The legalization of online and mobile sports wagering in North Carolina has presented a lucrative revenue opportunity for banks willing and able to navigate a regulatory pathway fraught with uncertainty and potential penalties.
However, banks’ cautious approach to date in the 28 states with legalized online and mobile sports wagering comes from these primary questions:
- What each will be allowed to do?
- What are they expected to do in terms of regulatory compliance?
- What is their role in addressing problem gambling among customers, whether monitoring spending or setting credit card and lending caps?
“Banks have remained wary of sports betting and many have not yet decided whether they wish to do business with sports betting operators,” said Evan Harrell, an attorney with the Chapel Hill law firm of Bagwell Holt Smith P.A.
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While a UNC School of Law student, Harrell published in March 2021 a report for the N.C. Banking Institute on the topic of “Online sports betting: the opportunities and risks for banks.”
“The banking industry does not share the same positive opinions toward sports betting as the American public,” Harrell said. “Many financial institutions still refuse to offer their services to the sports banking industry.”
Timing the March 11 start of sports wagering with March Madness generated nearly $200 million in opening-week wagering, according to the N.C. State Lottery Commission.
After paying off $141.6 million in winnings, the state netted $42.7 million in overall revenue.
Meanwhile, legislative analysis of HB 347 projected about $40 million initially in annual tax revenue and exceeding $100 million by 2029.
Since the launch, there has been a nearly unavoidable flooding of marketing from the eight approved sports wagering operators: Betfair Interactive; BetMGM; Crown NC Gaming; FBG Enterprises Opco; Hillside (North Carolina); Penn Sports Interactive doing business as ESPN Bet; Tribal Casino Gaming Enterprise, an enterprise of the Eastern Band of Cherokee Indians; and Underdog Sports Wagering.
The first complication, according to Harrell, is that there is no federal banking regulator overseeing online and mobile sports wagering, but rather what has been permitted by the legislatures of the 28 approving states.
Yet, banks are aware they are subject to federal anti-money laundering laws, such as those monitoring the spending or withdrawal of large sums by individuals.
Harrell said banks are fearful “of being fined ... as sports betting has been previously used to cover up money-laundering schemes.”
“Many banks have decided to wait for federal action before engaging with the industry.”
However, by taking a precautionary approach, Harrell said “there is significant (revenue) risk ... because the sports betting industry is growing rapidly, and the banks that act first will protect their current customer base while capitalizing on new revenue streams.”
What N.C. law allows
The ways that bettors can fund their wagers tends to vary by state, in particularly using a credit card.
The bipartisan House Bill 347, which was signed into law June 14 by Gov. Roy Cooper, allows North Carolinians ages 21 and older to open an account with one of eight sports wagering operators.
As with pari-mutuel wagering, the bettor must be at least age 21 and online operator would be responsible for ensuring the identity and age of any person trying to place a wager.
An online account could be funded with any of the following: cash when betting in-person; foreign currency and coin; personal checks and drafts; digital, crypto and virtual currencies; online and mobile payment systems that support online money transfers; credit cards and debit cards; prepaid access instrument; and any other form of cash or cash equivalent approved by the Lottery Commission.
During the House Commerce committee debate on HB347, an amendment was voted down 18-8 that would have disallowed using a credit card to place a sports wager — even though a credit card cannot be used to play the N.C. Education Lottery.
Bill sponsors said the amendment is not needed because credit card is a popular form of financial transaction, and that wagers can withdraw money from their credit card to place bets anyway.
Rep. Deb Butler, D-New Hanover, said during the debate that prohibiting credit card usage for sports wagering would limit the potential damage of a consumer who is overspending on bets.
Harrell said state legislatures are likely to evolve their sports wagering laws, whether from learning from other states or feedback from banks and sports operators.
“The risk of money laundering in sports betting can be reduced by state action,” Harrell said. “Some states limit online sports betting to only occurring within the boundaries of the specific state.”
Most operators use GeoComply Solutions to track bettors, ensuring as required by HB347 that they are wagering inside their home state when using the apps.
“Banks should focus on what states and sportsbooks are doing to mitigate the risk of money laundering, rather than waiting for the risk to be fully eliminated,” Harrell said.
“Many sportsbooks include protections in the process of setting up a betting account, such as identity verification, so that the sportsbook has at least one person tied to the account.”
Harrell said that wary banks “should look to partner with sports betting operators in states where the onus is not on the bank, but on the betting operator to police the transactions, as this should avoid a situation where the banks are being pushed to regulate the sports betting operators.”
Credit cards too risky?
According to a January article in Forbes Advisor, “many credit card issuers simply don’t consider gambling an acceptable purchase — they may see it as too risky.”
“This is mostly because banks and other credit card issuers are worried about inadvertently facilitating illegal behavior and facing legal consequences, even where the applicable state law allows online gambling.”
