SECURE TRADING UNLOCK THE UNKNOWN FOR ESPORTS PAY-WITH-ST( )

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1 SECURE TRADING UNLOCK THE UNKNOWN FOR ESPORTS ONLINE PAYMENT EXPERTS PAY-WITH-ST( )

2 CONTENTS 1.0 REGULATION & PAYMENTS 2.0 REGULATORY LANDSCAPE 3.0 PAYMENT PROCESSING LANDSCAPE 4.0 TRUE PATNERSHIPS FOR MARKET ENTRY 5.0 GLOSSARY OF TERMS 6.0 SOURCES 7.0 ABOUT SECURE TRADING

1.0 REGULATION & PAYMENTS With more than 45 million unique viewers, esports has quickly grown into one of the most viewed spectator sports in the world.

3 1.0 REGULATION & PAYMENTS With more than 45 million unique viewers, esports has quickly grown into one of the most viewed spectator sports in the world. Contest prize pools now exceed $20M for the largest professional tournaments and it also boasts the largest percentage of fans that actively participate in the sport. This creates a huge opportunity for both marketing to tournament viewers, and capitalizing on revenue generated from amateur peer-topeer play. However, as the market begins to mature there are many questions that need to be answered. In fact, at the first annual Casino esports Conference in September 2017, industry founders struggled to even define the term esports. Two major aspects where esports operators need to focus are regulation and payment processing. In this article, we explore the key regulatory challenges operators face, and how payment processing can help operators navigate the regulatory landscape and optimize their payment strategy to achieve the best possible outcomes. 3

4 2.0 REGULATORY LANDSCAPE Technology has outpaced regulation in many industries; peer-to-peer online game of skill play is a textbook example. In an environment that is largely unregulated the best protection against inevitable regulatory changes that disrupt existing business models, is to self-regulate. Lessons must be learned from Online Poker and Daily Fantasy Sports; both industries outpaced regulation, and because they did not properly self-regulate, were dramatically impacted when regulators took action. Payment processing is already a heavily regulated sector and as such can help esports operators self-regulate and militate against regulatory unknowns by adopting best practices. Therefore payment processing should be part of the core decisions made by operators prior to launch. Failure to develop a holistic payments plan leaves the operator at the mercy of decisions made by financial institutions that have little to gain - and a lot of downside - from supporting a developing market that is lightly regulated. The fortunes of esports and online payments sectors are tied together not simply by virtue of a reliance at a business model level, but by the technology that underpins them and the regulation that also frames them. The cross-border nature of the transactions that lie at the heart of their enterprises attracts greater oversight even while advances in technology and consumer demand point towards an ever more transformed future landscape. That landscape will continue to be defined by a regulatory framework that entwines both the esports industry and the Payments Service Providers (PSPs) that work with and alongside them. The PSPs are thoroughly enmeshed in FinCEN, global banking and AMLD rules, EU directives and regulations related to the Single European Payments Area (SEPA); meanwhile the esports operators are dealing with an ever more complex and fractured jurisdictional regulatory map. However, the relationship between the two sectors is about more than just being thrown together in a regulatory embrace. WAIT AND SEE APPROACH So far, esports has not seen much regulatory action. Regulators in the US and UK continue to address skins wagering, attempting to persuade game publishers to make best efforts to eliminate this activity. However, moves by regulators to abolish what was estimated to be a $7 billion wagering market have proven to be difficult (1). According to Narus Advisors (ESPORTS BETTING REPORT, 2016) most skins wagering involves betting on the outcome of a professional tournament or match, or using skins as currency for online versions of traditional casino and lottery games. Black market sites have taken the place of popular online marketplaces that facilitated this type of wagering after the regulator crackdown in Aside from skins wagering, regulators have been quiet on real money play for online tournaments and peer-to-peer matches. Regulators are taking a wait and see approach to the industry. Comments and actions by regulators have focused on live tournament events hosted at casinos, keeping underage players and spectators off the casino floor. PAYMENT PROCESSING SHOULD BE PART OF THE CORE DECISIONS MADE BY OPERATORS PRIOR TO LAUNCH 4

2.0 REGULATORY LANDSCAPE CONTINUED If history is an indicator, a negative event once the market reaches a substantial size will lead to reactive regulation.

