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The rapidly rising payoff for acquirers from the state-by-state legalization of online sport betting comes with flashing caution signs.
Online sports betting has become a big business since the Supreme Court in 2018 opened the door for states to legalize it (“The Sporting Chance,” July 2018). But now it’s poised to undergo staggering growth.
Between June 2018 and mid-October of 2020, $26.9 billion in legal sports bets have been wagered. About 90% of all sports bets placed in the United States are through digital channels, according to Eilers & Krejcik Gaming, a research and consulting firm that tracks sports betting regulation and revenue. That’s significant volume that didn’t exist a just few years ago.
In 2019, the first full year of legal sports betting in the United States, gamblers wagered $13 billion in the channel, double the amount in 2018, according to the American Gaming Association. Some 59% of the bets were placed outside of Nevada, with 70% made through online or mobile channels.
Currently, online sports betting is taking place in 18 states, with four more set to go live soon.
Nevertheless, processors aren’t racing to cash in on this gold mine of new volume. One factor keeping some processors, especially small and mid-size ones, on the sidelines is a widespread concern that online sports betting is a high-risk market for fraud and money-laundering schemes.
Legal barriers to entry are also formidable. Acquirers must jump through a hodge-podge of hoops to get certified. “Acquirers have to provide a lot of information about their business and ownership to receive approval to process online sports bets in each state,” says Gerald Rau, managing director of electronic money movement for Eilers & Krejcik. “That precludes a lot of acquirers from entering the market.”
Rau adds that it took more than a year for one top 10 acquirer his firm worked with to fully digest the steps needed to receive certification to process online sports bets.
Stopping Abuses
Another speed bump is the Covid-19 pandemic, which has upended the economy and dampened some acquirers’ desire to enter the market.
“Pre-Covid, we were seeing more competition entering the market, but much of that competition has diminished due to the stress the pandemic has put on the acquiring industry, particularly on smaller processors,” says George Connors, senior vice president, gaming and sports solutions, at Fiserv Inc. “Right now, sponsor banks and merchants are looking for an established provider that brings size, scale, and resiliency to the table.”
Fiserv carved out its stake in online sports betting in 2019 with its $22-billion acquisition of First Data Corp., which had been processing gaming transactions for years.
“A lot of large acquirers such as Fiserv and FIS have entered this market through acquisitions that bulked up their economies of scale,” says Raymond Pucci., director for the merchant services practice at Mercator Advisory Group. “I expect legacy players in this market to keep riding this wave.”
Several months after the Firserv-First Data deal, FIS Inc. acquired Worldpay Inc., a legacy player in the gaming business, for about $35 billion.
“Online sports betting is a growth market, so acquirers are likely looking closely at it,” says Pucci, who adds e-commerce gateways are also interested. “Any acquirer or processor looking to get in this market, however, most likely doesn’t want to talk about it too much because of the risks associated with the market.”
Worries that criminals will use online sports-betting accounts for money laundering are rising fast. Account vending, or account brokering, is a money-laundering scheme that occurs when a bad actor sets up an account, uses it heavily to get VIP status or show a good transaction history, then sells the account to criminals so they can mask money movement, says Angie White, a senior manager at Trans Union, the big credit bureau.
“This is a growing trend that we’ve been hearing about from [online-gambling] operators,” White says. “There are a number of controls operators can put into place to stop these abuses, such as adding device-based authentication at login to allow operators to see whether an unauthorized device is attempting to access the account even if the log-in credentials are correct.”
Another preventive measure is adding device risk intelligence when funds are deposited to open the gambling account. This allows the gambling operator to see if there are any suspicious velocities or account-to-device linkages, which are very useful for uncovering fraud rings, White adds.
Acquirers also need to be on the lookout for what White calls bonus abuse. In this scam, fraud rings look to exploit cash bonuses online-betting operators offer for setting up an account. Fraud rings set up hundreds of accounts and cashing out the bonuses, resulting in losses for the operator.
“Bonus abuse is one of the fastest-growing fraud types we see, growing 72% in 2019 and 493% over the past three years,” says White. “Bonus abuse is likely to be particularly problematic for sports-betting operators just launching in the U.S.”
A Mobile Market
Money laundering and fraud are not the only risks for acquirers. They also need to evaluate online-gambling operators to ensure they are viable businesses. While large players such as London-based William Hill Sports, which was acquired in October by Caesars Entertainment for $3.7 billion, have established track records as financially sound companies, a lot of smaller players entering the market don’t.
Although it is a common practice in states that have sanctioned online sports to require the betting operator to have an affiliation with a casino before they can be licensed, the affiliation does not guarantee the operator has the financial reserves an acquirer wants to see.
“Acquirers we work with require the gambling operator to show a minimum of three consecutive months of six-figure volume before taking their business,” says Jennifer Carrigan, who handles processing and sales at PayKings, a St. Petersburg, Fla.-based processor for high-risk merchants. “Acquirers want to be sure that the online gambling operator is vested in the business for the long haul.”
Acquirers able to look past the risk associated with online sports betting will find that bets through mobile applications are skyrocketing. In New Jersey, for example, 89% of online bets were placed through mobile devices prior to the Covid-19 pandemic, says Rau.
Such a high percentage of bets placed by mobile devices is not a surprise to acquirers, considering how popular e-commerce has become.
“Across the e-commerce landscape in the U.S., mobile is the fastest-growing channel,” says Warren Tristram, president of Worldpay Gaming Solutions at FIS. “When consumers want to shop, socialize, or pay, they are now reaching for the smart phone.”
A Secure Medium
Indeed, some racetracks offer onsite betting through mobile devices, so gamblers don’t have to place their bet at the parimutuel window before each race, according to David Mattei, a senior analyst for Aite Group. Bettors can download the app at the track and fund the account with cash at the parimutuel window or with a credit card.
In general, placing sports bets through mobile devices is a secure medium, because measures such as biometric controls help ensure that the device is not being used by a third party. Geo-location controls further enhance security by confirming the device is physically in the state where the bet is being placed, says Tristram. The latter is a capability states require of online sports-betting operators, Rau adds.
As more states legalize online sports betting, and those that have legalized it finally go live (such as North Carolina, Tennessee, Virginia, and Washington), the opportunities for acquirers to mine this new bonanza of volume are likely to become too attractive to resist.
“Gamblers in search of a touchless experience are shifting their dollars from casinos to digital-gaming platforms,” says Fiserv’s Connors. “As more states allow online gaming, an uptick in digital players can be expected.”
