By Ray Birch
ST. PETERSBURG, Fla.–A Supreme Court ruling allowing gambling on sports at the state level is raising the ante on a wide number of issues for any credit union that issues plastic cards.
Financial institutions will need to reconsider policies and communications with cardholders, while potential risks that include “friendly fraud,” charge-backs, cash-back offers, breaches and even members willing to absorb a ding on their credit than pay gambling losses will all need to be taken into consideration.
For credit unions, there is the additional matter of acting in their members’ best interests.
While CUToday.info reported that most big banks don’t yet allow sports betting—over the Internet or in person—with their credit cards, some sources are forecasting that may change, opening the door for financial institutions to make more on their credit card portfolios.
Sources told CUToday.info they expect most credit unions will not change their card policies to allow members to use their plastic to place bets, as gambling by using the credit union’s credit card runs counter to the mission of credit unions—to promote thrift and improve members’ financial lives.
Experts further noted that if some members refused to pay large balances after losing, that the cost of those charge-offs fall on the shoulders of members in good standing.
“This is an interesting issue and has been for a while,” said Brian Scott, SVP of sales and solutions consulting at PSCU. “Card present gambling, using your card at a casino for cash advances, for example, has always been allowed, while online gambling has had various restrictions and legal prohibitions. For some time, some states, like New Jersey, have voted to allow certain types of online gambling but only for games operated within their state lines.”
Brian Scott
Two Areas to Watch
Scott said any financial institution allowing account holders to use their plastic for sports betting should pay attention to two important areas: disputes and chargebacks.
“These would follow the standard rules already in place,” he said. “Collections, obviously, would become a much bigger priority with the expectation that more losses would occur. I think many FI’s would be reluctant to allow broader gambling access through credit cards simply because of the loss potential and unsecured nature of credit cards.”
Scott believes financial institutions, particularly credit unions, will be stopped from entering the market due to ethical reasons.
“Especially for credit unions that want to help improve the financial lives of consumers, allowing sports gambling transactions might be counter to that goal,” he said, noting that some institutions may move to allow sports betting on debit cards. “Essentially debit is no different than using cash when walking into a casino. Debit is accessing funds consumers have versus credit, which are funds they don’t have.”
Scott noted that placing limits on the size of gambling transactions also creates some interesting discussions.
“You are limiting how much I can gamble but not how many pairs of shoes I can buy. Opening the door just a little might create a Pandora’s box of gambling discussions,” he said. “There are some people already saying things like, ‘You allow me to buy a lottery ticket on my credit card, what’s the difference of allowing me to gamble on a football game?’… In the end, I have a hard time seeing credit unions choosing to benefit financially, whether it be from fees or finance charges, from this type of sports betting.”
Cash-Back Offers
Lou Grilli, director of payments strategy at Trellance, said that cash-back offers would be great for gamblers if bets were viewed as a purchase.
Lou Grilli
“Cardholders would get a lot more cash back due to the high balances,” said Grilli. “But in almost every case, this is not considered a purchase, but rather a cash advance, which does not earn rewards and usually carries a fee, or at least interest through the end of the billing cycle.”
Grilli emphasized that fraud is becoming more sophisticated, and could present some interesting twists with cards used for sports betting.
“Friendly fraud is growing, and is very hard to track down,” he said. “Each reported dispute must be researched by credit union staff. A member using the card for betting could charge up to the cash advance limit, then have regrets later and dispute the charge. As long as it was a chip-on-chip transaction, the liability is with the issuer, who must spend hours requesting and reviewing security footage, searching Facebook and Instagram updates, to determine if this is friendly fraud.”
What About Breaches?
The more nefarious form of fraud that would be enabled is money laundering breached data, said Grilli.
“Today, counterfeit cards are used at Best Buy and Walmart to purchase fencible goods like electronics, or to purchase gift cards which are more easily ‘launderable.’ Allowing credit cards, with credit limits much greater than balances stored in debit accounts, opens up a whole new laundering avenue. Real fraudsters—not friendly fraud crooks—can max out the cash advance at casinos, then literally and figuratively cash in their chips and take the money. Once again, the issuer left with the liability.”
Although the Supreme Court’s decision was based on states’ rights, it did not change the Unlawful Internet Gambling Enforcement Act (UIGEA) put in place in 2009, which requires credit card companies and other financial institutions to block transactions related to illegal Internet gambling, noted Grilli.
“Certainly authorizing charges for legal gambling would not get the issuer in trouble, but it would be up to the issuer to determine whether the charge is coming from a legal or illegal bet taker. This is too much of a burden,” Grilli said.
Stakes Are High
While there is money to be made by issuers on cash advance fees and interest income, the stakes are very high, which is why issuers have yet to tread into this area, even where gambling is already legal—such as Las Vegas and Indian reservation casinos, Grilli said.
“None of the reasons to decline usage at casinos change with the Supreme Court’s decision to allow states to permit various forms of betting,” added Grilli.
But with all the FI concerns raised by Grilli, he said there are “cracks in the dike,” that could lead some issuers to enter this market and possibly influence others to follow.
“JPMorgan Chase is allowing charging at horse tracks, for one specific category—advance deposit wagering. Other issuers may follow. But that is a lot narrower than online gaming, sports betting, casino gambling,” he said.
Expect Some Issuers to Enter Market
Payments expert Tim Kolk thinks certain types of issuers will come out to play under the new rules.
“I suspect some specialty issuers will get into allowing this merchant category, but I think the largest issuers will continue to block related merchant codes,” said Kolk, principal at TRK Advisors. “But this is speculation. Gamblers just seem too risky for most issuers’ tastes, ethical issues aside.”
Bill Hardekopf
Bill Hardekopf, too, sees the risk keeping most issuers on the sidelines.
“Home loans and car loans are secured loans—if you default on your payments, your home or your car will be repossessed,” said the CEO of LowCards.com. “But credit cards are unsecured loans—if you default on your balance, the credit card issuer can’t repossess the stereo or wardrobe you have purchased. That’s why credit card interest rates are much higher than secured loans. So credit card issuers will be very reluctant to allow legalized gambling with a credit card. They stand too much to lose. And since all credit card interest rates are assigned on risk, they will likely not allow this because of the high risk factor.
Potential Trouble
Vincent Hui, senior director at Cornerstone Advisors, sees trouble ahead for issuers.
“I see two main issues,” he said. “Gamblers can gamble with potentially no loss of money if they use credit cards. They are gambling on credit, and if they can’t or don’t pay, they may be pursued by FIs. However, if they are gambling addicts or run up a big debt, they may just not pay and take the ding against their credit—something they may be OK with. This creates a bit of a moral hazard since the situation creates lower risk to the gambler. The person may do it again, although banks may prevent that person from getting another card.”
Hui said credit unions have that concern and another.
“CU members effectively pay for the loss on the credit card. In other words, other members have funded the person’s gambling, which is both unfair and inappropriate,” he said.