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.

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