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Payments in iGaming Sector – Part 2: Fraud, Crypto and Banks

11 May 2021, 17:25
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Payments always make operators rack their brains. This vertical is full of unexpected moments and complications connected with regulations and KYC.

Payments in iGaming Sector – Part 2: Fraud, Crypto and Banks

Jake Dovey, CEO and Founder of Rubiks Tech, has provided detailed information about those aspects of the payments sector, which you won’t find in financial news.

How can you describe payments in the gambling industry in 2021? What is their differentiating feature?

2021 continues a number of key trends experienced in 2020, such as widespread online adoption and increasing focus on improving user experience. More alternative payment methods, changing consumer preferences (partly due to COVID-19), and the adoption of even easier ways to pay continue to dictate, which methods are relevant for operators (note: non-registration methods/solutions such as Trustly, TrueLayer, etc.).

One interesting development is that the payment function continues to have an increasing influence on the wider business. Traditionally, the payment space is seen as more of a “back-office function”, whilst current trends show payment functions influencing marketing campaigns, ensuring conversion and being strategically important towards the ongoing growth and success.

What are some of the current payment trends in the online gambling industry?

Increasingly with more choice for consumers, the general trend is that slightly fewer people are depositing, using Visa and Mastercard as a total percentage of an operator’s cashier. This is partly due to the growing popularity of alternative payment methods, which boast new experiences and a higher level of security that is associated with these methods (such as bank transfer and eWallets).

The payment methods, which are growing at the fastest rate, are powered by open banking and cryptocurrency. Open banking is a centralized initiative and cryptocurrency has been a “private” decentralized initiative. Open banking provides a low-cost benefit to merchants and in some cases, an improved user experience. Its increasing popularity has put pressure on existing methods but has mostly been beneficial to consumers, providing even more choice.

However, the overall popularity of eWallets, credit cards, bank transfers, and voucher methods will continue to remain popular and for the most part, have continued on an upward trajectory due to the overall growth of the online gambling space. Payment methods that focus on improving customers’ safety, a great user experience and enabling individuals to pay in countries where Visa and Mastercard are not typically issued will be the ultimate winners in the space.

What are the main obstacles that operators face in this sector? Are they more connected with regulatory aspects or with banking systems’ shortcomings?

The biggest obstacle operators currently face is the changing regulatory landscape. With many countries bringing in local licensing (for example, Germany and the recent announcement in Finland), many markets previously accessible without the requirement of a local license, financial services providers must stay compliant or risk losing their own licensing. It is becoming more complicated for operators to remain compliant and therefore more expensive to operate in multiple markets. In short, the regulatory gambling frameworks for each country must be appropriately and compliantly followed by the payment providers and banks, which will not provide services to inappropriately regulated operators, or they too can risk losing their license.

How can you prevent payment fraud in gambling? What tools are the most effective?

Whilst there is no silver bullet to preventing fraud, there are many solutions and systems that can be used to identify the end users and reduce fraud. PSD2 (Payment Services Directive 2) – a European initiative, ensuring that operators accept payments from users, using their own money and not somebody else’s. In other words, the user is using a credit card issued in their name, which can then be attributed to that user’s account. As simple as this sounds, many users will try to use multiple accounts, sometimes, those funds are hard to trace.

Providers such as Experian, TransUnion, Lexis Nexus and others work to provide data on individuals to protect against bonus abuse, ensuring the correct and valid identity and combat money laundering. Many large operators will use multiple fraud solutions to ensure the ongoing monitoring of their existing customers and new customers. This is done by collecting data from both these third parties but also via their financial services providers. Large operators will do so via the use of platforms with artificial intelligence rather than simply a rule-based system to tackle fraud appropriately. Combating “friendly fraud” attributed to Visa/Mastercard scheme chargebacks is also a problem for many operators.

Are cryptocurrency payments the future of online gambling payments?

Whilst nobody can predict the future, crypto payments have certainly been tipped (and blockchain protocols) as being of key importance for online casinos as more individuals invest and purchase cryptocurrencies. However, for many countries, cryptocurrencies have remained a very unpopular way to deposit money. Cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc. are currently viewed as “assets” rather than as a true method or sensible way to pay. With the current upward trend of cryptocurrency, users will think twice about depositing using cryptocurrency, especially if they feel that the value of their cryptocurrency will double (or more) on a weekly or monthly basis.

There are other hurdles that will need to be crossed, namely the high exchange fees that users pay to deposit and withdraw when they typically deposit via an online casino or sportsbook. The UX for customers depositing with Bitcoin and other cryptocurrencies is also poor as it is very hard to work out how much they are playing for because BTC holds very little real-world value or indeed is typically associated with fiat currency when it is valued. As an example, if you deposit 500 EUR worth of Bitcoin, ₿0.011, the player staking 10 EUR (₿0.00021), will get quite quickly confused as to the value of their wager.

In several countries, some banks have refused to provide services to gambling companies. What are the main reasons for financial institutions to not provide their services?

In many countries and separate states, such as the US states, gambling is prohibited and illegal. Gambling is either banned locally or on a national level by the government. Financial institutions are in part regulated by these laws and other regulatory bodies, which decide whether banking or financial services can be offered to gambling operators.

In countries where gambling is allowed, financial services companies, which are unwilling to provide such service, typically do not, due to reputational risk. Whilst gambling may be big business, for those of us who work in this industry, gambling revenues make up a very small percentage of the global revenues generated by large financial institutions and merchant banks. Many pension funds and other large investors do not want the companies they are invested in to be associated with this type of activity, especially if it is not their core activity. Vice versa, sometimes gambling, in many countries, is not appropriately regulated, making it a legal minefield for those who want to work in the space.

On a personal note, more should be done to protect individuals with gambling problems, and there is a fine line between enabling a gambling industry and the potential for widespread societal damage. We should remind ourselves of the damage that gambling can have on certain individuals’ lives and respect certain companies for not wanting to be involved in this type of activity.

Read more: Advantages of a Bitcoin casino

Read more: Interrelation between sports betting and blockchain technology

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