"I sincerely believe... that banking establishments are more dangerous than standing armies" - Thomas Jefferson
The Banking Crisis supposedly
ended six years ago. It probably doesn’t feel like that if you work in the
remote gambling sector, however.
Back in the first heyday of
remote gambling IPOs (2004 – 2005), banks were happy to lend, albeit on
expensive terms and rapid rates of payback, and were more than happy to provide
commercial services and process payments. The banks’ appetite for ‘risky’
remote gambling companies changed markedly in the summer of 2006, when UIGEA
ended the party and put the banks in the spotlight, both for enforcement and
past ‘misdeeds’ for supporting businesses facing the USA. The global Banking
Crisis (2007-09) swiftly followed, highlighting some rather riskier banking
activities and putting any form of even slightly controversial banking activity
beyond the pale. These two events meant that the banks were firmly shut to many
(most) remote gambling operators and largely have been since, an economic
recovery and substantial remote growth notwithstanding.
But before we bash bankers too
much, it is probably worth flagging that their Risk Committees had a point when
it came to remote gambling. There are (or were) seven things typically found in
remote gambling which give bankers pause – and it is the presence of all seven
that made remote gambling particularly toxic (rather like the Titanic, bankers
would probably have been more or less relaxed about the breech of any three of
these risk-assessment bulkheads, but any more would be fatal).
First, and probably most
importantly, the US government made its anti-remote gambling ire known to the
financial services industry: every global bank has perforce extensive US
interests - which are probably bigger than most countries’ gambling markets; it
is not an unreasonable commercial decision that most banks fled from
potentially upsetting the US government, whatever their own views were.
Second, back in 2006 the vast
majority of remote gambling was regulated on a point of supply basis. Given
that even many gambling executives use the shorthand of ‘unregulated’ for this
activity (or even pointedly don’t put some revenue in a ‘Sustainable’ category
when reporting), it is unsurprising that many banks regard ‘point of supply’
revenue as risky.
Third, and as a result of the
second point, most remote gambling companies have their Headquarters in
‘exotic’ jurisdictions, typically associated with ‘tax optimisation’. With
tongue firmly away from cheek, many bankers frown on these sort of structures,
especially if…
… Fourth, most gambling companies
are rather small by international corporate standards (eg, not one gambling
company is in the FTSE 100, pending the Betfair – Paddy Power ‘mega merger’), meaning
that the ‘return on risk’ on most remote gambling business simply doesn’t stack
up for banks.
Fifth, the ‘entrepreneurial’
nature of many remote gambling companies meant that things like social
responsibility and corporate governance were not early priorities. This not
only plays badly in a corporate box-ticking environment, but also (far more
importantly) increases the risks of negative regulatory change: especially
where some mainstream press has an ‘anti-gambling’ stance. All of this
naturally reduces a bank’s already low appetite for the sector still further.
Sixth, back in the .com world
where most operators took money from most jurisdictions, providing a lot of
trading access (or at least details) to a regulated entity with a fiduciary
duty to block or report ‘dubious’ transactions was probably considered poor
risk management from the gambling companies themselves: relying on ‘sector
specialist’ financial services was much safer and more reliable.
Finally, many remote gambling
companies are relatively young and, given the cash generative nature of such
(more successful) businesses, have not hitherto needed much ‘vanilla’ financial
services support. This has meant that there is no long-standing relationship or
network of relationships within the financial services community to leverage:
it is much easier to turn down a new business than turn off an established one.
Many of these ‘legacy’ issues are
now being solved however. The US has been firmly shut for nearly a decade -
levels of compliance have been comfortingly high and the US has even positively
modified its regulatory stance (albeit in certain highly specific areas). Many
remote gambling companies now generate most or all of their revenue from
regulated markets, while UK Point of Consumption licensing has made many
companies more visible and more accountable. Remote gambling is now big
business, driven by a combination of organic growth and M&A: in the UK (the
most liberal domestically regulated market), remote gambling is now the single
largest commercial sector by official Gross Gambling Revenue stats, as well as
one of the fastest growing.
