Published: November 4, 2018

How esports, gambling, and sports betting are converging

In May, the U.S. Supreme Court struck down a federal law that prohibited states from legalizing betting on professional and collegiate sporting events. That meant a lot of things, including the notion that esports betting could finally step out of the shadows in the legal sports betting arenas.

Joseph Pappano, managing director of Worldpay Gaming, is watching this space closely, as it means that legal esports betting, sports gambling, and other forms of gambling will eventually converge into a single market.

Worldpay enables payments around the world, and that matters in this space. When the federal government banned online gambling back in 2007, it shut down a lot of the online gambling operations by restricting payments. I talked with Pappano at the recent Money 20/20 event in Las Vegas. We talked about esports, online gambling, and cryptocurrency.

Here’s an edited transcript of our interview.

Joseph Pappano: It’s exciting times. When you look at the convergence of gaming, gambling, or payments–think of what’s happening in the esports ecosystem. Whether it’s the social or skill-based side, you’re seeing a convergence of all these different business models.

Obviously recent movement with the U.S. Supreme Court deeming a 25-year-old law unconstitutional, the Professional and Amateur Sports Protection Act, has now paved the way for many of these land-based casinos, state lotteries, and race tracks to start to monetize real money gaming and leverage the skill- and social-based side as it relates to esports and a lot of the other types of gaming activity.

In the past, there wasn’t a framework to help monetize that, from regulatory compliance to legality and permissibility of that type of activity. You’re seeing this intersection of all these different flavors of skill-based, social, real money gaming all converging. Our hypothesis is, over time, whether it’s esports or sport betting, or i-gaming, or anything of that nature, they’ll operate within the same legal framework and regulatory controls.

GamesBeat: I remember when online poker was made illegal in 2007 or so.

Pappano: They called it Black Friday. You had all these online operators with no compliance, no controls in place. What happened was, it was tied to the Safe Port Act. Part of the law that passed made online gaming illegal. Overnight all these sites had to shut down. It created mass confusion within the market.

Since 2010, I believe, or 2012–it’s taken a number of years for states to create a regulatory framework that makes internet gaming legal, which was inclusive of both poker and casino. You have internet lotteries now in various jurisdictions. The lotteries started in December 2012, when the DOJ reinterpreted the Wire Act. That paved the way for states to to go ahead and legalize online lotteries, and eventually internet gaming.

GamesBeat: Did the government stop all this activity just by stopping payments?

Pappano: When it officially became law and online gaming was deemed illegal, they created–the merchant category code that existed was 7995. Within that, they created the Unlawful Internet Gaming Enforcement Act, which said that any financial institution could be prosecuted for facilitating the movement of an electronic transaction, a payment, for any type of online gaming activity.

With that MCC code, they went out to Visa and Mastercard, and Visa and Mastercard created what they call stand-in processing. When a transaction came in under this MCC code, it was automatically blocked. They blanket blocked an entire merchant category that protected issuing banks. They said, “We need a gateway, another layer of defense, so that when this transaction comes in, they automatically block it.” It came in as “Transaction not permitted” to the cardholders. That’s what created the issue when online gaming started to become legal. You had this stand-in processing in place where issuers had to start opting out.

GamesBeat: What was the consequence of that, the opt-out process? Did it work?

Pappano: It has, over time. Online gaming has now been legal for four years in the states of Nevada, Delaware, and New Jersey. Lotteries have been online in a number of states since 2012. Recently, with the PASPA being deemed unconstitutional, it’s now opening up to where many states are creating laws to allow sports betting or online gaming.

At Worldpay, we’ve been able to extend our value proposition to work with the state regulators and the gaming regulators, educating them on payments and the inherited protection framework that exists for the consumer. By leveraging payments, cascading that down to both the card schemes — Visa, Mastercard, Discover, and American Express — and the corresponding issuing banks, we can educate them that this is good, lawful activity. Issuers are now opening up.

