Rau Consulting 

Possible mitigation efforts for Daily Fantasy Sports’ loss of Vantiv (published 1-30-16)

Vantiv (a top card processor) recently informed the two top DFS sites (Draftkings and FanDuel) they will no longer process card transactions as of February 29.  It is an unfortunate turn of events because Vantiv has been a proactive advocate of legal online gaming. This was not an easy decision for Vantiv. This situation has turned partners into adversaries.  Assuming Vantiv is not forced to accept transactions by court order, I have gathered my opinions on how the DFS industry may proceed.

The only major remaining payment provider doing business with both is PayPal.  Since PayPal has been very cautious with online gaming they are risk averse in this space. It is probable they will follow suit and cancel services.  This leave DFS in a crisis.  Below are possible strategies to stop the freight train from hitting.  DFS will probably end up using / exploring several of these strategies concurrently.

Geo-fencing

DFS operators need to employ geo-fencing technology to accurately verify the location of the players.  GeoComply has perfected this technology to be very accurate and spoof resistant.  Draftkings stated in November they have contracted with them, so they may be very close to deploy. I have not seen anything from FanDuel, but I am certain they are doing the same or something similar.   This technology can pinpoint a player within a few feet. Once this technology is in place, the operators can prevent activity in States that are not friendly to DFS.  This may be enough to convince Vantiv to rescind their action and PayPal not to take action. DFS may be forced to have their card merchant ID code changed to a high risk business, and have significant restrictions placed by PayPal.  These actions will significantly reduce the approval rates.  Geo-fencing has a high possibility of success to deploy, and a medium chance of success to stop the termination (if done in time).

Get another card processor

Sounds easy, but it is not.  It is also riddled with land mines and hurdles.  It is very possible DK/FD could go to a high risk processor.  Many processors and some banks will no longer touch high risk merchants. DFS operators are now considered very high risk, due to recent court and Attorneys General’s actions.   The initiation of Operation Choke Point by the Department of Justice http://www.justice.gov/ola/operation-chokepoint makes processors and Banks liable for the actions of merchants.   If DK/FD in fact do find a processor to agree, they can only transact business if they get a bank to underwrite the risk. Getting a bank may be the most difficult task.  DK/FD also must get a merchant account approvals from Visa, MC, Amex and Discover to accept their cards.  It seems like too many hurdles, and may just not be possible.  Even if they get approved, DK/FD will be assigned a high risk merchant code that will prevent the majority of the transactions to be denied by the issuer off the card.  This has a low possibility of success.

Go to an offshore processor and Bank

This is just a really bad idea, but it may end up being the only strategy available. It will just add fuel to the fire that is already raging.  High possibility of successful deployment, very low long term success strategy.

ACH transactions

This is where the player will give the DFS operator their checking account information to initiate a transaction.  Sounds easy, but these have significant fraud risk for the operator, due to the lack of real time checking balance validation.  This can be mitigated by using a company like Telechek or Certegy who will assume the risk, for a price.  In any case, a U.S. Bank will need to authorize the relationship.  This has a low to medium possibility of success.

Branded PrePaid card

There are some very smart payment companies that have figured out a workaround for situations like what DFS is facing.  It is complex, but to boil it down, DK/FD could set up a branded prepaid card that can be loaded by another card.  Once the funds are loaded on the branded card, it can be moved over to the DFS site.  Because you can also use the branded card for making purchases at stores, it does not go through the same level of scrutiny to get the program approved by the bank and Visa/MC or Discover.  It is a brilliant process that is used for gaming sites outside the U.S., as well as some in the U.S.  Possibility of success is medium, but may be the best option.

Cash deposits

Yes, cash deposits.  They are a few companies out there that can facilitate cash deposits and retail stores, convenience stores and check cashing agencies.  It was originally designed for paying utility bills, but is also used for loading online gaming accounts.  The success of this would be medium because of the difficulty to load by the player, and the possible lack of appetite for one of the limited amount of processors available.

Adding more eWallets besides PayPal

DFS may be able to get other eWallets to facilitate payments.  PayPal is the king of this sector, so if they leave any other ones will have minor impact.  If they stay, then others are not needed as much.  Success is medium but impact to fix the problem will be low

Add Bitcoin or some other cryptocurrency

Although this would be compelling, this would be a bad path for DFS.  Adding the unregulated currency in an industry that is on the path to regulation, is not a good combination.  But if there is no other option other than closing the doors, it could be an option.  Likelihood of deploy is low.

The “other” category

There are some other obscure solutions out there that involve putting funds through BillPay, sending checks by mail, use old style money movers like western union or use new FinTech money movers that send money via SMS or email.  Each of these have issues of their own and would have limited penetration.    

Conclusion

Daily Fantasy Sports has proven to be well received and well adopted, even with the issues.  This may be the case when the pioneers get slaughtered, but I hope not.  After we get through all of the legal hurdles and licensing with oversight is in place, we may end up with something that resembles DFS.  But before we get there, it seems like getting the money on the site has become the most recent and the most significant obstacle to overcome.


