacks because the purchaser may dispute ever making the purchase. You can call it buyer’s remorse. Unlike a brick-and-mortar retail store, an online store doesn’t have a cardholder present in a physical store from whom a cashier may take the physical card to dip or swipe to process the payment. Similarly, customers of online gambling and casino sites have a clear prerogative to rid themselves of gamblers’ remorse and the gambling debts they’ve incurred in the process.
Furthermore, financial regulators aren’t always on their side. The Unlawful Internet Gambling Enforcement Act of 2006 is an Enforcement Action by the Federal Reserve which puts the onus on the financial intermediaries and prohibits them from “knowingly accepting payments in connection with the participation of another person in unlawful Internet gambling.”
What you’ll need to apply for a merchant account for your gambling and casino business?
Given the inherent risks that exist within the industry, there are very few payment processors that entertain the option of offering their services to online gambling and casino businesses. Even in the rarest of cases when a merchant service provider does decide to work with an online gambling business, they seldom have specialized industry domain expertise for their specific needs to offer their services effectively.
Host Merchant Services understands the labyrinth of rules of different card networks for online gambling and casino businesses. Your business would need to complete the application and have a functional website. Furthermore, our skilled underwriter will need the below details of your company once they start working on your application.
- A voided check or a bank letter
- Three months of bank statements
- An Employer Identification Number
- The principal’s Social Security Number
- Valid government ID of the principal
- The details of existing chargeback ratios.
Numerous statistics show the upward trajectory of the online gambling and casino industry. The advent of smartphones and expanding internet coverage has ignited greater adoption of online gaming on these devices worldwide. Some estimates that the online gambling industry is expected to exceed $153 billion in annual revenue by 2030.
However, the industry still experiences a lack of acceptance by the payment and financial services industry. The high-risk nature of the industry is too significant for acquirers to ignore. Merchant accounts for online gambling and casino sites are different from a regular merchant account because of their risk profile. There are different needs for compliance and ongoing monitoring, as well as being more expensive. As a result of these risks and the perception of the industry, it is important to work with a merchant service provider which has an objective view in helping all businesses and has years of experience in setting up and processing payments for online gambling and casinos businesses.