#86 © Copyright 2003, all rights reserved worldwide Gambling and the Law® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA
Players wager billions of dollars online each year. Almost all bets are funded, at least initially, by credit cards. Companies like Visa get a piece of the action every time their cards are used, without risking a player getting a hot streak.
Yet players are finding it more and more difficult to make a deposit, let alone an actual wager, on a gaming website, using their credit cards. The largest banks, including Citibank, Bank of America and Wells Fargo, will not let their credit cards be used for online gaming.
The situation is not limited to the United States. HSBC, formerly the Hongkong and Shanghai Banking Corporation, now headquartered in London, is one of the world’s largest banks. In 2001, HSBC sent the following notice to its credit card holders:
The Card shall not be used for payment of any gambling transaction or other transaction which is illegal under applicable laws and the Bank reserves the right to decline processing or paying any Card Transaction which it suspects to be a gambling or illegal transaction.
Notice that the bank first says you cannot use one of its credit cards for gambling that is illegal. But later it reserves the right to decline processing all gambling transactions, illegal or not.
This is not really a surprise. Traditional banks have historically been very conservative by nature.
But the situation got considerably worse for Internet gambling when the lesser known, but more daring, financial institutions which dominate the credit card field also backed off. MBNA, Capital One and even Providian Financial, one of the largest issuers of credit cards with 18 million card holders, are automatically declining to process transactions from online gaming merchants.
In addition, companies like PayPal, Neteller and SureFire Commerce have made hundreds of millions of dollars over the past few years as facilitators, making it easy and safe for individuals and businesses to send money through the Internet. One of the most common transactions is a patron using a credit card to fund a web gambling account.
Yet PayPal has also abandoned this extremely lucrative market.
What is going on?
The problem seems to be a combination of real fear, false fear, business judgments bordering on complete incompetence and misplaced morality.
Credit card executives have a real fear that what they are doing may be illegal. No one likes to be sued. But the suits brought against Visa and others, based on their involvement with online gaming operators, have not been for innocuous breach of contract. Instead, the complaints allege RICO — Racketeer Influenced and Corrupt Organizations.
RICO and similar statutes were designed to get the leaders of organized crime, who, despite what you may see on “The Sopranos,” usually do not get their hands dirty. When Congress thought of organized crime, or “O.C.,” as they call themselves, it thought of illegal prostitution, loan-sharking, drugs and gambling.
The anti-O.C. laws were enacted when Nevada was the only state with casinos and legal sports books. No one thought about the possibility of legal and quasi-legal gambling sweeping the nation and the world, with players making bets with credit cards.
Visa and MasterCard have so far escaped liability under RICO for allowing their cards to be used for online gaming. In fact, very few people in the world have lost civil suits, let alone been criminally convicted, for being involved in Internet gambling.
But the fear is real. People do not go to business schools, get MBAs and go to work for banks, in order to risk years in prison, for relatively little reward.
Credit card companies also have the false fear of losing money directly with these transactions. Gambling debts, even money owed licensed casinos, are not usually legally enforceable. If a player uses his credit card to get gaming chips, he may not have to pay the bill when it arrives in the mail. The credit card issued with the Caesars Palace logo specifically states that it cannot be used for gambling.
I once asked the head of a company that places cash ATM machines on casino floors whether he was concerned about the possibility of players refusing to pay their credit card bills. He answered that it never happens. Although suits by losing gamblers have gotten a lot of attention in the press, financially, the problem is so small as to be non-existent.
A slightly larger problem are chargebacks. If a player loses a lot, he can call up the credit card company and say his card was stolen. Obviously, a card-holder cannot make these false claims more than once or twice. Although chargebacks do happen, the industry is coping by sharing information on card-holders and by charging higher fees to cover the greater risk that comes with taking credit cards online.
Which brings us to the question of incompetence. Some top-level executives do not want to take the time to find out what Internet gambling is all about.
The most extreme example is eBay, which paid $1.5 billion for PayPal, then immediately announced that it was eliminating many of its new subsidiary’s most profitable accounts. In its press release, eBay proudly noted that 40% of PayPal’s business comes from “small merchants who constitute a potential new audience for eBay.” No one at eBay seems to have checked who those “small merchants” were. But online gamblers knew.
Last comes the morality issue. Although they usually deny it, many credit card executives want to have nothing to do with Internet gambling. They often, unfairly, lump gambling in with pornography.
Alternative forms of funding are being developed. But Visa and other credit card companies will be back, once the industry matures, and is made completely legal.
Professor I Nelson Rose is recognized as one of the world’s leading authorities on gambling law. His website is www.GamblingAndTheLaw.com