Online Payment Processors

The boom in online gambling was made possible by the advent of secure financial transfers over the Internet. In the early 1990's it was risky and most unusual to try to send money over the World Wide Web. Today, such transactions are so commonplace we probably do not even stop to consider what an incredible convenience it is. In the space of a decade, online retailing has come to rival brick-and-mortar sales.

Ironically, even though online gambling was at the leading edge of Internet financial transfers, Congress' passage in 2006 of the UIGEA has forced web-based gaming to use old-fashioned techniques when dealing with customers in the U.S. This is not true, of course, for players located outside the boundaries of the United States.

Here is a summary, in rough chronological order of development, of the many and various methods of handling the financial aspects of online gambling. At the end is a second summary of the techniques that must currently be employed with respect to U.S.-based customers. Naturally, if Congress enacts any of the pending legislative proposals to regulate (rather than prohibit) online gaming activities, one would imagine that most of the options available elsewhere in the world would return to American shores.

Methods of Funds Transfer:

Checks. The time honored transfer method was to mail a check. Today this method is still used, in both directions (deposits and withdrawals), either with escrow funds managers and payment processors or directly with online casinos, books and poker rooms. The obvious disadvantages are the loss of time in transit, the inconvenience of "snail mail" and the cost of an international courier, if one is used.

Western Union. Almost as old as the mail is the wire. Western Union will process payments, but many online casinos will not return funds by this method unless the customer pays the relatively high cost. Wire transfers of relatively small sums out of one's bank account also work, but the fees are relatively high. In light of U.S. regulations, Western Union will not transfer
funds directly to a gambling company. For the same reason, U.S.-based banks will not make wire transfers to known gambling sites.

E-Checks. The 1990's brought the e-check into the spotlight: By giving someone a transit number and account name and number, a creditor could process a check as if it had been written and sent by the customer. The problem with this approach, of course, was that disclosing one's bank information and then authorizing such withdrawals could lead to unauthorized runs on the account. For several years a number of check fraud rings (mainly based in Nigeria) were able to accomplish exactly that, after hacking into some store of names and numbers. In truth, however, anyone in possession of one of your checks could theoretically give it a try. Banks have worked hard to put a security fence around e-checks, so the transfer process is more secure than when it first started.

Credit Cards. In the last half of the 20th century billions and billions of dollars were created in the U.S: money supply, not by the Federal Reserve, but by little rectangular plastic "plates" (as they were first called). Their origin goes back to the corner store (or General Store), where the merchant knew his customers and would extend credit terms to those strapped for cash. Later, larger stores opened charge accounts for good customers, and then a few companies consolidated the credit side of the business by creating a "generic" charge card. Eventually these companies were absorbed by banks, leading to the small number of credit cards in circulation today. Before the Internet, modems or the PC revolution, charges would be written down and then phoned in over normal voice lines at the end of each day. Operators would receive the merchants' transaction data and enter them on punch cards for processing payments and debiting users. Obviously the shift to automatic telecommunications and realtime processing caused a boom in the number of cards and transactions. Online casinos and payment processors are fully capable of processing credit card transactions, and can receive deposits and pay withdrawals by this medium. Debit Cards. The 1990's brought not only e-checks, but also debit cards, a hybrid of the credit card and e-check. As ATM's became commonplace, banks needed to issue access cards to their customers anyway, so it made sense to honor them at other places besides a bank machine. Thus, debit card funds were not advanced by any credit card lender, but rather deducted directly from the user's bank account. The grand inovation was that the debit card did not display the bank account number, but a different code that could be processed as if it were a credit card number. This added a measure of security as well as convenience. Higher fees applied if the "charge" was processed without the "card being present," meaning that the transaction was cheaper for the merchant if the card holder was physically available to sign the slip and provide identification (assuming the card was not stolen).

Online Payment Processors. The grandfather of online payment processors is "Pay Pal," which was purchased by eBay, perhaps the largest Paypal merchant in the early days of the system. Paypal is essentially a payment "portal" that will keep track of registered users. If a user registers a bank account, Paypal can process an e-check. I the user registers one or more credit cards, Paypal can process credit card charges. The user can invoke Paypal as a payment processor from, for example, the payment page of an online retailer, and then chose which credit card or bank account to be used as the source of funds. The rest is handled in background. The merchant is paid quickly, and the customer's payment is processed timely. No additional paperwork or accounting is required of the customer beyond the bank account and the credit card statements.

Online Funds Holders. A fairly recent elaboration of the Paypal mechanism is to add the idea of escrowing funds to the menu of payment options of the customer. To distinguish them from the mere processors of bank and credit card paperwork, these facilities came to be called generically "e-wallets" (though the term has also been used as the trade name of a specific company). The customer of an e-wallet has the option to e-transfer funds from one or more of the traditional sources (bank accounts and credit cards) into an "electronic wallet" maintained
by the online establishment. The entity would begin to look much like a bank, except that it would not lend money, just hold it. This avoids the sticky issues of reserve requirements and interest rates. Naturally, the faith, competence and solvency of the stake-holding company are of paramount importance. The formal arrangement of holding funds for other persons is, technically speaking, an "escrow." The largest and most prominent of these companies is NETeller.

