PayPal’s not just for buying Pez dispensers on eBay any more. The popular Internet payment service is quickly becoming the currency of choice at many online casinos.
Nearly 500 gambling sites signed up to accept PayPal in the first quarter this year, almost doubling the company’s roster of such merchants, which stood at 1,022 as of March 31, according to PayPal.
Unfortunately for PayPal, its booming online gambling business may be illegal in the United States.
“If you help to facilitate or promote gambling, you could be found guilty of breaking the law. We’re trying to get the message out to intermediaries that there’s real liability there,” said Ken Dreifach, head of the Internet bureau at New York State’s office of the attorney general. New York estimates that offshore online gambling sites soak Americans for $4 billion annually.
While efforts to pass federal laws specifically prohibiting online gambling have stalled, New York’s saber rattling impressed Citibank. The nation’s biggest credit card issuer announced earlier this month that it has agreed to ban the use of its credit cards for Internet gaming. In doing so, Citibank belatedly joined Bank of America, Fleet, MBNA, Chase Manhattan and several other major banks that have established policies forbidding their credit card holders from placing online bets.
Now, in their quest to protect citizens from the “pernicious” effects of online gambling, New York and other state and federal regulators are also turning their attention to non-bank financial services such as PayPal, according to Dreifach.
PayPal officials declined comment on the company’s role in online gambling, citing a mandated quiet period in the run-up to its impending secondary stock offering. But documents filed with the Securities and Exchange Commission reveal that PayPal is well aware of the dangers of servicing gaming sites, which it terms “higher risk” accounts.
PayPal’s latest IPO filing acknowledges that its business with online casinos could be jeopardized by their “uncertain” legal status, and could expose it to “civil and criminal lawsuits, administrative action, and prosecution for, among other things, money laundering or for aiding and abetting violations of law.”
In exchange for taking such a risk, PayPal is expected to derive more than $16 million from Internet gaming in 2002. Already this year, its revenues from such merchants — who pay higher fees to offer the PayPal service — have more than doubled, accounting for 8 percent of its total income.
Against that upside, PayPal concedes that any enforcement action against the firm could mean “material penalties and fines, both of which would seriously harm our business.”
Such risks are what led many big banks to ban online gambling — prohibitions that could slice the growth of Internet gaming companies in half this year, according to a recent study by Bear Stearns.
After all, “gambling with a line of credit is one of the huge attractions” of online Judi Slot Online gaming with credit cards, according to Bear Stearns analyst Michael Tew.
Enter PayPal as a possible solution. The service, which enables users to securely charge online payments to their credit cards or checking accounts, is being touted as a means to circumvent credit card bans.
“If you’re like me, you’ve been really discouraged lately. Credit card companies aren’t allowing a lot of their players to place transactions at online casinos…. So, what can you do? Simple. Use Pay Pal!” reads a message at PayPal-Casinos.net, one of several such independent sites that have cropped up in recent months.
A similar directory at GamblingNavigator.com says PayPal is “becoming very popular at online casinos since this is a nice workaround if your credit card bank decides to refuse transactions with online casinos.”
Casey Watson, a spokeswoman for Visa, said the credit card association’s member banks have the option of blocking online gambling purchases with a system of authorization codes used by Internet casinos to earmark their transactions.
But what happens when a gambler places an online bet using PayPal, and, like most of PayPal’s 16 million customers, has set up the payment service automatically to transfer charges to a credit card?
Watson would not comment on whether Visa merchant identifying codes would be passed along to PayPal in such a scenario, or whether PayPal’s technology could honor a specific Visa card issuer’s ban on Internet gambling.
MasterCard, on the other hand, prohibits altogether the use of its cards for funding online gaming through intermediaries like PayPal. The card association depends on PayPal to identify and block any gambling transactions, according to senior counsel Joshua Peirez, who declined to detail PayPal’s blocking methods.
Anthony Lupo, head of the contests and sweepstakes practice at Washington, D.C., law firm Arent Fox, said loopholes in PayPal’s and card issuers’ authorizations systems could make it easy for unscrupulous sites to evade a gambling ban.
“All a gambling site would have to do is charge the bet to another code. They could call it ‘services,'” said Lupo.
Visa routinely performs audits of merchants to ensure they are properly coding their transactions, and it fines those not in compliance, according to Watson. Similarly, MasterCard polices merchants and has the ability to penalize members who violate its rules, Peirez said.
According to Dreifach, gaming sites currently have no need to doctor their credit-card authorization codes. He said New York’s investigations revealed that many payment providers are idly watching online gambling transaction codes go by.
“Financial institutions involved in many cases are tracking the transactions but not blocking them. It’s not permissible or legal to put your head in the sand or to knowingly play a role,” he said.
But for now, PayPal appears to believe the pay-off from online gaming is worth the high-stakes risk.