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eBay to PayPal Gamblers: No Dice

The online gambling business, once thought to be a can't-lose proposition for offshore casino operations, has been taking it on the chin lately as more and more high-profile credit card companies have begun refusing gaming transactions.

And things didn't get any brighter this week when San Jose, Calif.-based eBay eBay said that PayPal would continue to provide "a variety of consumer services, including its popular Web Accept product, which makes it possible for independent online merchants to accept payment directly at their Web sites."

But if that Web site is an online casino, eBay's position is thanks, but no thanks.

"In view of the uncertain regulatory environment surrounding online gaming, eBay plans to phase out PayPal's gaming business after the transaction closes," the company said. "Gaming providers who use PayPal will have ample opportunity to find alternative payment solutions."

Apparently that wasn't enough for the New York State attorney general's office, which has subpoenaed PayPal, seeking information related to gambling payments that are funneled through the service by some of its users.

Just how many gamblers have PayPal accounts?

"Higher risk accounts, which were primarily online gaming accounts, accounted for 8 percent of PayPal's business volume in the first quarter," a spokesman for the Mountain View, Calif.-based company said.

Clearly 8 percent is not a huge proportion, but it certainly represents a chunk of potential income. Why not just quietly accept it?

"... online gaming revenues (are) fraught with potential risks and uncertainty that ultimately could pose problems for eBay," said Paul Ritter, program manager for Yankee Group's Internet Business Strategies unit.

"Internet gambling in the U.S. generally is considered to be illegal (Congress is considering a federal prohibition proposed by Rep. Bob Goodlatte, R-Va.) and there are many issues surrounding the future growth, or decline of online gaming revenues over the next few years," he told internetnews.com.

"Just because a certain line of business can generate significant revenues for a firm, it does not necessarily make it a good business decision," he added. "eBay, with the PayPal acquisition, can generate enormous revenues by focusing solely on completely legitimate business activities, and for a public company, that really is a critical issue in today's financial -- and political-- climate.

"In my opinion, this is the right business decision for eBay to make."

Credit card firms snub online gaming

But it may be another arrow directed at online gaming. Even a year and a half ago, there were reports in Internet gaming circles that as many as 50 percent to 80 percent of gaming transactions are being rejected by credit card companies.

And there's a long list of credit card companies that reportedly have moved to disassociate themselves from online gambling. These include Bank of America, Fleet, MBNA and Chase Manhattan, as well as Citibank, which controls about 12 percent of the U.S. credit card market all by itself.

Online credit card transactions are often coded to indicate what is being bought or sold. By blocking certain codes, banks that issue credit cards can avoid issuing credit for much of the gambling activity that occurs on the Internet.

The Interactive Gaming Council (IGC) in Vancouver, BC, Canada, contends on its Web site that, for the most part, 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."

IGC is a trade association with more than 100 member companies worldwide including software producers, wagering site operators, e-commerce providers and information services. None of the major U.S. casino companies have operational domestic online gaming sites, however.

Sue Schneider, chairman of the IGC, agreed that the news on the payment solution front hasn't been good for the industry over the past year or so "....at least as it relates to U.S. solutions."

"I would note that this phenomena is somewhat unique to the U.S.," she told internetnews.com. "You don't see these sort of negative responses in Europe and other parts of the world."

"PayPal obviously was a viable alternative for moving both deposits and payouts in recent times," she said. "It will be missed. But it will also be replaced by other methods that are functioning such as debit cards, ATM cards, online checks, etc."

"What's ironic," said Schneider, "is that these kind of restrictions are leading people to other forms of payment -- things like online checking or e-wallet kind of things. We're getting into more and more things that are less trackable."

And that, she said, could lead "to an increased risk of money laundering."

Nevertheless, the departure of so many credit card companies already had prompted Bear Stearns to pare its growth forecast for the industry to an estimated $4.2 billion in revenues for 2003 from a previous forecast of as much as $5 billion, according to a Reuters report.

Now, as a result of PayPal's exit, Bear Stearns will probably reduce its 2003 estimates by another 5 percent to 10 percent, an analyst was quoted as saying.

How big is the industry?

Mark Balestra of The River City Group, which tracks online gambling, said the number of Internet gaming sites on a year-to-year basis doubled from 700 to 1,400 from 1999 to 2000. Four hundred more were born the following year.

"Unofficially, I'd say there were 300 or so in 1998, a few dozen in 1997 and a handful in 1996," he said.

There are about 300 companies worldwide operating in the Internet gambling space, and about 120 software suppliers, he said.

Christiansen Capital Advisors, a gambling and entertainment analysis firm, has estimated that worldwide online gaming revenues will reach about $4.09 billion this year, and $10.3 billion by 2005.

It seems clear that people who want to gamble online are going to find a way to do it, regardless of PayPal or rule-tightening by credit card companies.

One alternative is FirePay, operated by SureFire Commerce, which calls itself a global B2B provider of proprietary payment processing solutions, with offices in Montreal and London and a "a significant focus on the licensed gaming industry."

But for U.S. companies, "one of the considerations is that many popular forms of online gambling are considered illegal, although there is limited ability for states to crack down because the sites operate offshore," said Chris Musto, vice president for research at Gomez.

"There is some legal exposure to PayPal, that comes from allowing people to pay for gambling in casinos," he said. "So the question is, how much is this worth to you?"

And for credit card companies, there's a lot of hazard in the gambling space. "People can lose their money, go back to the card company and say 'hey, that wasn't me,'" Musto said. "It can be a risky business."

Just like gambling itself.