Gambling And Fintech: Two Sides Of The Same Coin?

Similar to cannabis, the growing legal acceptance of gambling in the United States and elsewhere is ushering a nascent class of digital technologies to support the burgeoning industry and address the regulatory complications involved. Yet what is underway doesn’t merely reflect another application of the typical tools in the fintech shed — regtech, payment processing, data mining, analytics, AI, loyalty programs and the like — to transform an industry. In the unique case of fintech and gambling, a causative relationship between the two is really bidirectional. Fintech’s increasing imprint on the gambling industry, after all, follows the imprint that gambling principles has already had on the design and course of fintech itself, where gamification is a universal pursuit in a bid to retain customers and investment is democratized and at times randomized on a fanciful whim —“Wall Street Bets,” anyone?

Through digital technology, we are witnessing a convergence of gambling, gaming and finance towards a shared plane of design, goals and challenges, a development offering critical context in understanding not only the direction these two sectors are hurtling towards – but in what they really constitute at the present moment.

Adjusting The Buy-In

The fundamental impact fintech is having on the gambling industry is a bit more straightforward than the other way around, but that does not mean it comes with simple solutions followed by a predictable path. Consider the peculiar position that gambling venues occupy. Casinos in the U.S., for one, are regulated as financial institutions under FinCEN’s Title 31, as they must manage an incredibly high volume of transactions and a fluid float that comes with them.

Of course, these are financial institutions that traditionally struggled to be serviced by traditional financial companies.

Jonathan Michaels is Senior Vice President of Strategic Development and Government Affairs at Sightline Payments, a leading payments processor specializing in the gaming industry, and before his time at Sightline he had spent seven years working for the American Gaming Association, spearheading their payments modernization effort. When he started working in the industry, none of the top ten U.S. banks accepted gaming transactions under MCC 7801. Debit acceptance rates in Nevada before 2018 were at 60%, with credit acceptance at 40%.

The landscape dramatically changed, however, when the U.S. Supreme Court in 2018 overthrew the Professional and Amateur Sports Protection Act, thereafter permitting states to oversee sports betting. Since then, the industry has made large strides in gaining acceptance among traditional financial services; the debit acceptance rate in the industry now stands at 90%, with the credit acceptance rate at 60%. Nine out of the top ten U.S. banks now accept gaming transactions, according to Michaels.

In sports betting, the effects of the court ruling have been immediate and dramatic: digital sports betting companies like DraftKings and FanDuel are now unicorn companies splashed across media, and sports leagues that once shied away from gambling now engage in full-throated partnerships. Such betting apps utilize algorithms to enable wagers on seemingly every possible outcome at every play, with automatically updated betting odds.

Accelerated further by the pandemic, the online gambling industry is growing at a 12% annual rate. Yet this dramatic expansion of digital gambling options — and the frictionless payment options that come with them — naturally comes with risks. In particular, advocates worry that gambling is suddenly too available and easy to use with the pain of paying greatly diminished — a dynamic that is celebrated when it comes to designing e-commerce, but one that raises alarms considering the uncertain risks and rewards and rapid, iterative transactions found in gambling.

Kahlil Philander is a professor at Washington State University whose research has largely focused on the psychological underpinnings and consequences of gambling. In a 2014 study, Philander found that rather than producing greater instances of “problem gambling,” online gambling actually saw a decrease compared to in-person gambling. Among the reasons cited were the ability for online vendors to facilitate lower-limit games — allowing say $5 hands instead of $50 hands — thanks to reduced labor and facility costs as well as a diminished “isolation effect” compared to in-person venues that makes it harder for gamblers to walk away.

However, Philander isn’t sure that this finding would still hold up in the post-2018 landscape. The pervasiveness of legal sports betting has greatly increased the number of people participating in gambling, and because these new entrants are often participating in high-frequency in-game wagering, this may increase addiction risks due to the faster feedback loop involved in such gambling forays.

Ultimately, the market has moved ahead of the research understanding the effects.

“We just don't have a good sense of how problems may have changed, or how risk levels within organizations may have changed. And that's, in some ways, a function of these firms kind of owning the player behavior data, being protective of that data, and not necessarily sharing it with researchers or health experts.”
Kahlil Philander, Assistant Professor, Hospitality Business Management, Washington State University

Place Your Bets

All of this is taking place as gambling vendors adapt to a lattice of laws overseeing suddenly legal gambling ventures on a state-by-state basis while cashless technologies nudge their way into the industry. Sightline Payments, which has received $340 million in funding in the last year alone, has been at the vanguard of payment processing in a tough environment to operate in. Few payment processors serve the gambling industry, owing to its high-risk designation and regulatory burdens. Different payment regulations across state lines means Sightline, which has more than 80 partners across 44 U.S. states, has to constantly create regulatory solutions to keep businesses compliant; in Iowa and Tennessee, for example, gambling patrons can’t fund their account using credit cards, requiring Sightline to develop credit card blockers to deny such cardholders in these specific states.