5 2.0 REGULATORY LANDSCAPE CONTINUED If history is an indicator, a negative event once the market reaches a substantial size will lead to reactive regulation. The Daily Fantasy Sports crackdown of 2015 is the latest example saw a dramatic spike in advertising from the two largest DFS operators as they competed for market share and major investment dollars from some of the world s largest corporations. In October news broke that accused a DraftKings employee of using insider information from his company to win second place and $350,000 in a FanDuel contest (2). Within 30 days several states took action to either ban DFS play or required operators to obtain a license before continuing operations. During the review of internal procedures regulators found insufficient controls in place to ensure that games were not fixed, poor vetting of players, and inconsistent or nonexistent compliance policies. The result was a public perception that DFS operators did not protect the integrity of their industry, a huge reputational hit. The cost to the DFS industry was a dramatic drop off in the expansive growth between 2013 and According to a 2016 report by Eilers & Krejcik (3), 2015 DFS deposits were $3B up from just over $100M in 2013, a 30X growth rate in three years deposits grew year over year in the single digits. Early unofficial reports for 2017 are flat or slightly lower year over year growth. The flat growth of the last two years can be traced directly back to the fallout from regulatory action in The esports community is in a similar situation as DFS was in The global communal nature of esports is responsible for its explosive growth. Organic offshoots are natural in this type of environment where rapid advances in technology are aided by expansion of the global communications infrastructure. However, if the industry is going to continue to grow as it matures there must be a clear line between operators wishing to participate in a regulated industry, and activities that regulators deem black market activities like skins wagering. This will not only prepare operators for regulatory oversight but also allow PSPs to provide payment processing services backed by top tier financial institutions. Operators best protected from this regulation will be those who take a proactive approach by establishing a robust compliance policy that includes: AML/OFAC screening, player ID validation, setting player age restrictions, and location validation. 5

6 3.0 PAYMENT PROCESSING LANDSCAPE Every country is a different story when it comes to payments. In some countries consumers can only deposit with a credit card and not with a debit card, whereas others are completely the opposite. Banks, meanwhile, can also become inventive, such as by demanding that gaming deposits be treated as a cash advance. Payment Service Providers (PSPs) need to take a consultative approach with operators to understand how payments regulation intersects with gaming regulation. While esports regulation is still in its infancy, payments regulation is well established across the globe. Financial Institutions, and as an extension PSPs, are held to strict regulatory policies issued by government agencies as well as rules from Payment Networks. THE MERCHANT CATEGORY CODE CHALLENGE A significant challenge for esports operators is getting access to credit card deposits and the supporting services that processing payment card transactions requires. The payment card networks and Acquiring Banks categorize esports as high risk merchants, falling under Merchant Category Code (MCC) 7994: Video Game / Skill Game. Visa and MasterCard (V/MC) each have about 500 MCCs and 200+ page manuals that direct Acquiring Banks and Processors on how to categorize each merchant. While the proper MCC for esports is 7994, the initial assignment of the MCC is ultimately submitted by the sales rep working for the Processor/Acquiring Bank. esports operators should be conscious of the MCC that will be included on all credit card processing agreements. There are numerous examples of intentional miscoding across all high risk industries in an attempt to subvert Processor/Acquiring Bank credit policy. In most cases the merchant is unaware that miscoding is occurring, they are simply relying on the expertise of the sales rep. The consequences of miscoding is the termination of the merchant s credit card account and possibly fines of up to $10,000 per transaction. Networks, Processors, and Acquiring Banks take miscoding very seriously and continuously monitor transaction activity to identify miscoded merchants. Here is how being a high risk merchant with MCC 7994 can impact on the operators ability to process card transactions: BANK SPONSORSHIP There are differences between an Acquiring Bank that sponsors transactions in the V/MC Network versus an Original Depository Financial Institution (ODFI) that acts a sponsor for ACH transactions submitted to the FED, or banks that sponsor prepaid programs. However, for the purpose of this article we will use the term Sponsor Bank to describe any financial institution that actively participates in sponsoring esports transactions into the various payment networks. Only a small percentage of banks have the desire and capability to sponsor high risk merchants. Banks that participate in high risk industries must adhere to strict limits on fraudulent transactions and chargebacks, file extra documentation, and allow additional audits from the Network and/or bank regulators. WHILE ESPORTS REGULATION IS STILL IN ITS INFANCY, PAYMENTS REGULATION IS WELL ESTABLISHED ACROSS THE GLOBE 6

3.0 PAYMENT PROCESSING LANDSCAPE CONTINUED In addition to the added cost of monitoring and tracking high risk transactions, there is reputational risk for a bank that choses to facilitate money