Jerry Rau

President of Rau Consulting

jerry@rauconsult.com

605 595 6229


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 There are a number of issues creating revenue shortfalls for regulated iGaming in the U.S.  They include regulatory naivety, poker liquidity, marketing shortcomings, the presence of unregulated sites, and poor payment options.  For payments, it is well known that card denial rates are the major contributor to poor performance. In this article I will concentrate another poor performer in payments, ACH. It is also known as direct bank transfers.  Poor card performance is due to decisions and policies in the card network.  Poor ACH performance is due to an antiquated banking system. 

An ACH request from an online gaming operator is created on behalf of a player to retrieve funds directly from a bank account.  Unlike the card network, there is no significant infrastructure set up to validate funds and authenticate the requestor.  The operators must either mitigate their risk by limiting deposits, or use a third party to guarantee the funds.  These third parties make an authorization decision using secret algorithms that are based on assumed risk from brick and mortar models.  Even after they have history with players, the algorithms are not tuned to handle the behavior of an online gaming player.   Transactions get denied sometimes for reasons no one can understand.  So why does a highly advanced society that can track almost every activity we undertake not have a simple authentication and authorization process for ACH.    It’s simple.  Banks do not have a vested interest in doing so.  They are protecting a huge revenue source of overdraft fees.  If funds validation were robust enough to deny a transaction, that would also deny the bank the upcoming overdraft fee.  These punitive fees account for billions in revenue ($37.1 billion in 2009).  Banks would also lose revenue from wire transfers, which would become obsolete.  If ACH transactions could be authorized and authenticated in real time, the iGaming industry could easily direct players to use this superior method.  iGaming would increase revenues, and there would be a great multitude of other economic benefits.  Let’s try to keep the scope to iGaming.

So how is this addressed?  There is a little known secret that most banks hire third parties to keep track of real time balances in checking accounts.  There are just a few “core processors” that account for the vast majority of financial institutions data warehousing.  It seems simple to me, but I have a tendency to not care about details like competition between processors and banks protecting revenue.

How is it fixed? In my simple way of looking at complex situations, it’s easy.  Some smart people need set up a protocol and trafficking for authorization and authentication of ACH transactions. The banks’ processors would set up temporary holds on the funds that have been authorized.  Just like the card network, settlement comes later. This new ACH process will involve a cooperative clearing infrastructure, but it’s a simple repetitive process.  The next phase of the solution would be the ubiquitous use of mobile and card based real time ACH transactions.  Assuming this could be done for just pennies per transaction, this would put tremendous pressure on the interchange based debit cards in existence now. This would be a huge friction relief for iGaming, it would also take the pressure off retailers who are forced to pay 2 to 3% of their gross revenue for interchange fees.  In a business that has 10% margin, that is a 20 to 30% increase in profit.   This would be a true consumer win because it takes cost out of the eco system, and should allow merchants to pass some of the savings to the consumer.  The losers would be banks, processors and any company involved with debit cards.  Do you see the dilemma?  It is like having ExxonMobil create and allow someone else to sell small fusion reactors for cars.  It will never happen unless they have no other choice.  The only difference is real time ACH is possible.  As a side note, there is a current attempt by the Federal Reserve to solve ACH velocity by multiple ACH runs per day.  That is like putting a second driver in a mail truck and calling the process an email emulator.  It just does not make sense

Let’s get back to iGaming.  Why is payment innovation so important?  The regulated iGaming industry needs to be able to eliminate friction.  It doesn’t matter how good everything else is if you can’t get money on the site.  Cards are problematic due to very few issuers allowing gaming transactions.  Visa is the largest card brand, and they have a process in place where issuers need to opt in for regulated gaming transactions.    The irony is that the unregulated sites use processors that disguise the transactions from Visa, and get much higher approval rates.   There is supposed to be some relief of this later this year from Visa, but unless federal legislation allowing safe harbor protection for online gaming transactions, I do not see much uptake in the approval rates. 

Even though I took you through how to fix this, there is little possibility that it will happen. Payments will be a patchwork of consumers throwing the spaghetti on the wall, until something sticks. Until someone makes a better mouse trap to enhance an antiquated payment system, spaghetti it is.   By the way, the other iGaming friction points have easier resolutions than payments.  Regulatory naivety will be fixed by trial and error and experience. Poker liquidity will be fixed with more jurisdictions and reciprocal agreements.  Marketing skills will be increased with experience.   Unregulated sites will be handled when there is enough critical mass of states to push them out.  Payments will only show marginal improvements since the financial services industry and the current regulatory pressures create friction due to interests other than making this work.  If the right conditions present themselves, eWallets will become the payment method of choice for iGaming, but that’s another conversation………  So is Bitcoin…..and let’s not forget that mouse trap I could be working on….

Jerry Rau

President Rau and Associates 

1/27/2015




ACH (Bank Transfers) reducing revenues from online gaming in the U.S.

published 1/27/2015