Will the Drive to Local Regulation Impact Payment Friction? By Matthew Harrod, CEO, Payments Company
Payment Acceptance in the Gaming sector has always been a challenge, at times almost looking like a standoff between the regulated financial institution and the regulated gambling operator. Will the drive to local regulation actually reduce this friction or cause more?
From an operator’s perspective, payments are a necessary evil that collects the money, rewarding the efforts of building products that appeal to customers and then acquiring those customers. This is not very different from other industries, but the challenges of operating a gambling payments program are much more complicated.
From a product perspective – realtime processing, pay-out of winnings, unique fraud challenges, differing models requiring differing processing limits, security and cashflow management and reconciliation across multiple suppliers and platforms – makes a payments managers role in a gaming operator much more onerous than that of their counterparts in other sectors. However, before the product management there is a greater hurdle that payment suppliers grapple with:
Payment providers (especially card acquirers) have viewed gaming merchants unfavourably for many years. There are two main reasons for this: Reputational and Financial.
Financial Risk can be managed using spreadsheets and security provided to cover potential fraud and chargeback exposures, but reputational is a far more complex mostly based on regulation and compliance and often hard to quantify as emotions play a part.
From a regulatory and compliance perspective there are three main areas of concern for payment providers:
- Financial regulation including AML and customer (player) KYC
- Gambling regulation and whether the operator has the correct licensing
- Card scheme (Visa and MasterCard) regulation.
There is overlap across the 3 areas that need supplier risk managers to understand the drivers for all. For example, does an operator’s gambling regulation covers the financial AML and also Visa rules for operating?
The amount of work that is necessary to learn these various rules takes years, but in order to then apply the knowledge and more importantly keep up to date on the ever-changing landscape across payments and gambling regulation and compliance, in most cases kills the business case for non-gaming focused solutions providers. No adherence, even by accident, can lead to huge fines and licensing problems with central payment regulators and big scheme fines.
In addition to this, there is also the emotional stance of “gambling is bad, do we want to be associated with it?”. This is a strange stance when these same providers would see a pub chain or off-license chain as being a key strategic win, but that’s for another day!
How does regulation affect the stance?
Regulation is good when executed effectively and with stakeholder best interests at heart. It provides an even playing field, drives competition and protects consumers.
This seems a logical stance but obviously depends on if the regulation is put in place for the right reasons. We are seeing globally that there are different views on gambling when defining regulation at a local level. Some countries are sincere in their protection of consumers as the main driver, others want to impose a political view, and some others want to primarily be able to tax locally. A cross border regulatory framework would adhere to the EU’s frictionless trade vision and would drive competition and provide greater protection of customers in an even playing field whilst also providing robust and transparent regulation, but this seems to be the opposite of what we are seeing currently.
The lack of cohesion across countries, and especially within economic areas like the EEA, will cause lots of re-evaluation of supplier risk policies. This is not just with the current trusted supplier to the industry when looking to target or remove countries and licenses from their policies, but also with the Tier 1 providers looking at a “newly regulated landscape” that may decide to tip their toe in the water.
These acquiring businesses, especially in countries like the UK, are at the end of a 20-year market share war on each other. This is resulting in a race to the bottom in terms of pricing for card products ending in a potential post Brexit increase on the interchange. This will increase costs (but not margin) to their customers for a card solution that has offered little innovation in the last 20 years. Yet again this may force the hand of some businesses to reduce their perceived risk stances to secure revenue targets.
The reality is that, while the regulation causes some concerns, at the moment the suppliers best placed to manage the ever-evolving landscape are the usual suspects. They have experience and understanding and are keeping up to speed with all developments. Tier 1 providers are still a couple of years away from being able to develop a product set, execute and integration pipeline and risk appetite and to get them all working in tandem. There are also a number of new players to the market, who seems to be naive to the regulatory landscape, but unlike the tier 1 suppliers who understand what they don’t know, these businesses seem to plod on regardless offering unsustainable solutions.
There is, without doubt, going to be a lot of change over the next couple of years and while there is an expectation that suppliers and operators keep up to speed and adhere to multiple new regulated territories, keeping up to speed will cause some challenges and innovations over the period prior to the relationships settling down again and suppliers being able to support the industry’s aspirations. Whether that’s with the current payment products or innovative alternatives is yet to be seen.
About: Payments Company provide payment advice to a wide range of customer sectors while using industry knowledge and experience to tailor solutions and solve problems for merchants