The Sporting Chance

Now that legalized sports betting is  up to the states,  a market some say is worth $150 billion in transaction value lies in acquirers’ cross-hairs. As this market goes legit, how soon can they cash in?

No sooner did the U.S. Supreme Court rule that the question of legalized sports betting is up to the states than speculation ran rampant about who will see a payoff. State governments, sports leagues, casinos, online fantasy-sports platforms—all are expected to get in on the action. But the high court’s 6-3 decision also opened a gaping opportunity for payments processors, and more of them are now preparing to step up to the plate.

“We think the potential is tremendous,” says Neil Erlick, executive vice president for business development at Paysafe Group Ltd., a London-based processor with major operations in the United States.

The allure of sports wagering is such that players already in the game—such as Paysafe and Cincinnati-based Worldpay Inc.—are likely to find plenty of rivals jockeying for a piece of this nascent market. “Absolutely, it will be competitive,” predicts Joe Pappano, senior vice president of Worldpay’s gaming division. “It’s an emerging category, and it’s got great opportunity.”

Since most sports betting outside of Nevada and a few other states has been illegal, nobody knows for sure just how big this market is. A common estimate puts the volume of betting—authorized and illicit—at around $150 billion annually, though some experts put the number as low as $60 billion. Nevada alone accounts for $4.9 billion, a share that has nearly doubled since 2009 (chart, page 32).

But while the market is tempting, there are obstacles that could bedevil even the most determined provider. The most obvious, of course, is the moral pall that has always hung over the subject of gambling. That creates a wide range of issues as state legislatures exercise their newly won discretion on sports betting. These range from legal injunctions to the reluctance of many card-issuing banks to authorize transactions coded for wagering.

“What banks could earn on swipe fees is huge, but banks don’t take risks lightly,” says Matt Schulz, senior industry analyst at Creditcards.com. “Gambling by its nature is risky. That will give them a lot of pause.”

Tiptoeing In

As of early June, just three states besides Nevada allowed sports betting in one form or another: Delaware, Montana, and Oregon. New Jersey, which had been the plaintiff in the case that went to the Supreme Court, was on the cusp of authorizing it.

All told, legislative action so far (map graphic) indicates some 32 states will have legalized sports betting online or in casino sports books, or both, within five years, predicts Chris Grove, managing director for sports and emerging verticals at Eilers & Krejcik Gaming LLC, a Santa Ana, Calif.-based consultancy.

The odds that all 50 states ultimately will allow sports betting are just about nil, says Grove. But the 50-state potential, the top estimate of what legalized operations could earn annually, is in the $16 billion to $17 billion range, according to his estimates.

Other estimates are more modest. Last year, Oxford Economics worked out just how big sports gambling could be if permitted nationwide (chart, page 29). Assuming a “future stabilized year” after all operations have established themselves and all states have had a chance to put rules in place, and also assuming widely available mobile and online access, the firm figures sports wagers that year would total $287.4 billon, generating $18.7 billion for sports books and $2.6 billion in tax revenue for the states.

States that do allow wagering on sports are likely to tiptoe into it. Delaware, for example, only last month decided to allow bettors to gamble on single games in a wide variety of sports (box, page 34). Before, only parlay-card betting (picking multiple winners from a list of the day’s contests) was allowed, and only on National Football League games. Punters are still required to place their bets at one of the state’s three casinos—a restriction that raises the highly charged question of online betting.

Experts interviewed for this story agree that sports betting will never reach its full potential unless online, and especially mobile, gaming is allowed. For that reason, some expect more states outside of Nevada to authorize betting through smart-phone apps. About three-quarters of sports-betting dollars will be placed by mobile within four to five years, says Grove.

That prospect is already setting off a scramble to get a share of the mobile volume. The obvious targets are the two big U.S. fantasy-sports platforms, FanDuel and DraftKings. In May, the Irish bookmaker Paddy Power Betfair PLC said it was laying out $158 million to acquire New York City-based FanDuel, which last year earned $124 million in revenue from 1.3 million active customers in 40 states.

FanDuel’s Boston-based rival, DraftKings, has said it intends to roll out a sports-betting operation of its own. Details so far have been scarce, but the company recently established a wagering presence in New Jersey by forging an alliance with Atlantic City’s Resorts Casino Hotel. DraftKings would not speak to Digital Transactions on the record.

Fantasy-sports operations have escaped most gambling restrictions by arguing they offer games of skill rather than of luck. Participants win by studying players’ statistics in various sports to figure outcomes.

Now, with states working to regulate rather than ban sports betting, European powers are seeking out U.S. partners. “They all have the technology and expertise U.S. companies need, and the U.S. companies have the licenses,” says Grove. “These are the sides that are trying to get together.”

Even the sports leagues are looking to get in on the action. Once unalterably opposed to any sort of legalized gambling, the leagues now are talking about a so-called integrity fee amounting to about 1% of the total amount bet in any state, with the state collecting the fee on behalf of the leagues.

At the Oxford Economics nationwide estimate of $287.4 billion annually in regulated sports betting, the fee would potentially rake in more than $2.8 billion annually.

The Law

Professional and college sports associations weren’t always favorable to the idea of gambling. The Supreme Court decision struck down a 26-year-old federal law called the Professional and Amateur Sports Protection Act, which Congress enacted ostensibly to shield the integrity of sporting contests by banning wagers in most states.

The leagues had lobbied heavily for PASPA, but now that the question of whether to legalize sports betting, and in what form, is up to each state, theories are emerging about how far legislatures are likely to go, and how soon. As the summer arrives, many legislatures are adjourned, leaving the question up in the air for months.

