Card processing for igaming and online sports betting comes with hidden costs and fraud risks that casino operators may not be aware of or understand.
Partnering with the right third-party payment processor can help mitigate them, according to Leighton Webb, vice president of igaming and sports betting for PayNearMe, billed as a modern and reliable payments platform designed to manage the complexities of igaming and sports betting.
Webb said many operators take the cost of card processing at face value. But they’re simply looking at the transaction rate and not considering underlying factors.
“When many operators think about the cost of card processing, they’re thinking about the transactional costs, but there are other costs associated with card processing,” Webb said. “It’s far more complex than just choosing the cheapest vendor.”
Many operators allocate resources to expansion and new business, while outsourcing payments to a provider focused solely on processing rather than other protection aspects like fraud and chargebacks.
“If you don’t have the right solution in place, you run the risk of your cost of card processing exploding and running out of control,” Webb said. “When a provider such as PayNearMe help operators automate — providing the tools and data to make them more efficient in making decisions, catching fraud, and going through the review process — it’s extremely valuable. If operators manage fraud more efficiently, it will bring down their costs and expose them to less risk.”
Cards have a higher decline rate than other payment methods and request declines have given cards a negative reputation amongst sports bettors, Webb noted. Some 52% of bettors said they’ve experienced declines when signing up for a new betting app, with 17% of those leaving the app and never returning, he said, citing PayNearMe’s 2022 research. While card acceptance rates have improved to about 87%, that still leaves a double-digit rate of decline.
Webb added up the mounting costs of card declines by combining the hard costs of a decline with the cost of losing the lifetime value of a customer. Thus, a decline often has an associated hard cost, which can be a significant multiple of the cost of a successful transaction. There’s also the risk of multiple declines for a single deposit attempt, which can multiply the cost of a decline.
PayNearMe research showed that after a declined payment, 27% of bettors try the same deposit method again, thus creating additional hard costs, resulting in a poor user experience. The overall cost of losing customers to a poor experience is high, Webb said. The long-term value of an online-betting customer averages around $2,000. Add acquisition costs and operators are losing thousands of dollars per decline if that player is one of the 17% who chooses to abandon your app, Webb calculates.
On top of the hard costs of declines are the regulatory costs to an operator’s entire business. If an operator builds up a high rate of declines and chargebacks, it may be subject to monitoring programs that lead to fines, penalties, and even a complete ban from a specific card processor, Webb said.
Some issuing banks have been hesitant to allow card payments for online-gaming transactions, Webb said. Operators can be seen as high-risk vendors and charged a higher rate for card processing, because gaming is a growing market with many new operators that don’t have a proven track record with card processors.
The Federal Trade Commission reported that consumer fraud, calculated by the amount of money lost, jumped 30% between 2021 and 2022, mostly through the payment system. Staffing costs for mitigating the growing rate of fraud can be enormous in fighting chargeback disputes or processing declines, Webb said.
In a blog post by OneSpan, the rapidly expanding operator Unibet told the story about having 14 risk and compliance analysts before they realized that throwing bodies at the issue wasn’t a sustainable business model. They calculated that they would need 36 analysts to properly manage their risk and fraud management at scale.
As the frequency of fraud increases, operators are potentially setting themselves up to be blindsided as risk and fraud costs jeopardize their overall business. While the organization as a whole is impacted, potential repercussions also exist on a personal level, as directors can be held personally liable for failure to mitigate fraud. They could lose their jobs or worse be fined and banned from working at a regulated gaming operator in the state, he cautioned.
“If one bad actor discovers a vulnerability in your platform and publishes the findings to fraud rings or the dark web, the problem can explode,” Webb said. “Your fraud explodes. Your chargebacks explode. Your costs explode. You have to divert resources to manage the situation. Your immediate cash flow takes a major hit. You fall further behind in an already hyper-competitive market.”
In the end, successful operators will come to realize that if they can’t scale internally, they must address these issues by working with a partner that has the ability to address these costs and risks holistically.
As for what they should look for in a partner, experience in the igaming space is at the top of the list, Webb said. Out of hundreds of reputable card processing firms in the U.S., few have extensive experience in the igaming industry. Look for a partner familiar with processing gaming transactions and make sure they have the compliance, risk, and technology capabilities to ensure you can maximize controllable factors that influence card acceptance, Webb recommended.
Second, there should be a focus on data and tools to help fight fraud. Payment providers should actively monitor behaviors to head off fraud situations. It’s important to set velocity rules and player limits, limit the number of cards per player and the number of states those cards can come from, dispute chargebacks directly in the platform, do name matching, and pay attention to chargeback trends and insights.
“We have the capability to limit the number of cards that a player can add over a certain period of time,” Webb said. “If you see someone coming in and they’re adding three, five, or ten cards at a short clip, there’s a direct correlation between that behavior and fraud. If you see a lot of cards coming in from different states, that’s an indication of fraud. When you see that type of behavior, it’s important to take action and tighten down those rules in real time. That’s where we come into play.”
Third, proven reliability is vital, Webb said. Every minute of downtime, especially during betting surges around timely events, can be expensive for operators. Working with a processor with industry experience, exceptional scale, failover routing, and multiple distributed data centers is crucial for reducing the impact of downtime.
“Reliability is important in online sports betting. It’s time sensitive. It’s tied to an event that’s going to take place. There’s a cost in not having redundancy, backup, and reliability.
“Last year in Colorado, one of the main processors went down because their license lapsed and if you go down on a Sunday afternoon, that’s a big deal,” Webb said.