By the Blouin News Business staff

FEATURE: Does legal online gambling have a future?

by in Asia-Pacific, Europe, U.S..

Players fill the room for the Poker tournament at the Horseshoe casino, in Baltimore, MD, on February, 26, 2015.

Will poker players, seen here at the Horseshoe casino, in Baltimore, MD, February, 26, 2015, play more online if it becomes legal?

On Friday, MasterCard, Visa, American Express, and Discover introduced new Merchant Category Codes (MCCs) for regulated online gaming transactions, which could help the industry advance beyond its shaky start. Currently only three American states allow online gambling — Delaware, New Jersey, and Nevada — but others are seriously considering legalizing and regulating online gambling.

In the U.S., the federal government’s stance on online gambling is still not entirely clear. The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 prohibits most forms of online gambling but excludes legal intrastate and inter-tribal gaming. For the time being, the government has not interfered with the state-run online gambling industries, but even so many banks and financial institutions have steered clear of them. Bank of America, Wells Fargo, PayPal, and American Express continue to block transactions for all forms of online gambling, regardless of whether or not they originate from a regulated website. Since only a small percentage of the U.S. population has access to regulated online gambling, the banks have felt the risks of running afoul of UIGEA were not worth the returns.

The high proportion of credit card declines is regularly cited as one of the key factors behind falling traffic levels at New Jersey’s regulated online poker sites. “Credit card issuer and suppliers’ hesitancy to support iGaming transactions has hobbled the industry here in the United States,” said Matthew Katz, the CEO of CAMS, a player verification company in the regulated U.S. market. The new MCCs will give more legitimacy to the legalized markets, but ultimately it will still be up to each individual bank or credit card company to decide if they want to process online gaming transactions or not.

While the new MCCs are no substitute for clear federal legislation, their existence should help the existing online gambling industries as well as the prospects for proposed legalization in Pennsylvania and California. But a Republican bill in Congress, the Restoration of America’s Wire Act (RAWA), is worrying all states with a current or desired stake in legal online gambling. Backed by billionaire casino owner and Republican mega-donor Sheldon Adelson, RAWA would prohibit wire transfers for electronic wagering, thus putting an end to online gaming in all states. It remains to be seen whether or not the controversial bill gets passed.

All things considered, the results of legalizing online gambling have been a mixed bag. Delaware’s revenue during the first fiscal year of legal online gambling, ending in June 2014, fell far short of its anticipated $5 million target. It netted only $318,000 for the state and none at all for the three casinos involved. While Morgan Stanley believes that 15 states will have online gambling by 2020, on March 31 it nevertheless slashed its earlier estimate of the industry’s future in the U.S. Instead of $5 billion by 2020, it now expects the industry will reach $2.7 billion by 2020. “Legislative processes continue to be slow as lawmakers remain unconvinced that online gaming is currently worth the hassle for limited tax revenue,” the firm wrote. Morgan Stanley also predicted that federal legislation to ban online gaming was unlikely, but could yet gain traction in Congress.

Similarly, most of Canada’s provinces have legalized online gambling, but they don’t necessarily do well economically. Alberta is now considering legalizing online gambling; its chief regulator estimates that Albertans currently spend $120 to $150 million a year on offshore gaming. While legalization will likely push the market into the range of $200 to $250 million per year, and the province may be able to capture about a quarter of that, it still may not gain on balance. Gambling “doesn’t create wealth, it’s simply a transfer of money from one sector of the economy to another sector,” says Robert Williams, a researcher at the Alberta Gambling Research Institute. People only have so much disposable income, he added, so when governments encourage more of it to flow into gambling, they take it away from other businesses. That could lead state revenue from sales taxes to fall, lessening the benefits of legalizing online gambling. Still, gambling money that previously flowed out-of-province would stay, and the legal sites would certainly be safer for users.

Online gambling is also popular in the Netherlands, and the country is getting ready to regulate the sector, which has been somewhat of a free-for-all. A report by the Dutch Gaming Authority (KSA) stated that “the estimated result of legal operators (including gaming machines) in 2013 was €2.2 billion,” which generated tax revenues for €480 million. The KSA also estimates that the turnover of illegal operators in the Dutch online gambling market is between €250- €850 million. Encouragingly, over 200 operators have already informed the KSA that they would be interested in a remote gambling license once the new legislation comes into force. While land-based venues would be taxed at 30%, online operators would pay only 20%, so they could compete with unregulated sites that are likely to continue trying to operate even after the new regulations come into effect.

On the other end of the spectrum, China is cracking down on online gambling as part of its high-profile anti-corruption drive. Aside from state-run lotteries, all gambling is illegal in China except in the self-administered territory of Macau. In a sweep from June to December last year, Chinese police arrested over 1,000 people involved in an online gambling network that operated over 200 illegal websites using Thai servers. But gambling remains hugely popular in China, so gamblers continue to use illicit websites or head to casinos in nearby countries.

The jury is still out on legalizing and regulating online gambling. It may not ever take off in popularity, but it could bring in more revenue for the governments that regulate it, and would protect users from unscrupulous gambling websites. Those two reasons alone make it worthy of serious consideration.