Nor is the federal government entirely out of the picture. A 2011 interpretation of the 1961 Wire Act by the Obama Administration’s Justice Department confined the law specifically to sports betting. But while the Wire Act is seen to restrict online betting, many see that restriction applying to interstate, not intrastate, activity. That could open the door for more states to follow Nevada’s example and allow mobile wagering.

Clearly, processors eyeing the new sports-wagering opportunity opened by the Supreme Court decision are counting on states authorizing online and mobile betting. “In order to optimize sports betting there has to be a mobile component,” says Worldpay’s Pappano. “Mobile has to be part of the offering.”

Worldpay’s expectation is that states that authorize sports betting will start cautiously by requiring players to register and place bets on-premise at casino sports books. “At the start, you’ll want people to come in and sign up,” Pappano says. Then, as the games become more mature and casinos register more bettors, regulators may be open to remote “credentialing,” he says, which could pave the way for remote betting.

Without this option, the expansion of sports betting state-by-state will do little to wean players off illegal betting with off-shore operations, Pappano argues. “If I can go to an off-shore site and make a wager, or get to a land-based casino, that [latter option] is not going to change my behavior,” he says.

In fact, online gaming and fantasy-sports platforms already boast a ready-made market for online sports betting, some experts argue. “Once the floodgates are opened, this [market] will mature very quickly,” predicts Thad Peterson, a senior analyst at the Boston-based payments consultancy Aite Group LLC. “The audience exists and is ready to go [and] the technology exists.”

If and when those floodgates open, experience in processing for regulated markets will be critical, some sources say, a factor that could limit the availability of acquiring banks at the start. “It’s not something somebody can come into overnight,” warns Paysafe’s Erlick. “There’s more to this than just processing a payment.”

The Gatekeepers

There will also be gatekeepers at those floodgates—the banks that issue the cards gamblers will be using to finance their bets. Sports bets are assigned a specific merchant category code—7801—that issuers can identify and then either block or permit, as they see fit.

Right now, some observers predict there will be more blocking than permitting as states open up their casinos to sports wagering. But Schulz of Creditcards.com figures banks will start weighing risk against potential income very soon, if they haven’t started already. That could lead some financial institutions, at least, to lower their barriers over time.

“It gets down to what default rates would they see on those transactions, and they’d have to see if it works out in their favor when considering the swipe fees,” he says. “I would imagine there are smart people in banks trying to figure that out.”

One such bank executive is already leaning toward allowing sports wagers—if his home state allows it. “It’s an interesting problem, and if it comes up in Michigan, we’ll have to deal with it,” says John Schulte, chief information officer at Grand Rapids-based Mercantile Bank of Michigan. “I would say we probably won’t take a step to block it unless we see a problem bigger than we expected.”

As it stands now, a bill pending in the Michigan legislature would legalize sports betting if federal law doesn’t stand in the way. The card networks themselves tend to leave the question up to state and federal law. A spokesman for Mastercard Inc., for example says, succinctly, “Our rules allow our products to be used for legal purchases.”

So, “the devil’s in the details,” notes Raymond Pucci, associate director of research services at Mercator Advisory Group, a Maynard, Mass.-based payments consultancy. For all the predictions of what sports wagering could total to and how much banks, processors, states, and sports leagues could earn, he says, the current scenario “is going to have to play out a little bit.”

That you can bet on.

 

Delaware Gets  in the Game

Delaware began allowing dramatically expanded sports betting at three casinos starting June 5, and it didn’t take long for the state’s citizens to respond. They wagered a total of $322,135 on sports bets on that Tuesday, well ahead of the daily rate of $131,500 in 2017.

Delaware became the first state to act in the wake of a U.S. Supreme Court ruling in May striking down a 26-year-old federal law that banned most states from authorizing sports betting. Before June 5, Delaware allowed only parlay-card betting on National Football League games. These bets totaled approximately $48 million last year. Now, touts can put down money on a wide array of sports and can also make single-game bets.

And while sports bets in Delaware must still be placed on premise at one of the three casinos, experts figure states ultimately will allow online and mobile betting as they accustom themselves to their new authority to legalize the activity. Currently, Montana, Nevada, and Oregon, along with Delaware, permit sports betting, with Nevada also allowing single-game bets.

“Delaware will launch a full-scale sports gaming operation at all three casinos in the state—Delaware Park, Dover Downs Hotel & Casino, and Harrington Raceway & Casino,” read a post on the state’s official Web site shortly before the broader action started. “Betting offered [June 5] will include single-game and championship wagering on professional baseball, football, hockey, basketball, soccer, golf, and auto racing.”

Delaware officials acted following a May 14 ruling by the high court that invalidated the Professional and Amateur Sports Protection Act of 1992. That law prevented most states from legalizing sports betting. Now, a liberalized federal stance toward this form of gambling has at least some states looking at authorizing wagers on sports events. In many cases, the lure is the revenue that could flow into state coffers from taxation and additional tourism.

“Delaware has all necessary legal and regulatory authority to move forward with a full-scale sports gaming operation,” said Governor John Carney, as quoted by the official post. “We’re hopeful that this will bring even more visitors into Delaware to see firsthand what our state has to offer.”

With companies ranging from payment processors to casinos to fantasy-sports sites looking to get in on the action in sports betting, the odds seem to favor a boom in this business, and soon. Now that each state can decide for itself, payments experts expect the action to be fast and furious for processors.

How many states will ultimately legalize sports betting is anybody’s guess, but Eilers and Krejcik Gaming, a Santa Ana, Calif.-based research firm that follows the business, figures 32 states will have allowed regulated sports wagering by 2023. Wagers will total to about $90 billion annually by that time, the firm forecasts.