Credit Card Processing Issues - Present and Future

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If you have ever attempted to place bets at an online casino with a credit card, chances are that you have experienced some difficulties getting payment authorization. Most of the time, the problem lies not with your own MasterCard or Visa, but with a change in the credit card companies approval policies which results in the denied transaction.

Sometimes, a player will have to try four or more different credit cards until they find one that authorizes the payment.

Why is this happening you ask? The answer is that major credit card companies like MasterCard and Visa have chosen not to allow online casino transactions any more. Online casinos (the merchant) are identified through a code provided by the credit card companies to the merchant banks. "7995" is the code number and it is the possibly the most reviled number throughout the online casino industry. Since last year, this number has caused a decline in online gaming revenue by approximately 30%.

The code is an identifiable marker of the nature of a company's business based on the traditional Standard Industrial Classification (SIC) system.

The merchant online casino's processor will be coded 7995 by the bank that issuing bank (i.e. HSBC). Thereafter, the 7995 code reveals itself every time a player attempts to use an HSBC credit card at that online casino and the transaction is automatically rejected. Once denied with the first card, a player will try a different credit card from an alternative bank. A player will continue this attempt with subsequent credit cards until (A) the transaction is approved by one of the cards, or (B) the player has no more credit cards left.

Visa introduced the 7995 system in 2001. Implementation by a merchant back was entirely voluntary. Unfortunately, one of the first merchant banks to use the program was Providian because they are also one of the largest, and thus, the online casino industry felt the repercussions nearly instantaneously. Not shortly after, other merchant banks followed suit. In May of 2002, MasterCard commenced an analogous program and today almost every issuing bank uses code 7995.

As a result of the blow to the online gaming industry and the aggravations suffered by players, a new type of business has emerged called Alternative Payment Processing. From onset of this niche market, one of the most dominating companies has been Paypal. Purchased by e-Bay for $1.4 billion USD last summer, Paypal's swift growth - both from e-Bay as well as i-gaming - was considerable. Along with the buyout, Paypal announced that i-gaming transactions would no longer be a part of their business model. Paypal officially "outed" themselves from the online gaming e-commerce market on November 25, 2002.

Today, a whole host of new companies have broken into the Alternative Payment Processing market: Although there are numerous emerging companies competing to get a share of the money to be made from online gaming e-commerce, Neteller is the reigning market leader. Some other prominent companies are Internet Cash Card, PayManager, ProCyber, 900pay, e-Gold, OneWPS, etc. For an operator, this can be a perplexing situation. The objective of an operator when choosing an alternative payment system is that it not only be dependable but that they will not have to change systems again in next few years. Since every time an operator changes alternative payment systems they often lose clients, it can be a very expensive experience.

The Alternative Solutions for Reliable Online Commerce conference (ASROC), an event focused on Alternative Payment Processing for online gaming businesses, is held on January 7, 2003 (www.asroc.com). The purpose of the conference is for knowledgeable online casino operators to be able to view the products of the numerous alternative payment processors with the hope that the next "Paypal" will be discovered. Three or four systems will probably be selected by agreement amongst the operators. The implementation timeline places their introduction in the spring with almost all players using the new systems by the fall of 2003. The conference is scheduled for January 7, 2003 at the Hotel Real Inter-Continental in San Jose, Costa Rica.

Quite a few online casinos have been able to avoid the 7995 code, despite its growth and widespread use. The method they use is rather uncomplicated. Until the online casino has been branded with the 7995 code and is unable to process Visa or MasterCard transactions, the merchant will stay with that payment processor. As soon as they are encoded with 7995, the online casino will change their merchant bank to a different payment processor and begins again awaiting another 7995 code. For a new payment processor to be coded takes in the range of a few days, a few weeks, to a month. It is similar to the "phone phreaking" of the old college days where a hacker would get a multinational corporation's calling card numbers and then distributes a few of them to half of the campus. People would call all over the world using the calling codes until the company received the gigantic phone bill two weeks to two months afterwards. As soon the multinational cancelled the calling card numbers, the hacker would distribute new ones and the process would run all over again.

If the system remained in stasis, the merchants would continue to be able to avoid this problem by constantly switching payment processors as described above. Unfortunately, life cannot be so simple. In Spring 2003, Visa is officially launching a "Verified by Visa" program Under this new policy, the online casino will have to verify the nature of their business and the player will be required to certify their identity.

Here is what you should expect:

CONSUMER VERIFICATION: A password or PIN will have to be generated by every Visa cardholder after they register the card online, which will be mandatory. Every online transaction the Visa cardholder makes will require this password or PIN. This aspect of the policy is meant to create a higher level of protection by confirming that the cardholder actually owns the card.

MERCHANT CERTIFICATION: Every payment processor will act to certify each merchant through its encoding. Notably, the nature of a merchant's business will receive a designated code. Denied in almost every transaction, code 7995 for online casinos will now receive even greater inspection. Issuing and intermediary banks will now make sure that every online casino is certified correctly to avoid being blacklisted by VISA.

As a consequence, a stark decline in online gaming transactions should be fully anticipated if dependable alternative payment processing systems are not in full implementation by the spring of 2003. It is anticipated that MasterCard will be initiating a policy analogous to Visa's shortly. Furthermore, this decline in revenue can be fully expected to hit online casino companies around the globe, whether or not they are in a licensed jurisdiction, because the "Verified by Visa" program operates without borders.

As for those online casinos that have been able to get around the 7995 code by consistently changing merchant banks or payment processors, each time they do so now requires the lengthy submission for re-certification process.

It is also quite noteworthy to view a potential upcoming conflict. It appears, as sources indicate, that although VISA is very serious about this program, almost all of the online casino operators in Europe and the Caribbean are almost completely ignoring the verification/certification policy.

The source of the entire "Verified by Visa" program generated from complaints by retail online merchants regarding charge backs and fraud. Thus, it is the issuing bank which carries the liability and not the merchant or even Visa, for that matter. Therefore, this policy has in fact received a warm welcome from online merchants outside of the online gaming industry.

This will probably be discussed thoroughly during the ASROC conference. Specifically, there is a 45 minute session headed by a senior analyst from the Gartner Group focusing on just this topic.

The creation of a new alternative payment processing industry has created huge prospects for the internet. A large slice of the pie for payment processing businesses searching for heightened economic growth is the i-Gaming industry. It is apparent that regardless of may come, Alternative Payment Processing for the internet will not be going away anytime soon.

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