Casino chips

PayPal has been in the news of late for its possible spinout from Ebay and its ongoing search for a new CEO, but there’s another largely overlooked storyline that could have an equally big impact on its future. According to reports from across the casino world, PayPal is considering (re)entering the online gambling market and could be in line for a contract to process payments on behalf of the state of New Jersey.

The news comes via a tweet from Gambling Compliance, Inc. researcher Chris Krafcik who cites confirmation from New Jersey’s Division of Gaming Enforcement.

New Jersey is one year into its legalization of online poker but the state has been plagued by payment issues. Due to restrictions imposed by banks and credit card companies, more than 50 percent of players have had payments rejected, according to a recent AP report. But integrating PayPal as the preferred payment gateway could be the answer to all these issues.

Deputy Attorney General Mary Jo Flaherty tells the AP, “MasterCard has approved 73 percent of attempted transactions in New Jersey since Internet gambling began in November, while Visa has approved 44 percent. American Express and Discover do not approve any such charges.” When credit cards are rejected, alternative payment methods, including ACH bank transfers have picked up some of the slack, though these transfers aren’t guaranteed to clear either.

Online gambling generated $31.6 million in revenue to the state of New Jersey through the first quarter far cry from the $1 billion year one pace anticipated by Gov. Chris Christie. Even by Wall Street’s more conservative $200 million year one estimate, the numbers have been disappointing, and a central reason has been payment processing. Globally, online gambling is estimated to be a market valued in the tens of billions of dollars per year and growing at ten percent per year.

PayPal already has more than 150 million registered users around the globe and an estimated 50 million in the US. Anyone without an existing account can register and be up and running in a matter of minutes. Then it is as simple as users transferring money from their bank into their PayPal account, before then making a payment to the gambling site. As far as the bank is concerned, PayPal is the recipient of the transfer, and any compliance issues around what happens with the money next is the online payment company’s problem. On the reverse side, players could also withdraw winnings (assuming there are any) from online gambling sites into their payment accounts and then, should they choose, subsequently transfer those funds to their traditional bank account or use them for other online or offline transactions.

PayPal has a history with the online gambling industry, and was once the leading payment processor in this sector. But when law enforcement began to question the legality of many of the most popular sites in the early 2000s, PayPal pulled back entirely. The company has since waded back into the gambling waters, but only in select jurisdiction where the regulatory framework is explicitly clear. In the US, this is anything but the case, given the absence of federal regulation around gambling, which leads individual states to determine their own policies around both business and citizens within their borders.

As OnlinePokerReport notes, PayPal already has integrated with PokerStars.net, allowing free-to-play customers to buy chips to play on the site. Participating in online gambling, where legal, seems like the next obvious step.

PayPal has competition in electronic payments within the gambling sector, with niche services like Neteller, Skrill (fka, Moneybookers), and Net+ Card growing in the company’s wake from 2003 through today. The eBay subsidiary remains far and away the largest of the three, but the company has yet to establish any integrations in the sector. In addition to New Jersey, Delaware has also legalized online gambling and Nevada is in the process of doing so. According to Krafcik, PayPal has yet to submit a payment license application in Nevada, while he makes no mention of Delaware.

The other issue hampering the growth of legal online gambling within the US is geolocation, in which online casinos must verify the location of the consumer before permitting them to wager. As of January, New Jersey reported a 95 percent success rate in this regard.

The benefits of integrating PayPal into online gambling are greater than simply fewer rejected payments. Given its heft and brand recognition, the addition of the online payments pioneer would add credibility and boost awareness of the new, kinder, more legal US online gambling industry. And it’s a good bet that once that market grows and the magnitude of the payments revenue generated becomes obvious, traditional banks will reevaluate their decision to sit on the sidelines.

Like many markets, the earlier one company claims ownership, the harder it will be for others to catch up. In the meantime, this market looks like a potential goldmine for PayPal with limited competition.

[Image via  Mait Jüriado, Flickr]

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