Beyond compliance, gambling payment processors like Sightline are working to overcome a significant education gap, with Michaels considering Sightline to be as much of a communication channel as a payment processor.

“Gaming and banking are two highly regulated industries, and one of the challenges that we have is we're always educating the other about the other half of our business. So if you're talking to folks at financial institutions, we have to educate them on gaming: why it's safe, why it's secure. And then on the gaming side, they don't necessarily understand payments: what is net settlement, how does ACH work, what are some of the new alternative payment methods.”
Jonathan Michaels, Senior Vice President of Strategic Development and Government Affairs, Sightline Payments

Alongside the education front, Sightline must contend with an industry in gambling that has remained notoriously cash-heavy even as other sectors have gone cashless; Michaels calls casinos “probably the largest cash-centric business left in the U.S.” According to Michaels, only “a handful” of casinos have gone cashless, the most notable being the $4.3 billion Resorts World Las Vegas Casino, a client of Sightline, which utilizes a multi-tiered digital technology system to provide a cashless payment program for gaming and non-gaming activities. Sightline recently announced a $300 million investment to facilitate cashless payments at 250,000 cashless slot machines.

The entertainment aspect of casinos will ensure that in-person gambling won’t be going away any time soon. Taking a page from other sectors transformed by fintech, the overarching goal is uniting payment systems across a given property or company. The industry’s word of the year? Omnichannel.

“To us, omnichannel means that money and loyalty should follow a customer wherever they go. So if you are in New York, and you want to wager on the Yankees to win right now, you can go do that. If you want to go to the casino later in the evening with your friends, and it's the same property, your money should follow you there. You should be able to spend your winnings immediately, and you should be able to earn loyalty.”
Jonathan Michaels, Senior Vice President of Strategic Development and Government Affairs, Sightline Payments

In Michaels’ eyes, such forays signal both a modernization of the traditional casino model and a transformation of it altogether. One constant point of friction for casinos, for example, has been in terms of withdrawals, with big-ticket gamblers needing to wait for ACH to clear. Sightline’s solution, at its core, is a debit account that customers can deposit funds into. While driven by partnerships with gambling venues, Sightline’s solution is technically an open loop prepaid access card issued under Discover and MasterCard. This enables both a quasi-closed loop experience with its rewards program, while allowing these cards to be used at any point of sale.

Source: Sightline Payments

Though still early, wider integration of payments across properties lies ahead; Michaels believes 60-70% of casinos will have a cashless solution in the next five years. What’s been holding back the industry from that cashless transformation so far is a tale heard elsewhere, and then some: a brick and mortar stuck in its ways, yes, but also concern from problem gambling advocates who believe going cashless on such high-volume transactions will worsen financial outcomes by reducing friction further.

To allay such concerns, Michaels points out that digital solutions like Sightline’s allows gamblers to track their spending and losses throughout a casino visit while giving themselves limits on just how much they risk on a given night — no different than a financial wellness app, only on a compressed timeline and in an industry famous for transforming large-dollar amounts into fun-looking chips.

All In On A Flush Draw

The balances that must subsequently be struck in gambling’s forthcoming digital transformation — making payments frictionless, but ensuring proper guardrails are in place to facilitate responsible gambling while adhering to KYC standards — aren’t so different than the ethical and legal considerations that come with such powerful fintech tools in any emerging industry. What distinguishes the gambling industry’s relationship with fintech is the fact that, in many ways, the psychological forces and product design of gambling are increasingly reflected in the digital sphere it is finding its footing in.

“Gambling, gaming, and finance are all kind of merging together into different versions of products that use all three elements in very novel and unique ways. This is enabled by technology and scaled by social media.”
Kahlil Philander, Assistant Professor, Hospitality Business Management, Washington State University

Philander is currently taking his career-long research pursuits in gambling and applying the same praxis to researching what’s happening in crypto investments, and especially regarding meme assets like dogecoin. When observing the vast quantities of money poured into perpetual futures or meme coins, Philander sees a new kind of gambling venture already outstripping the size of the traditional gambling industry; Philander describes Binance as “the largest online casino in the world.”

“People that own meme assets, in terms of their attitudes towards risk and their overconfidence in their abilities to make money or predict the future, they cognitively look a lot like gamblers.”
Kahlil Philander, Assistant Professor, Hospitality Business Management, Washington State University

Yet trying to gauge where this is all going is a bit hazier to sort out. As Philander puts it, no one would have imagined five years ago that the world’s richest person would create a $10 billion market cap out of a dog-themed coin that fundamentally has no value.

Frankly, this seeming disconnect between real value and hype-driven acclamation goes beyond the fringes of the cryptosphere. Amid inflation and the market downturn, fintechs have been confronted the past year with discrepancies between high company valuations and nonexistent profits, insisting that indeed, their all-in-one financial app is truly differentiated from competitors.

If there’s a shared lesson to be learned from gambling and fintech alike, it’s that humans are terribly awful at predicting the future — and even worse at walking away while the table is hot.