In that time frame, new merchant category codes were created. Instead of using 7995 for online gaming, which was being blocked, the four card schemes came together and agreed on a framework for MCC codes: 7800 for lottery, 7801 for online gaming and sports betting, 7802 for horse racing or pari-mutuel, and then you have code 5816 for fantasy sports, which was predicated to Visa only.

The industry said, “Look, it’s going to be a challenge to get people to opt in and out and take a look at the oversight related to this legacy 7995 code. We’ll create a new framework, create new codes, that provide good transparency back to the issuing banks on the type of activity being conducted.” At the same time, both Visa and Mastercard had registration processes that included a legal opinion validating that the activity was permissible. You needed a third-party audit on the controls, that the controls were in place as far as Know Your Customer/Anti-Money Laundering (KYC AML), and age verification. There had to be appropriate licensing in place on a jurisdictional basis.

Visa, as part of that registration, required what was called a merchant verification value. Caesar’s, for example, would get registered. World Series of Poker would get registered. Visa would say, “Yep, the oversight, the compliance, all of this has been approved and validated.” That MVV is a unique algorithm or number that needs to be passed in the authorization message, so when it comes to the issuing bank, they can properly decision that transaction.

Going back to the days of Black Friday, we had to evolve as an industry to create new codes, new registration, and new frameworks to allow the issuers to better decision these transactions. The legacy code, the 7995, and the historically negative connotation attached to it–the industry would never proceed forward if we were still trying to leverage a code that was just deemed to be bad.

GamesBeat: Are you seeing results yet? Is the industry growing, and the related payments business?

Pappano: In my going on 27 years at Vantiv and now Worldpay, I’ve never seen an opportunity so massive in regards to the convergence of payments and what we call “gaming and/or gambling.” Within gaming is skill, social, esports, console gaming, downloadable content, that category. Gambling would be lottery, casino, sports betting, advance deposit wagering, charitable gaming.

You have a trillion dollars circulating in land-based casinos worldwide. Everyone is motivated to move from cash to cashless. When you look at the state lottery industry, you have $80 billion in cash that they want to move from cashless. The evolution of online and mobile gaming–you see the pattern. Payments is going to be critical in regards to the growth of mobile and online gaming.

That’s why you finally have two complex and highly regulated industries merging in payments and gaming. Historically, think of your experience in a land-based casino resort. If you’re not on a gaming floor, anything non-gaming, you have a frictionless experience. You can use your wallet, your phone. You can conduct a transaction seamlessly. Food and beverage, retail, spa, lodging, everything is seamless. But if you walk onto a gaming floor, everything is predominantly done in cash. A lot of friction is embedded on that gaming floor.

Now the regulatory environment is aligning with the payments industry to accommodate what each of us as a consumer–we want a seamless experience. We want to be able to use payments. That’s what’s happening with land-based casinos and state lotteries. It’s evolving to that online experience. Payments is gradually having a strong foothold in creating that seamless environment.

There’s still friction in the ecosystem related to some of the top issuers: Bank of America, Wells Fargo, Capital One, TD Bank, Chase. They don’t yet accept or participate with legalized real money gaming and sports betting. All these other issuers have accepted the ability. They’re optimizing the market opportunity. I’m confident based on Visa and Mastercard and the other networks working with these issuers to better understand that this is lawful activity.

Right now, sports betting — and multiple sources cite this — has been deemed a $150 billion market opportunity. Obviously the opportunity to take advantage of that market–these issuers, their consumers are going to drive them toward acceptance of these transactions. Whether it’s online, mobile, or back to a brick and mortar experience.

GamesBeat: I wrote a story today about Unikrn.

Pappano: Yeah, the esports betting platform.

GamesBeat: They got a license from the Isle of Man finally. They’re going to launch in several regions. The notion of paying through cryptocurrency is getting interesting. I don’t know if you guys are following that.

Pappano: We continue to monitor the crypto landscape. We do work, at Worldpay, with a couple of crypto companies as key partners of ours. That’s a landscape that’s evolving very quickly. But we’re very mindful and prudent around the compliance and regulatory environment as it relates to crypto.

