A Credit Crisis for Web Casinos 

By MATT RICHTEL The New York Times
January 21, 2002

ining the margins of legality, operators of Internet casinos assumed their big worry was regulators and law enforcement agencies. Lately, though, it seems that the online casinos have a more immediate problem: the growing number of credit card companies and banks that are refusing to process payments for Internet gambling.

Although demand by bettors remains brisk, whether they are wagering on sporting events or online games like roulette and blackjack, the credit card companies are concluding that the business is more trouble than it is worth. Internet gambling is illegal in many states, and some types of wagering are barred by federal laws. But beyond that, customers frequently deny having placed bets or simply refuse to pay their credit card bills after running up large gambling debts.

That can pose trouble for credit card companies — as when a California woman lost more than $100,000 but argued in court that gambling debts were not enforceable and had her debts wiped clean in a court-ordered settlement. And so, in many cases, the credit card companies and banks simply refuse to approve a transaction if they know it is for a gambling site.

Some Internet casino owners say four of every five transaction requests are now denied. As a result, some gambling sites, particularly those serving the United States market, where 8 of every 10 wagers originate, have seen revenue fall at least 30 percent. Analysts who cover the industry say the liquidity crisis has already forced some operations to close.

"It's excruciating for the casinos," said Mitch Garber, an executive vice president at SureFire Commerce (news/quote), a company in Montreal that processes credit card transactions for hundreds of Internet casinos. Mr. Garber said that last year 25 percent of the credit card transactions he tried to process for casinos were rejected by United States banks, a third higher than the previous year's figure, he said. "The magnitude of the rejection rates has taken off."

Among the banks that Mr. Garber said had rejected gambling transactions were Wells Fargo (news/quote), Providian Financial (news/quote) and MBNA (news/quote).

Visa and MasterCard do not have blanket provisions that prohibit banks that issue their cards from paying Internet gambling transactions. But late last year, Visa USA started auditing Internet casinos to make sure they were accurately identifying transactions as wagers. The idea behind the audit was to make sure that casinos did not try to report gambling activity as another type of transaction — the purchase of a shirt, say — to trick a bank into approving the transaction.

Casinos have increasingly turned to third-party credit card processors like SureFire or PayPal, another major processor of Internet gambling. Processors enable consumers to use their credit cards to set up accounts with online casinos — as well as many other kinds of Internet-based merchants — many of which do not have direct relationships with banks.

MasterCard International has put a crimp in that activity with a policy that specifically forbids the use of its card at third-party processors for purposes of Internet gambling.

The steps by Visa, MasterCard and the banks that issue their cards are catching up with the policies of American Express (news/quote) and the Discover unit of Morgan Stanley, which have not allowed their cards to be used for Internet gambling transactions for several years.

"We do not do business with illegal or very high-risk industries," said Joanne Fisher, an American Express spokeswoman, echoing the views of numerous credit card companies and banks. "We have to be in a position that we know were going to be paid."

Alan Elias, a spokesman for Providian, one of the nation's largest issuers of credit cards, with 18 million card holders, said the company's policy to deny such transactions was "not about us making judgment calls about morals and ethics." Rather, he said, "our company puts itself at risk for large business losses if we allow charges for Internet gaming."

But some casino operators complain that the banks are acting too much like the police.

"People don't like being told what they can and can't do with their money," said Simon Noble, chief executive of Intertops.com, an Internet casino based in Antigua. He said that efforts by United States financial institutions to clamp down had begun to have an influence in Europe, where German customers in particular were beginning to find their transactions being denied. "It's very frustrating," Mr. Noble said.

As a result of the clampdown, Christiansen Capital Advisors, a New York firm that serves as a consultant to casinos, recently — and for the first time — downgraded its worldwide growth forecast for the online casino industry. Christiansen estimates that the 1,400 gambling sites on the Internet generated $3 billion in revenue last year and will generate $4.1 billion in 2002, a drop of about $500 million each year from earlier projections.

Besides paying by credit card, gamblers can set up accounts ahead of time using wire transfers or checks. But the casinos say these alternatives are inconvenient and discourage playing.

Whether residents of the United States are breaking the law by gambling online depends largely on where they live and where the gambling operator is situated. I. Nelson Rose, a law professor at Whittier College in California and a gambling law expert, said that about half the states forbid residents from placing bets on the Internet. And in all states, it is illegal to operate an Internet casino, Mr. Rose said, which is why they are usually operated offshore, in Costa Rica or the Caribbean in many cases.

At the federal level, the question is not entirely resolved, legal experts say, although they note that under the Federal Wire Act, it is illegal to operate a sports betting operation over the Internet.

Matthew Katz, who operates Ecasino Solutions, a Los Angeles company that advises offshore Internet casinos, said American banks, while leading the crackdown, were not alone. Mr. Katz recalled the activity of a Singapore resident who logged on a few months ago to eBets.com, a gambling company client of Mr. Katz that is situated in Belize.

On three consecutive days, the gambler tried to deposit money from Visa and MasterCard accounts into eBets, but on 18 separate occasions, his banks in Singapore did not allow him to deposit money. Persevering, the gambler was eventually permitted to deposit $1,500, which he used to play European Roulette. Within three days, he had lost all the money, and his banks denied his subsequent efforts to deposit more — except for a few deposits of less than $10.

Then came the bad news for eBets. A few weeks later, the gambler called his banks and disputed the $1,500 charge, saying he had not gambled.

Mr. Katz said the casinos, trying to help the banks, once regularly asked new customers to fax photocopies of credit cards and drivers licenses to prove that the customer had, in fact, approved use of his card for gambling transactions.

But Mr. Katz said that in recent months, the banks stopped honoring the photocopy evidence, and starting simply siding with the gamblers in such disputes, demanding reimbursement from the casinos. "Nobody looks at gaming as an industry with any respect," Mr. Katz said. "Everybody says it's shady."

Among those seeking to regulate online gambling is Representative James A. Leach, Republican of Iowa, who has proposed the Unlawful Internet Gambling Funding Prohibition Act, which would prohibit online casinos from accepting credit cards, electronic money transfers and checks. The proposed legislation would also impose penalties on financial institutions that knowingly participate in such transactions. Even if the legislation goes nowhere, its introduction might motivate banks, wishing to avoid additional regulation and the threat of penalties, to try to pre-empt passage by stepping up their efforts to reject gambling transactions.

Casinos, meanwhile, hold out hope that new payment options will emerge in coming years that will enable the industry to continue growing. But such options could be limited.

Mr. Noble, the Intertops.com executive, said he had recently received a call from a credit card processor in South Africa. The company promised him that it could have credit card transactions approved, but suggested it would do so in a duplicitous fashion. Mr. Noble said he had inferred that the processor would disguise the gambling transactions as some other transaction, in an effort to fool the banks.

"How long can you do that?" Mr. Noble asked, saying he thought the banks would soon catch on. "I can't imagine it can last for more than a few weeks. But for a lot of people in gaming, it's worth it for two or three weeks."

The preceding article was reprinted solely for information purposes. Casino-Browser is in no way affiliated with the 

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