CREDIT CARD WOES? ALTERNATIVE PAYMENT PROCESSING TO THE RESCUE!

By Marc Lesnick

Those trying to use their credit card for wagering at an online casino and sportsbook have certainly noticed problems getting authorization for approval. The problem in most cases is not the individual's credit line, but changes in the policies of Visa and MasterCard that have rejected the transaction.

In some cases, players have attempted to make deposits using up to 4 credit cards and found each was denied. In some cases, a 5th credit card would work.

What's causing the problem? Simple. Visa and MasterCard decided that they do not desire to process gaming transactions. They offered the merchant banks a code to identify the merchant (casino/sportsbook) as a gaming operation. This code is known as "7995." Its one of the ugliest numbers in the online gaming industry, as it has caused a decline in industry revenues, most operators say it is off by 30% compared to last year.

The code is based on the old Standard Industrial Classification (SIC) code and identifies the type of business the merchant is engaged in.

What happens is an issuing bank (example: Providian Bank) codes the processor of an online casino or sportsbook (the merchant) as 7995. Whenever a Providian Bank based credit card is used from a player and authorization is attempted from that casino, the 7995 code comes up in VISA's database. Subsequently the approval for the charge is denied. The player tries to use another credit card issued from another bank, attempting to see if that gets through. The player does this until (1) he/she gets the charge accepted and starts to wager, or (2) he/she runs out of credit cards.

The 7995 program was first introduced by Visa in late 2001. It was strictly voluntary for the merchant bank to implement. Providian was one of the first to use the system. As they are one of the largest merchant banks, their effect on the gaming industry was felt almost immediately. Other merchant banks soon followed. MasterCard initiated a similar system on May 1, 2002. Most, but not all issuing banks now use the 7995 code.

Its impact to the online gaming industry and the frustrations it has brought to the player have sprung up another business: Alternative Payment Processing. Paypal was one of the first and most aggressive players to enter this niche market. Their rapid growth was significant (mostly from i-gaming as well as eBay). They were purchased by eBay last summer for US $1.4 Billion (a mind boggling figure). The purchase also resulted in an announcement that Paypal would no longer be involved with i-gaming transactions. On November 25, 2002 Paypal became officially "out" of the online gaming e-commerce business.

Enter new players into the Alternative Payment Processing market: Neteller, now the market leader, followed by many companies that want a piece of the online gaming e-commerce pie. Internet Cash Card, PayManager, ProCyber, 900pay, e-Gold, OneWPS, etc. It is a confusing situation for an operator. One wants to choose an alternative payment system that is reliable and will not need to be switched again over the next 2 to 4 years. It is costly for an operator to switch its players to a new payment system, as they tend to lose customers in the process.

The ASROC conference (http://www.asroc.com) on January 7, 2003 is a one day event on Alternative Payment Processing for internet businesses, with a focus on online gaming. The conference is designed so that numerous alternative payment processing systems can show their wares to many savvy casino/sportsbook operators. The idea behind it is that the next "Paypal" will be found at this event. Most likely 3 or 4 systems will be selected by consensus from the operators. By spring they will most likely be implemented with the online casino/sportsbooks, and by fall of 2003 most players should be using the new systems. The conference will be held on January 7, 2003 at the Hotel Real Inter-Continental in San Jose, Costa Rica.

Despite the 7995 code, many casinos/sportsbooks are able to get around the code. How they do this is quite simple. The merchant sticks with a payment processor until the casino/sportsbook is "e;coded"e; 7995 and no longer processes VISA/MasterCard transactions. At that time the casino/sportsbook switches their merchant bank to another payment processor and starts anew until they are coded again. The coding of 7995 from the new payment procesor can take anywhere from a few days, a week, or even a month. It reminds me of the old college days of "phone phreaking" when a hacker friend would find telephone calling card numbers from a multinational Fortune 500 corporation, and then provide half the college campus with it. Everyone would use the calling codes to call all over the world. It would take anywhere from two weeks to 2 months for the Fortune 500 company to see a whopping phone bill. Once the calling card number was cancelled, the hacker friend would provide 5 new ones. And so on and so on.

Leave the world alone like this and the casinos/sportsbooks will get around it. But it doesn't work so fast. Visa is instituting a "Verified by Visa" policy, which from what we hear is to be officially started in Spring 2003. It requires both the consumer to verify their identity and the merchant to be certified as to their business practices.

Here's how it is set to work:

VERIFICATION (FOR THE CONSUMER): Each Visa cardholder will have to register their Visa card online and generate a password (or PIN). This password will be used for ALL online transactions (including airline tickets, books, etc). This verification policy will ensure the cardholder is the owner of the card and serves as an extra level of security.

CERTIFICATION (FOR THE MERCHANT): Each merchant will be certified with their payment processor. This is important, as merchants will be coded as to their business practices. Online casinos, currently coded as 7995 and rejected in most cases, will be under further scrutiny. The intermediary bank or the issuing bank doesn't want to get blacklisted with VISA, so they will attempt to ensure that each merchant is properly certified.

What this means for iGaming is that come springtime 2003, reliable alternative payment processing systems need to be in place or soon thereafter a severe drop off in online transactions is expected to take place. (Sources have informed us that MasterCard is looking to create a similar policy - and soon). The verification/certification policy is borderless, meaning that an online gaming operation operating in a licensed jurisdiction will still see revenues drop due to rejections from credit cards.

And for the casinos/sportsbooks that avoided the 7995 code by continually switching payment processors and/or merchant banks, they will have to submit for re-certification each time, a lengthy process.

What's interesting is that we have heard through the grapevine that most casinos and sportsbook operators in the Caribbean and in Europe have for the most part ignored Visa's new "Verified by Visa" policy and turned a blind eye to it. We also keep hearing that Visa is DEAD serious about this policy.

The verification policy came not from a crack down on i-Gaming but from requests from retail online merchants, who were complaining about fraud and charge backs. This places the liability more on the issuing bank and less so on Visa or the merchant. Online merchants not in i-gaming are actually happy with this policy.

The ASROC conference has a senior analyst from the Gartner Group providing a 45 minute session scheduled just for this and will most likely be discussed at length with additional speakers.

A tremendous opportunity has come for the internet in terms of creating a new alternative payment processing industry. Each of these companies looking for rapid growth are focusing on the online gami

Date Posted: 23-Dec-2002

Marc Lesnick runs StartCasino.com, an information site for gaming executives on starting a casino business and a directory of the online gaming industry. Mr. Lesnick both consults with gaming executives and speaks at numerous industry conferences. He can be reached via e-mail. webmaster-03@startcasino.com