I’d say we have a couple of great partners involved in that industry that we support. We continue to keep a mindful eye on the relevance of crypto, and some derivations of crypto involvement as it relates to the seamless movement of money for players. But our main focus in the gaming and gambling ecosystem is centered around the protecting the integrity of that transaction between the player, the brands, and the operators. In doing say, we’re working with what’s been time-tested and proven, which is your traditional pre-paid debit and credit card ecosystem.

GamesBeat: The basic problem with crypto would be there’s, what, 2,000 currencies now?

Pappano: Speaking specifically in the U.S. market, in the regulated U.S. market, it’s going to be rolled out on a state by state basis. Within each state you’ll have a framework of licensing, controls, third-party audits, and inherited protections that have to be embedded for the consumer. Right now — right, wrong, or indifferent — crypto is going to be an outlier related to licensing and the controls that are required on a jurisdictional basis to roll out card acceptance and online gaming in the U.S. market.

Everyone’s isolated on some of the digital wallets. Your traditional bank products, whether it’s an ACH environment or a pay-with-my-bank type, real time money transfers, and payments — your traditional debit, credit, and prepaid cards — that’s where the focus is in terms of regulatory entities wanting to support that. Crypto is going to be on the outside. When we have a harmonious environment that protects the player and allows them to seamlessly move money in and out of the ecosystem, then more of a phase two will be, how do they leverage cryptocurrency within that regulated environment in the U.S. market?

GamesBeat: Where do you see payments being critical to enabling among all these things that are coming down the road in gaming and gambling?

Pappano: In the U.S. market, two things. One, gambling has existed for decades. In the U.S. market it exists in 44 states, whether it’s lottery or casino — commercial casinos, tribal casinos. You already have this inherited ecosystem for gaming and gambling that’s operated for decades.

When I take a look at the evolution of states wanting to embed more of an omni-commerce offering — how do I drive more revenues back to the state lottery, back to the land-based casinos, whether it’s tribal or commercial — there will be this evolution of gaming expansion which is inclusive a mobile or internet component. You have to start to accommodate that next generation. We live in a world of instant gratification on our mobile devices. Gaming regulators understate that in order to drive more tax dollars, they’d better accommodate that next generation. They need to alter their gaming regs and the expansion of gaming to include some kind of mobile and/or internet component.

In order to do that and truly drive that omni-commerce offering, what’s the key aspect, the linchpin of all of it? Payments. Payments allows you to seamlessly move money in and out of a wagering account or a contest from an esports or skills perspectives. Payments becomes that heartbeat. Knowing that payments has also existed for decades, and you have that ecosystem that’s time-tested and well-proven, that already has an inherited protection for consumers–when you start to layer in those pillars, they’re all intersecting. Payments becomes the linchpin to drive that omni-commerce offering, and does so in a regulated environment that already has inherited protection for the consumer.

GamesBeat: Are you guys in China at all?

Pappano: When you take a look at Worldpay in itself, we like to say 99 percent of the world is open for business to us. We’re looking at all different jurisdictions. It’s not necessarily–do we do payments and things of that nature in many jurisdictions? Absolutely. But one of the first and foremost issues — and I’ll speak from a gaming and gambling perspective — is understanding the state law. What’s permissible? What’s the regulatory environment look like? What’s the banking ecosystem look like? Prior to us ever going into a jurisdiction as it relates to gaming and gambling, is it legal and lawful?

At this point in time I’m not aware of any activity from a gaming and gambling perspective. Online gaming, in terms of real money gaming, is not legal in China. But we continue to work with the different stakeholders within a jurisdiction to validate what is permissible. Again, back to how we ensure that consumers are protected and what’s the state law or corresponding jurisdictional requirements, from a regulatory compliance perspective, what does that look like today?

GamesBeat: If the crypto space takes off, do you then have to re-architect a lot of the payments infrastructure?