7 3.0 PAYMENT PROCESSING LANDSCAPE CONTINUED In addition to the added cost of monitoring and tracking high risk transactions, there is reputational risk for a bank that choses to facilitate money movement for industries that operate in a fluid regulatory environment. As a result, scrutiny of merchant applications is much more onerous and in some cases Sponsor Banks will require a reserve to offset financial risk of merchant insolvency. ISSUING BANKS The bank that issues the consumer his credit card plays a significant role in a merchant s credit card approval rates. The issuing bank can block any MCC deemed to be outside of their desired risk profile. The most recent example of wide spread MCC blocking affected the regulated online gambling market. Shortly after the November 2013 launch of several New Jersey online gambling sites, MCC 7995 was blocked by at least 80% of Issuing Banks. Since these sites launched with only credit card processing for consumers to load their gaming account, blocking 7995 essentially eliminated the ability of operators to receive consumer funds. The industry fought to have additional MCCs created by V/MC to separate regulated online gambling into Casino/Poker, Lottery, and ADW (horse racing). However the approval, which came more than 12 months after the request, did little to solve the problem of issuing banks blocking these transactions. Most banks that had blocked 7995 simply blocked the new MCC for regulated online casino/poker operators. As this example demonstrates, high risk merchant category codes trigger certain unavoidable aspects of credit card processing that operators need to know to avoid any disruption in the ability to accept payments from players. Mitigation includes following credit card rules as well as adopting Alternative Payment Methods to allow deposits via prepaid, ACH and cash. ALTERNATIVE PAYMENT METHODS (APM) APM is a generic term for any noncredit card payment method that is sponsored by a financial institution. In the US widely supported APMs are: ACH, Prepaid, and Cash Loading. Providing multiple APMs for deposit and withdrawal is key to implementing a full payment processing solution for game of skill operators. Offering multiple deposit solutions in addition to credit card processing reduces the issue of high credit card decline rates common for high risk transactions, as well as providing options for players without the ability or desire to deposit via credit card. To tackle the issue of higher than normal credit card decline rates, designing a deposit transaction flow that immediately offers an APM deposit option after a credit card decline will dramatically increase the likelihood that your player will successfully deposit funds into his account. Additionally, APMs such as ACH and cash loading are typically more cost effective deposit methods for the operator. Multiple withdrawal options have been proven to lead to a more loyal population of players by enhancing their experience with the operator s platform. 7

8 3.0 PAYMENT PROCESSING LANDSCAPE CONTINUED ACH DEPOSIT AND WITHDRAWAL ACH is a direct movement of funds between a player s checking account and their gaming account via a nightly batch process. A Third Party Processor (TPP) is used to validate the player s bank account info, screen for fraud, and submit the batch file to the FED. There are two types of ACH for deposits, Warrantied and Non-warrantied. Warrantied ACH provides an insurance policy against the online version of a bounced check. With the Non-warranty solution the operator assumes the risk that funds will not be in the player s bank account when the batched transaction hits his checking account 2-3 days after the transaction has been authorized by the TPP. This risk can be mitigated by implementing rules in the operator s payment platform that delay a player s access to funds deposited via ACH until he has built a successful deposit history. ACH Withdrawal is processed via the same nightly batch process, and is treated by the TPP in a similar way to a refund transaction. ACH withdrawal costs are typically less than $1 per transaction, which is more cost effective for the operator and more convenient for the player than physical check payout. PREPAID DEPOSIT AND WITHDRAWAL Open Loop Prepaid is a pre-funded account that uses major card brand (Visa, MasterCard, Discover) rails (system) to process transactions. Transactions are processed as a PINless debit card and the player can use their prepaid card at any retail or ecommerce merchant that accepts the card brand. The prepaid account can be issued online in real time after a full KYC screening - required by the issuing bank. Funding options for the prepaid account are typically credit card, ACH, and cash loading. Funding with a credit card will instantly credit the player s prepaid account and allow him to immediately deposit funds into the operator s gaming account. In addition to instant access to the prepaid account online, a physical card will be mailed to the player. An open loop prepaid program of this type offers the operator a chance to brand the physical card with its logo which enhances brand awareness and loyalty. The physical card allows the player a vehicle to withdraw funds from his gaming account into his prepaid account and use the card like any other V/MV/Discover branded credit card at retail and ecommerce merchants. CASH LOADING DEPOSIT Cash loading allows the player to deposit cash into his gaming account at thousands of retail locations in the US. Examples of the participating retail locations are: CVS, Walgreens, Walmart, and 7/11. From the operator s site the player requests a bar code be ed or texted to him, then that bar code is scanned at the participating retailer which treats the transaction as a cash purchase at the register. The funds are immediately credited to the player s gaming account. PREPAID DEPOSIT AND WITHDRAWAL OFFERS THE OPERATOR A CHANCE TO BRAND THE PHYSICAL CARD WITH ITS LOGO WHICH ENHANCES BRAND AWARENESS AND LOYALTY 8

