Net Casinos Find They Can’t Bet on Plastic

Internet gambling, once seen as one of the Web’s big potential moneymakers, may turn out to be a loser bet because U.S. credit card companies and payment systems refuse to do business with online casinos.

Although boycotts by major credit card issuers and PayPal Inc. are in effect only in the United States, that’s where more than half of the world’s online gamblers live, gambling industry analysts say.

The decision by Bank of America, Citibank, Direct Merchants Credit Card Bank and other major issuers not to honor transactions with offshore casinos and sports-book operations stems not from moral qualms about gambling but from murky state and federal laws that make it possible for customers to wriggle out of debts.

Seven of the top 10 credit card issuers refuse online casino transactions. Without the participation of major credit card companies or a payment service such as PayPal, it is considerably more difficult to place a bet online even in states such as Nevada where gambling is legal.

“It changes everything,” said Michael Caselli, editor of Gambling Online magazine. “It does not mean that people will stop gambling online. People did not stop drinking during Prohibition.” But, he said, “it has made online casinos rethink the way they transact their business.”

Analysts who once predicted Internet gambling would become a $6.2-billion annual enterprise by next year now predict global receipts of $4.2 billion--or less than half the $9.3 billion that Nevada casinos take in.

Jason Ader of Bear Stearns Cos. said the credit card company defections are symptomatic of deeper problems for Internet gambling, a loose-knit, lightly regulated industry made up of an estimated 1,400 sites headquartered in such locales as Costa Rica and Vanuatu.

The sites offer an array of casino games, including interactive blackjack, poker, craps, roulette and slot machines. They look similar to electronic games, such as video poker, available in bricks-and-mortar casinos. Some sites also offer wagering on sports, the Academy Awards and even how long a celebrity marriage might last.

“The industry has to get regulation, it has to get control of the process,” Ader said. “People have to be convinced of the integrity of the games. Las Vegas and Atlantic City did it, and maybe they have to get involved to put together a system that will work.”

But the major casinos will take only tentative steps until the legal situation in the U.S. is resolved. MGM Mirage plans to launch its Internet casino, based on the Isle of Man, this year, but it will not take bets from Americans.

“It’s just not worth the problems it could cause,” said MGM spokesman Alan Feldman. “The lack of legal clarity makes it untenable.”

Several online casinos that take bets from Americans would not comment.

Credit card companies do not shy away from gambling in general. At bricks-and-mortar casinos in Nevada, credit cards can be used at cashier booths and bank machines for cash advances. In states such as California where online horse betting is legal, credit cards can be used to set up wagering accounts.

But the largely unorganized world of online casinos is a Wild West, not unlike Las Vegas was before regulations were established.

Some legal experts say no states have laws that explicitly prohibit placing a bet with an offshore casino from a home computer. But facilitating that bet by using a credit card or payment service may be illegal, depending on interpretation of laws such as those that banned telephone betting across state lines.

The case that unsettled the industry occurred in 1999, when a Marin County, Calif., woman racked up $115,000 in Internet gambling debts on various credit cards. She not only refused to pay, but also sued the credit card companies for allowing her to engage in what she said was illegal activity.

Countersuits followed, but before the matter went to court for what could have been a major legal test, a gambling software company not named in the suits stepped forward to bankroll a settlement and pay the legal fees.

The attempt to keep the system operating smoothly didn’t work--more gamblers refused to pay their losses and credit card companies began to bail.

“We kept hearing about suits from people who would take the stance: ‘You should have never authorized it in the first place, so I’m not going to pay you back,’ ” said Matt Melius, who oversees credit risk management for Direct Merchants, which has about 5 million card holders in the United States.

Melius said he was not aware of any of the bank’s customers fighting a major gambling charge, but the bank stopped accepting online casino transactions anyway.

“We wanted to get out of it ahead of any problems it might cause for us,” he said.

To the credit card industry, which processed more than $3.15 trillion worth of transactions last year through Visa and MasterCard alone, handling online gambling transactions were hardly worth the possible legal trouble.

New York Atty. Gen. Eliot Spitzer, best known for his investigations of brokerages’ roles in the stock bubble, began looking into credit card companies’ role in the industry, taking the stance that the facilitation of online gambling was illegal in that state. Citibank, the largest credit card issuer in the U.S. with about 12% of the business, was under scrutiny by his office when it struck a deal in June to quit taking the bets, donate $400,000 to agencies that counsel chronic gamblers and pay New York state $100,000.

In return, Spitzer agreed not to sue.

He did sue PayPal, which acted as a middleman for credit card companies. In a settlement announced Aug. 21, PayPal agreed to get out of the online casino business in the state and pay $200,000 in penalties and investigation costs.

Online auctioneer EBay Inc. is acquiring PayPal in a $1.5-billion deal and plans to take the payment service out of the gambling business.

Caselli, editor of Gambling Online, said PayPal’s exit from the industry has had a “massive effect.... PayPal has been the crutch the online gaming community used since credit cards became a problem.”

With little hope that the legal situation will be resolved soon, online casinos are looking for alternatives to credit cards. Electronic systems similar to PayPal are being courted, and one operation is trying a pay-telephone system that puts gambling charges directly on a phone bill.

Michael Tew of Bear Stearns is confident that a pay system will spring up to replace PayPal.

“The industry is still growing at a healthy rate at this point,” Tew said. “But the big question is, how resilient will gamblers be in looking for new forms of payment?”

Caselli predicted that credit card companies would return to the business if a way is found to determine the location of a gambler making a bet, thus limiting online gambling to states in which it is clearly legal. Systems involving global positioning system units and other technologies are in the works. He expects them to be ready to roll out in about a year.

“When we can go to the credit card companies and say, ‘We can tell you where everyone is,’ ” Caselli said, “I think $5 billion in transactions is enough to convince them to come back.”