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U.S. Trends in Online Gaming: Credit Cards, PayPal, and Government Regulation
By Frank Catania & Keith Furlong
July 2002

An important point is that these profitable e-gaming businesses are fueling a lot of the technological advancements necessary for Internet businesses in general.

But, what is happening to revenue estimates and growth projections for Internet gaming? 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. Given the new obstacles to this growth, specifically government and transaction processing concerns, Bear Stearns Gaming Analysts Jason Ader recently reduced his revenue estimates to approximately $4.2 billion.

American Express never allowed 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 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. Most recently, Citibank, reportedly in response from New York State Attorney General’s Office, announced a company policy to prohibit charges for Internet gaming.

Credit card transaction processing rejections are easily the number concern for Internet gaming companies. To make matters worse, when Ebay announced its planned purchase of PayPal, Ebay executives also announced that they would no longer service the Internet gaming industry; another payment alternative for online gaming halted.

What is the reason for financial institutions taking steps to prevent transactions for Internet gaming? Our guess is the unclear legality of online gaming as well as the pending legislation in Washington, D.C. to prohibit Internet gaming.

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 Kingdom, 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 states’ rights issue of regulating gambling.

In the U.S., the new thinking with regard to the prohibition of Internet gambling involves deputizing the financial industry as the “Internet police,” as displayed with the reintroduction of the Internet Gambling Funding Prohibition Act as drafted by Representative Jim Leach (R-IA). 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. The hypocrisy is that all but three of the fifty states in the U.S. have adopted some form of gaming, whether it be horseracing, land-based casinos, riverboat casinos, dog racing, jai lai or state-run lotteries. Gaming or gambling is without question a socially accepted means of entertainment.

If a person enjoys gambling and does not consider it improper, there should no reason why he/she does not engage in this form of entertainment. This principle is generally accepted throughout most of the United States. It becomes confusing, however, that, when considering that gambling is an accepted form of entertainment, the medium of delivering the game to the player, in this case the Internet, is of such controversy.

Diminishing States’ Rights? Historically gaming has always been a matter left to the states and states have done an excellent job regulating the form of gaming accepted within its borders. It is logical that each state should have the right to choose whether they want to license and regulate, prohibit, or take no action against Internet gaming. In fact, a prominent Congressional leader, House Majority Whip Tom Delay, announced in early July 2002 his opposition to the current legislation with regard to Internet gaming for fears that the prohibition would diminish states’ rights. In our opinion, the Federal government’s role should be to enact legislation prohibiting Internet gaming, unless the Internet gaming operator has applied for and receives a license from a state gaming regulatory agency.

So What’s Happening on the State Level? Let’s look at the legislative activity in two of the most respected gaming states in the World: Nevada and New Jersey. Nevada and New Jersey share leadership positions in the gaming industry and the business of casino regulation, albeit with a competitive undertone on occasion.

Anthony Impreveduto, a New Jersey Assemblyman, learned some time back that New Jersey residents were already playing casino games online and that a minority of Internet gaming operators, also known as fly-by-night operators, had no desire to play fair with these players. After careful analysis, Mr. Impreveduto decided to draft legislation to legalize and regulate an industry that historically had flourished in an environment with little, if any, regulatory oversight throughout the world. Almost simultaneously, and geographically at opposite ends of the United States, a Nevada Assemblywoman, Merle Berman, was also doing her own research into the issues surrounding this young and growing industry.

New Jersey and Nevada Legislatures have both introduced and debated legislation that would legalize, license, regulate and tax the Internet gaming industry. While the New Jersey legislation has been re-introduced by Assemblyman Impreveduto in the current legislative session (as it fell victim to the politics of bills sponsored by the minority party in an election year); the Nevada legislation was signed into law on June 14, 2001.

The Nevada law enables the Nevada Gaming Commission and Gaming Control Board to determine whether or not Internet gaming can be regulated, and if so, how it can be done to protect players, especially children and compulsive gamblers. Since the signing of the legislation, the state regulatory agencies have held hearings to review available technologies that could assist with Internet gaming regulation, specifically the regulators are interested in ways to prevent underage gambling, protect against compulsive gambling, and restrict gambling from jurisdictions not permitted to place bets are not granted access to the gaming sites.

Given the time already spent in Nevada with little progress, it has become evident that Nevada will move very cautiously with regard to Internet gaming while legal questions are resolved in the U.S. Congress. Control over gaming issues traditionally left for states to debate may be taken over by federal legislators.

The Internet Challenge While the Internet poses many challenges to governments and law enforcement agencies, creating a regulatory framework for Internet gaming is a far better solution to this difficult public policy issue.

At the present time, many American companies are uneasy about becoming involved with an Internet gaming company that takes bets from the United States due to the potential legal repercussions. To date, offshore operators are the only ones reaping profits from American play. The fact remains that experts estimate that billions of dollars are bet over the Internet with very little, if any, oversight or guarantee that the operators of these sites are fair and honest or that protections are in place to keep children and compulsive gamblers away. If U.S citizens are placing bets over the Internet, these monies leave the country, with no subsequent benefit flowing back to the jurisdiction, whether direct or indirect. This includes no dedicated funds being set aside to finance education campaigns for children and problem gamblers. To protect citizens, especially the most vulnerable, including children and compulsive gamblers, isn’t a regulated Internet gaming industry a better alternative?

American gaming companies are not the only ones losing by avoidance and resistance to regulatory processes; the states that would decide to regulate Internet gaming are also losing tax revenues. It is time for U.S. Federal and state governments to start negotiating the regulatory process by which the United States would provide well-regulated Internet gaming to those citizens that want it without their having to play at sites operated offshore.

Frank Catania is an attorney and principal in Catania Consulting Group, Inc. of New Jersey, a consulting firm with extensive experience in gaming issues. He is a former Assistant Attorney General and Director of the New Jersey Division of Gaming Enforcement, the regulatory and enforcement agency responsible for maintaining integrity and trust in all Atlantic City gaming operation. He currently serves as Chair of the International Masters of Gaming Law, has previously served as chair and vice chair of the International Association of Gaming Regulators, and was a co-founder and past Chair of the Forum of American Casino Regulators.

Keith Furlong is the Vice-President of the Catania Consulting Group, Inc. and serves as the Deputy Director of the Interactive Gaming Council, a non-profit trade association that promotes fair and honest online gaming. He is a former Public Information Officer and Legislative Liaison with the New Jersey Division of Gaming Enforcement.