With the Garden State’s Greenlight, Online Gambling’s Odds Look Better for Acquirers

Now that New Jersey has become the third state to legalize online gambling, the market for the first time in years has begun to offer possibilities to acquirers as a promising new source of transaction volume. But questions remain about how and how soon the new state laws will be implemented in practice and about how willing processors and banks will be to handle online-gaming transactions.

Home of a major casino industry, New Jersey on Tuesday followed Nevada and Delaware when its governor, Chris Christie, signed into law legislation allowing gaming Web sites to take bets from persons who are physically located in the state. The Garden State thus becomes the most populous state so far to greenlight online betting. Actual wagers, however, are not expected until later in the year.

The move by these states toward legal but regulated online gambling follows years of efforts by state and federal governments to quash the business. Perhaps the most far-reaching of these efforts was the passage in 2006 of the federal Unlawful Internet Gambling Enforcement Act, which banned banks and processors from handling online-gaming transactions. That law drove online-wager processing offshore and forced a number of U.S. acquirers to quit the business. “When UIGEA came in, we were doing a lot of online gambling,” recalls Richard W. Noble, chief executive of BCC Merchant Solutions, a North Kansas City, Missouri-based independent sales organization. “I’d love to do it again.”

A major turning point came in December 2011, when the U.S. Department of Justice released a memo in which the agency interpreted the 1961 Wire Act to apply only to online sports betting. This interpretation, which came in response to states looking to sell lottery tickets online, appeared to clear the way for online poker and other games, as well.

“President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally…I believe this will be a major incentive for the other states looking at legalizing intra-state poker and other games,” said I. Nelson Rose at the time the Justice memo came out. Rose is a professor of law at Whittier Law School, Costa Mesa, Calif., and a nationally recognized expert on online gambling law.

In an e-mail message to Digital Transactions at the time, Rose added that the UIGEA would not likely stand in the way of state efforts to okay online betting. “The UIGEA is an enforcement law,” he said. “It requires that there be an examination of other federal or state laws to see if the gambling is illegal. It does require that the payment processor obtain a ‘reasoned Legal Opinion’ that the gambling is legal.”

Still, it may require the repeal of the UIGEA to induce acquiring banks and processors to enter the market, says Noble. “Banks are not geared to look at laws, they’re geared to find a law and run away from it,” he says. “If there’s a risk of noncompliance, a bank will leave it alone.” A slow response by banks and processors to state legalization could hinder the market’s development for some time.

It also remains unclear how far the legalization trend will go. It is unlikely all states will eventually follow in New Jersey’s footsteps, and indeed a number of quite populous states could hold out. At the same time, leveraging the full potential of state legalization will require agreements, or so-called compacts, between states to allow residents of one state to place bets in another, much as multistate compacts now create bigger payoffs for lotteries.

But Noble remains optimistic, given developments so far.  “I’d imagine within a year or so we’ll see [online] gaming come back,” he notes. “I would not be a bit surprised to see the UIGEA repealed.” This would be particularly likely, he adds, as soon as state and federal governments “figure out how to tax” online-betting activity.