Pappano: No. I’ll speak through the lens of Worldpay. Our goal is to simplify payment innovation. Whatever a consumer desires, whether it’s to use a traditional credit card or use a digital wallet or use some other alternative payment, which could be some form of crypto–our goal is to seamlessly enable that, to allow whatever the consumer desires and enable that for our merchants and partners. That’s our goal.

Where the architecting occurs is–the adoption of crypto to be allowed in the U.S. market and facilitated an option for the consumer is going to be predicated on the federal government, the state legislation, the various controls and oversight groups within a state that are monitoring gaming and online gaming activity. Crypto is no different from any of the payment companies like Worldpay, where there’s some form of licensing that has to occur.

If you have this anonymous nature that’s tied to crypto, and if crypto is to be supported in the U.S. market, there’s going to be some form of licensing, some form of regulatory oversight that these cryptocurrency entities will have to go through to be enabled within the U.S. market to allow monies to seamlessly move in and out of a wagering account or a contest. The architecting will be from a regulatory perspective. It’s about the regs and the state law, as opposed to Worldpay. We have the ability to seamlessly allow that to move, but is it legal? What’s the regulatory compliance and the controls surrounding it that we have to adhere to within each state that rolls out some form of gaming or gambling activity?

It’s an exciting time. There’s a blurring of channels. If you think about it, there are some that believe the loot boxes and everything else is some form of gambling. What you’ll see, and why we love this industry–we believe, regardless of how people look at it, that over time, each state is going to create a framework, whether it’s for social, skill, or these loot boxes, the trading of skins and everything. They’ll create one regulatory framework and a state will determine how they want to regulate it, what the licensing process looks like, what the controls look like.

A state will offer up all forms or flavors of gaming, similar to what’s recently occurred in the daily fantasy sports. A number of states said, “You know what, we can argue if this is skill or real money gaming. We’re still going to create licensing and a regulatory environment for fantasy sports.” Our belief is states will start to create one framework, and all these different flavors of gaming or gambling will fall within it. Then a state can dictate what they enable within their jurisdiction.

GamesBeat: Are some states going to fall behind or catch up, do you think? Could there be a lack of clarity for a while?

Pappano: Here’s what I think. This is my opinion. The brisk movement of sports betting is going to force states. The opportunity is massive. Right now it’s a $150 billion marketing opportunity in terms of handle. When states look at legalizing sports betting and whether to include an internet or mobile component, when they look under the hood of that car, they’ll also think, “Hey, can I take the opportunity to legalize what internet lottery would look like, what poker would look like, what fantasy sports would look like?” Or esports betting, or the loot trade?

When they open it up, so they don’t have to constantly go back and forth through the legislative process to create new laws or abbreviations of such, they’re going to say, “How do I encompass all this movement in gaming and gambling and do that under one enacted law?” That’s my opinion. We’re already starting to see it.

What it will do, though, is create more scrutiny. Everybody wants to opportunistically take advantage of sports betting, but it will open up eyes. “We saw fantasy. What is this esports betting, though, the Unikorn model? What is this peer-to-peer thing? What are these video games where I can go buy skins?” It will open up more scrutiny on these other markets, because there will be a perception of, you know what? All of this is gambling. Put it all in the same regulatory framework.

You want to address it now, though. This has been stated, and it’s well known: it’s better to operate in an environment where you have clarity on what’s legal or not, versus operating in a gray area where at some point someone’s going to come back and restructure your operating model and create additional challenges.

GamesBeat: If the states all act now, then, that makes your life easier.

Pappano: Amen. That’s what we do. Our goal is to continue to educate about the payments industry and everyone within the ecosystem, whether it’s the gaming providers, the platforms or content providers, the card schemes, the issuing banks, the gaming regulators, the state regulators. We work with Responsible Gaming. Everyone in that ecosystem needs to understand how and what payments will do, and how the various controls are in place to properly protect the consumer, the player.

https://venturebeat.com/2018/06/02/why-magic-the-gathering-picked-tencent-as-its-partner-in-china/

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