Benefits of Payment Processors

The benefits of introducing another party into the relationship between an online gambler and the Internet gaming establishment are many:

• The e-wallet company, if large and reputable, presents less risk to an account holder than an online site that may or may not be dishonest, under-capitalized or "fly-by-night."
• The transactions costs of transfer are small, as both the customer and company would maintain balances with the "wallet holder."
• Transfers are immediate, simple to accomplish, and secure.

• A customer can make deposits or receive withdrawals with regard to several online gaming sites out of the same e-Wallet and not have to divide up the bankroll in bits and pieces.

(Do not confuse this use of the term with the Gator E-Wallet, one of the first and well-known pieces of spyware that would hijack Internet search results to Claria Corporation. This infection is typically erased by anti-adware programs.)

For online gaming that does not involve the United States, this most modern method is the funding technique of preference because of its low cost, high safety, and convenience.

An online gambling customer outside the United States has many different payments processors and escrow fund holders to chose from, but many of them will not accept business from U.S. customers. The situation will remain fluid until the legislative debate in the United States over online gambling finally comes to rest. The online sites themselves can be relied upon to have the latest information on which processors accept US business.

Industry leaders are Paypal (no gambling), NETeller (no US), Firepay (no US), Moneybookers (no US), eWalletXxpress and Click2Pay (existing US accounts only).

Others include the relatively recent Quicktender, also Webmoney, NUcharge, 1Pay, NetPayExpress, ATMonline, ePassporte (poker rooms only), Central Coin, and Cash to Cash. Many of the smaller payment processors do not work all casinos, books or poker rooms, so it is always worth checking in advance with the site you want to patronize.

How the United States is Different

Much has been written, both elsewhere and here, about the legality of online gambling in the United States. This is a quick summary: Under federal law it is forbidden to operate a sports book or bet on sports using most telecommunications facilities. Horse race gambling is permitted, if the states in which the bets are placed allow it. Casino betting appears to be legal under federal law, but not under most state law. Operating an on-line casino in the United States is illegal. The Department of Justice has taken the position that all online gambling is illegal under federal law, but Congress and the Courts do not agree. All but one of the states have some form of legalized gambling; however, most states are silent on the question of Internet gambling. Gambling is restricted or prohibited in the following states:

Illinois, Indiana, Louisiana, Michigan, Nevada, New Jersey, New York, Oregon, South Dakota, Washington and Wisconsin.

The main issue for funds transfers is that the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) subjects the funds transfer aspects of online gaming to scrutiny, regulation, and - in most cases - outright prohibition. While most observers believe the motives of this legislation are largely puritanical, there is also a concern that organized crime or terrorists could take advantage of these transfers in the same way that they manage to launder money through the conventional banking system. Threats of prosecution by the Department of Justice, both before and after the passage of UIGEA have caused most banks, credit card processors, payment processors and e-wallet companies to decline all U.S.-based business. Technically speaking the law did not outlaw funds transfers for the purposes of Internet gambling; it made them subject to regulations - regulations that were to be promulgated within 270 days. It took almost 15 months for the Federal Reserve to publish draft regulations for public comment, and as of January 2008, they have not been made official.

It is important to distinguish between the actual gaming itself and the funds transfers. Many online gaming sites are categorized as "US-friendly" or not. This means they either will or will not accept action from IP addresses located within the United States. Meanwhile, financial transactions from U.S.-based banks and credit card companies are much trickier to sort out.

In a spectacular use of intimidation tactics, the U.S. Attorney for the Southern District of New York forced NETeller out of the U.S. market in 2007 without having to make or prove a case. Most other e-wallet companies have quietly followed suit. Only a few remain.

Debit card transactions may still work in some instances, but usually on a one-on-one basis with some proxy entity created by the casinos, not with third party payment processors. The charge uses a name and merchant code that does not belie a gambling establishment. On a limited basis, some credit cards may still "go through" in the same way. Withdrawals are paid as refunds.

The "e-check" will probably work with individual gaming sites as a means of depositing into an account, though there will be a delay of several days while the transaction is processed. Wire transfers from U.S. bank accounts can be dicey because the so-called "Patriot Act" has led to a delay of overseas transactions for up to 72 hours (so the FBI can look at them). If the payee is recognized as a gambling site, the bank will cancel the transfer.

Some banks in foreign countries are happy to open dollar- or euro-denominated depositary accounts for residents of the United States. Where the money goes from that account should not be the business of the bank or of some foreign government. But recent press releases show that several European banks are nervous about this approach if they have branches, subsidiaries or affiliates inside the U.S. and subject to American banking regulation. Most of them do, of course.

Paper checks are a practical (not legal) exception to UIGEA, in the sense that banks can not reasonably be expected manually to monitor billions of payees of paper transactions on a daily basis.

Congress is still not done with its work on Internet gambling. Several legislators have sponsored less rigid and somewhat more practical regulation. Most observers believe that by 2009 there will be a basic re-thinking of the U.S. legal attitude towards online gaming. Until that time, carefully try out the few remaining payments processors on the Web, or try the credit card or debit card. If the cards don't work, try an e-check. If all else fails use the original paper check approach. The online casinos themselves are probably the best source for the latest information on how funds can be transferred from a player in the U.S. to an online gaming site, and back again.