Further, many companies have made
the transition to well governed, socially responsible entities, through a
combination of increasing scale, increasing regulatory scrutiny, and changes in
management and/or ownership. Lastly, many remote gambling companies are now (at
least) ‘medium sized’, well established businesses with a strong track record
of sustainable (and audited) revenues and growth.
Unfortunately, none of these
positives have yet been accepted by mainstream financial services businesses,
with appetite to deal with remote gambling companies (especially small and/or
new ones) very low. This is important. In fact it is a lot more important than
the remote gambling sector realises – I would point to five key reasons
(Finance Director readers could probably add many more!).
The most obvious impact of having
high volume ‘vanilla’ providers of financial services closed off as an option
is that the cost of doing business increases - for commercial banking,
processing or financing. This puts new and/or remote only businesses at a
competitive disadvantage in terms of day-to-day activities (eg, payment
processing as a cost represents c. 25% of typical remote profits).
Another impact of limited supplies
of debt is that it materially impacts flexibility to grow. If substantially all
of a company’s increased costs need to be organically funded by revenue or
through equity investors, then growth is made both slow and expensive; reducing
competition and innovation while favouring the larger incumbents.
The supply chain is probably the
area where significantly reduced financial services options have the biggest
and most problematic long-term impact. Platforms and content need R&D and
infrastructure spend to grow. If this can only come from organic resources then
the focus will be on short-term wins and tried-and-tested ideas. It will also
keep small developers small unless they hit lucky with one very high return
product or service or find a very generous equity backer. This not only
polarises the supply chain into very few haves and very many have nots
(materially reducing operator choice), it also stifles innovation.
A potential regulatory risk issue
for the sector is that forcing operators to use more exotic forms of financial
services also puts them (perhaps unwittingly) into the ‘grey market’ supply
chain. In a very narrow sense, this perpetuates the problem by providing life
to the support structures of the industry that often cause greatest concern. In
a wider sense, operators already plugged in to ‘regulatory flexible’ payment
solutions or financing may become tempted to broaden their revenue base to
riskier markets. This could be especially compelling when combined with the
need to generate high margin revenue to support costs, given the paucity of
attractive financing options.
Finally, by helping to keep large
parts of the remote gambling sector small and ‘colourful’, the lack of mainstream
financial services engagement helps to perpetuate the stigma that causes the
sector so many problems, from inviting negative press and adverse political
risk to making talent difficult to attract.
A further tangential risk worth
flagging is that traditional land-based businesses are becoming increasingly
remote (indeed need to); many of these companies also have material amounts of ‘vanilla’
debt. If the large banks maintain their anti-remote gambling position then
increasingly ‘omni-channel’ businesses could see themselves growing their financing
risk to dangerous levels; especially if land-based profits decline.
The lack of effective access to
large-scale financial services therefore touches nearly every key aspect of the
remote gambling industry. Moreover, as the industry matures, this lack of
access is likely to be felt ever more acutely, causing deeper problems to
perpetuate.
I would suggest that high-level
stakeholder engagement, including regulators and equity holders, is key to
resolving this impasse before the issue distorts the sector further and
potentially also causes value destructive levels of risk. The sector should also
be prepared to engage on more creative means of securing attractive financial
services for the ‘regulated age’, without simply turning to expensive and high
risk ‘.com’ solutions.
At the beginning of a year it is
usually tempting to focus on which channel will see most growth, or M&A
gossip, or some other form of crystal-ball gazing. But as the remote industry
matures, it should spend less time pondering the ‘next big thing’ might be and
more time focussing on resolving the very real issues that are retarding its
ability to be taken as not only the most dynamic gambling sub-sector but also
the most sustainable. As the remote sector challenges land-based sectors in
terms of scale in many jurisdictions, the fate of the entire gambling industry
might rest on making this transition successfully.
This article appears in the January/February edition of iGaming Business
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