“Sportsbooks in the U.S., by contrast, may take the step to ban credit card use more as a measure against excessive bettor debt rather than any liability.”
If a state technically allows credit cards to be used for gambling purchases, “many credit card issuers still won’t approve these transactions due to the risks of disputes, overspending, not getting paid back, etc.,” according to a March 2022 Creditcards.com posting by Ted Rossman.
“FanDuel lists Bank of America, Chase, Capital One, Wells Fargo, Huntington Bank and Union Bank as financial institutions that have been known to decline deposits for online wagering companies,” Rossman wrote. “They’re surely not alone.
“If your credit card issuer permits gambling transactions, there’s a good chance they’ll treat them as cash advances.
“That generally means an upfront fee (typically $10 or 5%, whichever is greater), plus a higher-than-usual interest rate (probably in the neighborhood of 25%) that starts accruing immediately.”
Some sports wagering operators rely on customers utilizing a checking account for betting transactions, as well as paying off winnings through fee-free debit cards.
“Either option will prevent you from going into debt while betting on sports,” Rossman wrote.
“Of course, even if you have the money in your bank account, you shouldn’t gamble more than you can afford to lose. It’s a good idea to set daily, weekly or monthly limits on your wagers.”
Glimpse into the future
Janney Montgomery Scott analysts point to GBank Financial Holdings Inc., a two-branch community bank based in Las Vegas, for a potential pathway for how banks adapt to sports wagering.
GBank, founded in 2007, is focused on small- to medium-sized businesses, high net-worth individuals and independent professionals. It provides federal Small Business Administration loans in 41 states.
GBank’s niche — appropriate for Las Vegas — operates a gaming financial-technology division “using a technology for cashless, mobile commerce solutions to the gaming, lottery and sports betting ecosystems,” Janney analyst Timothy Coffey said.
As a result, Coffey said, GBank has gaming fintech customers in every state.
Coffey said the division has three main product offerings:
* A partnership with Sightline Payments that provides secure pay and play prepaid cards;
* A partnership with BankCard Services, the owner of intellectual property that provides users of prepaid program accounts with gaming and consumer digital wallet/app providers the traditional consumer protections offered by banks and credit units, such as the FDIC; and
* A credit-card program launched in September being marketed to “prime and super prime borrowers” that could led to co-marketing the card with different gaming apps.
“The company has submitted an application to acquire the owner of a patented architecture for transactions between players/consumers and gaming/payment app providers that delivers consumer banking protection to each account user,” Coffey said.
Coffey said the “market for digital payments and wallets is substantial.”
“The Consumer Financial Protection Bureau estimates the number of digital payments is equal to the number of transactions via credit cards and debit cards and the dollar value of transaction exceeded $14.5 billion in 2021.”
Popular financial options
USBets.com includes a webpage dedicated to banking and other financial options available to bettors.
Its preferred vendor is a PayPal account because it allows customers to instantly and securely make deposits meant for sports wagers from several funding options that include bank transfers, person to person transfers and a PayPal balance.
It also cited linking a Visa, MasterCard or American Express debit or credit card for instant deposits with PayPal.
USBets.com cautioned it is important to note that you can’t use your PayPal credit card for funding online gambling accounts.”
In terms of traditional banks, USBets.com said some will allow the use of billpay features “to make safe, instant deposits to your online gambling accounts.” Those banks include Bank of America, Capital One 360, Chase, Citigroup, HSBC, PNC, Santander, TD Bank and Wells Fargo.
Harrell said that “while some bank transfers occur, many of the biggest banks still prohibit their customers from making transfers to a sports betting account.”
“Banks force players to either not make bets, or to switch to another provider who is willing to do business with bookmakers.”
Creditcards.com said another option is purchasing gift cards offered by a sports wagering operator.
“You might be able to buy these gift cards with a credit card, earning rewards and avoiding cash advance fees,” Rossman wrote.
“Tread carefully, however. You could be guilty of ‘manufactured spending’ if you take it to the extreme, especially when you’re trying to hit a credit card’s sign-up bonus spending threshold or racking up a lot of rewards.
“It would essentially be money laundering if you used a credit card to buy a bunch of gift cards to deposit money into a gambling account, earning rewards and then withdrawing your own money.”
Tony Plath, a retired finance professor at UNC Charlotte who offers consulting services to banks, said that “most of the banks that I know are working to develop and perfect generative artificial-intelligence pattern recognition systems.”
The banks will apply those AI systems to their electronic payments systems “to spot and suspend transactions that appear to indicate compulsive gambling activity and addiction,” Plath said.
“Many of these systems are already in place, but they’ll not doubt be improved through machine-learning as our generative AI systems gain greater knowledge about legal gambling activity and consumer payments behavior.
“Will this totally prevent compulsive, destructive and addictive gambling?” Plath asked.
“Of course not, but at least it’s a start.”