TRANSACTION TRENDS EXCLUSIVE CE SERIES: Risky Business

Exploring the current and future market potential of the gaming and cannabis verticals

By Michael Coleman

Gambling and legal cannabis sales—two of the fastest growing but most controversial business sectors in the United States—are evolving to confront ongoing challenges in processing payments. Federal court decisions and new state-level legislative initiatives have brightened the electronic payment horizon for online gambling and sports betting, but cannabis remains a mostly cash-only business deprived of legitimacy and legality by the federal government.

Heather Altepeter, ETA CPP, CEO of National Merchants Association (NMA), works on behalf of both online and brick-and-mortar merchants of all kinds and also specializes in high-risk merchant acquiring. Although NMA doesn’t have an official position on the gaming or cannabis markets, Altepeter says the opportunities for business growth in both are robust. But she also cautions anyone exchanging money in either sector to follow the letter of the law or risk possible legal disaster.

“Make sure you’re doing it legitimately,” she says, adding that merchants and processors should ensure they are not skirting regulations or laws governing the industries. “Do it the right way even if it’s the hard way.”

Paysafe, a multinational payments solutions company, has been involved in the online gambling payment realm for more than a decade. It provides “core processing business” for regulated gaming operators in Europe and around the world, and increasingly in the still nascent U.S. online sports gaming business, according to Neil Erlick, executive vice president of business development. The British company says it racked combined transactional volume of $56 billion USD in 2017, and Erlick says that Paysafe counts online gambling and gaming among its most promising growth industries, although he did not offer specific financial estimates.

“As it relates specifically to gaming in the United States, we think there is massive potential,” Erlick says. “We see this not only as a strategic opportunity but a larger business opportunity for Paysafe.”

The U.S. Supreme Court’s decision to overturn the 26-year-old Professional and Amateur Sports Protection Act (PASPA) in May was a crucial development for the future of online gambling. The court declared the federal ban on sports betting unconstitutional, which dramatically changed the landscape for legal betting. It is now up to the states whether to allow its residents to bet on sports.

So far, online sports betting is lawful only in Nevada, Oregon, Delaware, and Montana. But a 2018 report from Eilers & Krejcik Gaming, a market research firm, predicted that 14 states, including New Jersey, Pennsylvania, Mississippi, Michigan, and Connecticut, will legalize online sports gambling within two years. That could mean a huge tax windfall for cash-strapped state governments and a revenue boom for payments professionals now able to get a legal cut of the action.

Erlick predicts that banks and credit card companies will be much more willing to get into the sports betting game following the Supreme Court’s PASPA decision. “I think you will continue to see an increase in acceptance rates, which is another way of saying that the issuing banks will start approving more transactions,” he says. “What you’ve seen in the last year or so is some of the banks—some of our partners—working very closely with all of the credit card brands and working with Visa and Mastercard and Discover to actually come up with new [merchant category codes (MCCs)] specifically designed for the different areas of gaming.”

Joe Pappano, senior vice president of gaming at Worldpay, says that over the past several years, “we saw the convergence of two high-growth, highly complex industries—the payments and the gaming industries.”

The opening of new payment and transaction fronts has fueled the growth of sports betting, online gaming, and cashless lottery payments, says Pappano. And that wouldn’t be possible if it weren’t for the strict controls placed on the payment process by the banks, credit card companies, and the payment industry itself.

“Gaming has historically been a very cash-oriented business and now [with the growth of cashless payments] having the appropriate governance and velocity controls becomes incredibly important,” Pappano says. “Payments are driving that.”

Worldpay executives detected a tectonic shift in the gambling payments horizon more than a decade ago and began meeting with credit card companies, issuing banks, gambling companies, online platform providers, and others to help them understand what was possible—and legal.

“We’ve really worked to put together a framework that shows the permissibility of the activities within a jurisdiction and to validate that it’s a lawful activity,” Pappano explains.

A crucial part of that was convincing the credit card associations to create new MCCs to separate licensed gambling institutions from unlicensed ones. Previously, any gambling-related transaction was coded 7995, which often led banks to reject any transaction under this code, regardless of its legitimacy.

Now,  MCC 7800 is used for government-run online lotteries; 7802 indicates regulated online casinos; 7802 reflects regulated events for online dog and horse racing; and so forth. The codes give processors assurance that they won’t run afoul of the law, especially the still-in-force Unlawful Internet Gambling Enforcement Act of 2006.

Today, some sort of gaming exists in 44 states, including state lotteries and both tribal and commercial gambling. Banks and credit card companies are increasingly responding in-kind.

“Many issuers are now understanding that this is good, permissible activity and that controls are in place,” says Pappano, referring especially to what he says have been highly effective antifraud measures put in place by the industry. “We are starting to see a number of issuers start to open up and modify their real-time decisioning tools to allow these transactions to be accepted. Predominantly, everyone seems to be focused on consumer debit cards, and then, obviously, you are also seeing a broader rollout of credit card acceptance.”

The American Gaming Association estimated the market size for sports wagering in the U.S. was $150 billion for gross gaming revenues in 2017.

“This is demonstrated by the rise of alternative payment methods, including voucher-based systems and digital wallets, which are convenient, enable instant transfers to gamers’ accounts, and access to a much larger consumer base,” Pappano says.

But as Erlick cautions, “these new payment solutions are not without their challenges.”  The gaming sector is highly regulated and scrutinized, so the introduction and integration of alternative payment methods takes time, especially as regulations vary significantly across geographical borders.

