Poker and Sausage

Forbes today posts a terrific article looking at many of the peripheral issues surrounding the online gambling debate that I touched on yesterday. A few key passages:

Big credit-card associations MasterCard and Visa have allowed issuing banks to prevent payments from going through to Internet gambling sites for several years by using specially coded computer software that identifies a vendor as an online gambling site. American Express also blocks transaction with gambling sites. The online payment service PayPal actually got into hot water over the issue and had to pay $10 million to the federal government two years ago to settle charges it helped facilitate illegal online gambling.[…]

But with billions of such payments made every year, compliance with a new set of monitoring laws will be difficult at best and financially onerous to say the least. Smaller banks would be hit harder than larger banks, which have the resources to build the compliance technology that would be needed to track payments and block them if need be. Smaller banks are already struggling with the additional costs of complying with stricter anti-money laundering rules under the Patriot Act.

[…]

Blocking wire transfers through banks would force people to be more creative if they still wanted to use the online sites–for example, opening accounts in foreign banks or using non-U.S. Internet payment services.

Certainly, the House bill, should it become law, would be a boon to PayPal because it essentially eliminates all other online payment service competitors from the U.S. market. That would include Neteller, a U.K.-based online payment service, whose stock was down 15% on the London Stock Exchange’s alternative investment marketplace, and Firepay, owned by FireOne Group, whose stock was off nearly 20% on London’s AIM market. Both those companies would have to give up their online gambling site customers if they wanted to do business in the U.S. “It’s a protectionist bill for PayPal,” says Cato Institute’s Radley Balko.

Not surprisingly PayPal, owned by eBay, enthusiastically supported last week’s legislation. Its only remaining competitor in the U.S. market would be Google’s fledgling Internet payment service.

But other financial firms have been supportive of the effort to clamp down on Internet gambling. In a statement Tuesday, MasterCard said the vast majority of its cards deny authorization for Internet gambling. “MasterCard will continue to work aggressively with all appropriate parties to combat illegal Internet gambling,” it said.

It isn’t surprising that the credit card companies are supporting the ban. They already agreed to block their customers’ access to gambling sites and offshore payment services years ago, under threats from the Justice and Treasury Departments, as well as from aggressive state attorneys general, particularly New York’s Elliott Spitzer. It’s a similar story with the larger banks, who can absorb the costs associated with the news legislation. Probably doesn’t hurt that it’ll deliver a blow to their upstart competitors, who will have to spend a higher percentage of operating costs to comply with the law than will the bigger banks.

And neither banks nor credit card companies want to incur the wrath of the ban’s supporters in Congress, who some insiders I’ve spoken with say have made clear that how these industries approach the gambling ban might well effect the outcome of what the banking and credit card industries consider to be higher-priority issues.

All of which means banks and credit card issuers are supporting the online gambling bill, even though it will raise the cost of doing business, and require them to infringe on the privacy of their customers.

Sausage-making at its finest.