4.0 TRUE PARTNERSHIPS FOR MARKET ENTRY Given the political and regulatory landscape, it should be no surprise that when an operator is looking at entering into a new market, it often requires close

9 4.0 TRUE PARTNERSHIPS FOR MARKET ENTRY Given the political and regulatory landscape, it should be no surprise that when an operator is looking at entering into a new market, it often requires close alignment with its payments providers to define and agree how payments need to be handled in a particular jurisdiction. Alongside basic relationship management facilities, PSPs can help operators understand their new players, assist them with ensuring a trouble-free transaction that works within the bounds of the regulations, and guide them when it comes to the all-important issue of payment conversion levels. All of this demonstrates the importance for PSPs of understanding the regulatory esports landscape to advise operators on how to optimize the payment strategy to achieve best possible outcome. The relationship between payment provider and operator is a complex web of payments and anti-money laundering directives and other banking and financial rules added to the specific gaming regulations for each jurisdiction. To this has to be layered: + + Data on player behavior + + The specifics of payment types + + The drive for frictionless transactions + + The geographic elements + + The desire from the consumer from real-time deposits and payouts + + Audit requirements The reliance on PSPs is about much more than simply providing a commoditized service. It is ultimately why PSPs are considered to be such strategic partners for esports operators. 9

10 5.0 GLOSSARY OF TERMS ALTERNATIVE PAYMENT METHOD Non-credit card payment methods such as ACH, Prepaid, and Cash Loading. ACQUIRING BANK Financial Institution that is a member of one or more Network(s), contracts with merchants to provide credit card processing. CHARGEBACK When a consumer contests a transaction and initiates a process with their Issuing Bank to have monies refunded to their account. ISSUING BANK Financial Institution that issues a credit card to a consumer. PAYMENT NETWORK Visa / MasterCard / American Express / Discover / NACHA. PAYMENT PROCESSORS Provide data and funds movement for authorization and settlement for credit. card, ACH, and prepaid transactions. PAYMENTS SERVICE PROVIDER Provide connections into Acquiring Banks and Payment Processors that allow merchants a single connection point with access to multiple payment types, as well as provide access to fraud screening, chargeback mitigation solutions, data encryption and tokenization, and audit capability. SPONSOR BANK Similar function as Acquiring Bank to provide ACH or prepaid payment processing. 10

11 6.0 SOURCES 1 Esports & Gambling: Where s The Action? 2 Daily Fantasy Sports (DFS) Research Package: published by Eilers & Krejcik, January Daily Fantasy Sports Industry Update , Feb

7.0 ABOUT SECURE TRADING Secure Trading is an integrated payments services company a single point of contact for card acquiring, payment processing, PCI compliance and cyber security services.

12 7.0 ABOUT SECURE TRADING Secure Trading is an integrated payments services company a single point of contact for card acquiring, payment processing, PCI compliance and cyber security services. Established in 1997, Secure Trading s specialist service helps businesses of all sizes across a whole spectrum of industries achieve success online. Our worldwide footprint and network ensure that we can deliver tailored solutions to even the biggest international companies, while our uncompromising focus on customer service means that thousands of businesses across retail, gaming, digital entertainments and financial sectors trust us to give their customers the best possible online experience, 24/7. From its roots as a robust and secure payment processing company, to its best of breed acquiring and cyber security services today, Secure Trading is a one stop shop for payment services and has continually evolved to meet the ever-changing needs of online businesses. Headquartered in the UK, US and Malta, Secure Trading is your global payment partner. ONLINE PAYMENT EXPERTS London: PAY-WITH-ST ( ) Web: sales@securetradinginc.com securetrading.com/usa 12

Payment Processor Sample RFP

Payment Processor Sample RFP Sample RFP For your reference, here is a sample RFP when considering potential payment processing partners. Remember that your business is unique and you will want to make