“I think you’ll see acceptance rates go up, and more people will be able to use their credit cards,” he predicts. Until that happens, he advises payments professionals to encourage their merchant clients to offer a variety of payment options—including cash-based solutions—to consumers. “We believe that no valid customer should be turned away.”

Cannabis Compliance

While the gambling sector’s payment and processing options are expanding under landmark court decisions; updated, industry-friendly legislation; and widespread public acceptance, the still-emerging legal cannabis industry continues to struggle to move its payment options into the mainstream. It remains illegal for cannabis dispensaries to accept credit or debit cards under federal law—even in states where sale of the plant is legal.

Cannabis is still classified as a Schedule 1 drug in the United States by the Controlled Substance Act. But it’s medically legal in 29 states and recreationally legal in eight. Canada legalized cannabis in June, and the entire country will soon allow the sale of the drug for medicinal and recreational purposes.

However, major credit card companies such as Visa, Mastercard, and American Express continue to reject PIN debit or credit card transactions in both the United States and Canada. So, the cannabis industry—awash in billions of dollars of cash—is desperately seeking workarounds.

The most common payment innovation in cannabis dispensaries is a cashless ATM, which works just like a debit card transaction from the consumer’s perspective but is recorded as a cash transaction by the merchant. Customers make a transaction at the ATM in the dispensary, which prints out a receipt for the approved transaction. The buyer then presents the receipt to the cashier, who processes the purchase and provides the customer with change if the purchase amount is less than the amount withdrawn from the ATM. The transaction at the ATM is passed from the customer’s bank account to the merchant’s bank account via ACH transfers.

“Even though it’s a growing industry, cannabis is limited because certain states will have nothing to do with it, and the transactions can’t cross state lines under federal law,” explains Dan Hoff, CEO of Painless Processing, a California-based company that specializes in high-risk merchant transactions, including e-cigarettes, bill collection, firearms, and other retail fields.

Because of the tortured payment environment confronting cannabis merchants, a new class of payments professionals has stepped up to help—and profit. For example, PayQwick, a processor for the cannabis industry, advises its clients to follow the letter of the law, first and foremost.

“The key to compliance is really making sure that every dollar you take in comes from a state-legal sale of cannabis,” says PayQwick CEO Ken Berke. “Then there are a lot of layers to the onion beneath that.”

PayQwick has expanded beyond the cashless ATM concept and now offers an alternative payment service on the business-to-business transaction side.

“The cultivator harvests their cannabis, and they make a shipment to a dispensary,” Berke explains. “Typically, the dispensary has been paying cash. In our platform, the dispensary logs into their bank account either on their computer, smartphone, or tablet, then it selects the name of the cultivator from a drop-down list on the computer. They put in the manifest or invoice number, the amount of payment, the cell phone number of the driver, and it’s sent. And then that payment is instantly transferred from the dispensary PayQwick account to the cultivators or growers.

“It’s exactly how you buy something on eBay using PayPal; we just set up our own platform,” says Berke. And the service isn’t just for straight cannabis purchases. Vendors can use the service to pay rent, lawyers, insurance companies, or other bills.

PayQwick also facilitates massive cash payments and deploys armored trucks and accounting services to pick up cash from vendors, verify the amounts, and deposit it in banks.

Some in the cannabis industry are accepting credit cards but almost always under murky legal circumstances. One rapidly growing cannabis vendor told Transaction Trends that their business accepts credit card payments but classifies them under a legitimate merchant code unrelated to marijuana. That vendor declined to speak on the record for fear of catching the attention of authorities.

Berke and Altepeter say that merchant is playing with fire.

“There is a huge risk to anyone who has got a miscoded credit card account because you can get put onto a match list or merchant file, and it’s basically a blackball list [by the credit card companies] and you’ll never get a merchant code again,” Berke explains.

Darren White, a former sheriff in Albuquerque, New Mexico, now runs the Purlife medical marijuana dispensary, which does about $6 million in annual sales. He says President Donald Trump’s appointment of Jeff Sessions as attorney general, and Sessions’ openly hostile stance toward legal marijuana, has made credit card companies and banks that were already wary of the marijuana industry even more reluctant to enter the fray. He also suggests the cash-only nature of the business perpetuates negative attitudes about cannabis despite its legalization.

“When you have to tell a customer that you can’t accept a credit card because the federal government is uptight about cannabis, it absolutely, without question, contributes to the stigma,” White says. “Attitudes have changed dramatically in the last 10 years, but because of the way Washington is still handling it, the stigma remains.”

To that end, White and others in the cannabis industry are closely tracking the Strengthening the 10th Amendment Through Entrusting States (STATES) Act on Capitol Hill. If approved by Congress and signed into law by the president, the bill would amend the Controlled Substances Act to exempt the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana. The legislation, which has bipartisan support, would resolve the conflict between state and federal laws to allow cannabis companies access to the financial system in states that have legalized it. It also would protect payment processors by clearly stating that compliant transactions are not trafficking.

Altepeter says her message to lawmakers on Capitol Hill is that cannabis legalization is coming, it’s just a matter of when. And it makes sense to prepare for the additional commerce that will follow.

“This is like prohibition of old, we all know what happens in the end,” she says. “Certain states have already decriminalized it. It’s coming, and we can’t just put our heads in the sand. If we don’t give [the cannabis industry] an opportunity to be able to transact appropriately, then we do put them at risk for doing illegal or criminal acts. They will have to, or they are putting themselves in danger by having loads of cash around. It’s not a good environment.

“Plus, we need trackability,” Altepeter adds. “We need checks and balances.”

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