Wednesday, June 10, 2009

Online transactions - super long uber post

There have been some articles floating around about online transactions and who has not paid their debt to sites, who has gotten the funds seized, and how long will it take to get those funds back.

I used to work in that industry, and actually had Party as a client doing ACH's for them for some time. Before the shit storm that is. I've been hit up on the girly a few times as well, so I figured I would give you my take on the situation.

To do that, we will start with the law. That is the UIGEA. Which stands for fuck everyone in the ass multiple times because we can. I think. The background on this law is very familiar to me. I was a week away from flying to London to sign a very lucrative deal with a certain online site. That law was passed over the weekend on a saturday. Monday morning I was made aware of the companies intentions to ditch operations in the states, therefore, killing our deal. Or at least putting it on hold.

The law was hidden, or stuffed, into the Port Security Act. How this made any sense is quite interesting. Because in fact, it made all the sense in the world. From a legislative stand point. The Port security act was meant to give the US Government more freedom to attack and stop terrorists. How this relates to poker usually seems to be the head scratcher. But in all actuallity, it had nothing to do with poker, and everything to do with financial transactions.

See, the government learned that terrorists had an edge. That edge was being able to move millions and millions of dollars around to fund their little operatives and their operations. After 9/11, all investigations pointed to the fact that terrorists had a vast infrastructure of ways to move money undetected. That was a massive failure on the part of US intelligence. Follow the money was always a creedo of the CIA. But in this case, they couldn't.


Credit card companies enacted a policy a few years back, mandated by the Treasury that said they could not allow a negative balance on any card. What this means is that if you owed $200 on your card, and charged a $50 purchase to that same card between the pay periods, AND sent a payment in for $250, before that second purchase hit, the CC company would have to send you a refund.

What the terrorist were doing were opening up 6 and 7 figure credit accounts, and making payments without charging anything. They could then use the card to make whatever purchases they needed, or take cash advances. This was a very clean way to launder money.

On the back of that little scheme, they could, and did, do the same thing with online gaming. Deposit small amounts under seprate accounts, transfer to one, and take out a huge sum. Money cleaned. This is one reason why multi accounting is prohibited. And you thought it had to do with only concealing ones identity, therefore getting a bigger edge in a game. HAHAHAHAHA!

Now, the political benefit that the senators got from saying they were outlawing an immoral game came along with that bill. But was clearly secondary.

Stay with me here, it get's better....

The online POKER industry, not gaming, had an estimated gross of 80 BILLION in 2006. That's right! 80 BILLION. It was estimated that 80% of that came from the states alone. Seeing that none of that money becomes a realization without a processor of some type means that providers of money transfer, and transactions made a percentage on all of those dollars. All 80 billion of it.

Now, lets get back to the transactions. A quick run down so you can better understand how it works.

If you wish to skip the credit card processing history, scroll down to the next star.

You have a credit card and the merchant has a merchant account to process that card and receive funds from a bank that BELIEVES he actually just sold you goods or services (end run on sentence). The bank who underwrote that transaction (which we will refer to as tx's fom here on out), will send that bill to your credit card company, or issuing bank. They in turn will hit your card, and charge you interest until you pay it off. *Waffles should be reading this.

What's missing here is the process of information from the merchant to the underwriting bank, and back to your issuing bank. Plus, who the hell knows if your card is any good?

Visa and Mastercard are two competing associations. These association work independantly of each other, and actually can't stand each other. Each has their own rules and guidelines but work together to protect market share from Amex and others. Obviously it works. But trust me they hate each other.

The Merchant account:

To obtain a merchant account, you have to satisfy several requirements. The first is credit. Applying for a merchant account is like applying for a mortgage. Think about it. As a merchant you are basically purporting to the banks when you swipe a customers card that you are providing him with good's or services that he wants. You get paid by the underwriting bank. And you will be paid before the customer gets his bill in the mail, so there is a good faith effort on the part of the ubderwriting bank to pay you those monies. Fraud is very rampant in this industry, no matter how diligent the processors are. In the early days, people used to open up merchant accounts, swipe 100's of stolen cards out of their bedrooms, and collect thousands, if not more from the banks before they even knew what was going on. This is why today, part of your application, if in fact you have a brick and mortar business, requires the sales rep to include a photograph of your place of business.

Some companies will require that you put up a deposit of escrow to obtain an account. All companies will want a personal guarantee. It's not at all easy to get one. This is why you see people using pay pal quite often as an aggregator of tx's. People would rather use them, or a company like them, instead of going through the hassle of obtaining an account.

The processor:

The processor is the company that sells you the technology that enables you to take transactions. This is where it gets confusing, and I won't have the bandwidth to be absolutely complete, but I will try to sum up as quickly as I can. Some of these companies are nothing more than sales organizations that sell for several tech companies. These independant sales organizations, or ISO's, will sell the services of several different tech companies. Ones that actually own the rails that the information rides along. Processors make their money by grabbing a percentage of each tx, monthly fees they charge to the merchant for the provision of service, and any other hardware or technology they will provide. Such as a machine or gateway.
A gateway is a piece of software that enables tx's to be transferred securely via the internet. There are companies out there which all they do is provide gateways. Some processors require that you provide your own gateway, and some assign one to you. These gateways have a monthly fee attached to them, but recently, some banks have included them to be more competititve. Verisign is a gateway.

The transaction:

There are two categories of tx's, and hundreds of sub categories. Card present, and Card not present are the two categories.. Obviously they are self explanatory. The sub categories have to do with what you are selling. Products or services, what type of products, and what type of services. How you are charged as a merchant depends on what category and which sub category you fall into.

The formula on the cost of the tx is pretty obvious. Card present = less risk, so it will be inherently cheaper. Supermarkets are very high volume, and very low risk, so their rates are the cheapest in the industry. Usually around 1.5-2%. But online porn is super high. Obviously you are not there to sign, and the product itself can be a very embarrasing purchase. So if the wife finds it on the statement, the chance of her disputing it and getting it charged back, because you denied ever purchasing it is very high.

Not too mention that Visa and Mastercard have rules about not allowing those purchases through. But it happens. And it's not becuase of the moral issue. It's because those charge backs cost a ton of money. Porn companies usually get charged in the 30% range. So it's not Jenna Jameson or vivid who is making the lion share of the money in that industry. It's the processors!

There are also other tx's such as ACH's, better known as electronic checks. (ACH = automated clearing house). These are usually charged by the piece and not a percentage of amount. Same as debit.

The issuing bank:

The issuuing bank is quite simply the one who underwrites your MBNA or Capitol one card. They are the ones that assume the debt that you are running up everytime you fill the tank up, or buy shoes.

The settlement/ underwrting bank:

These are the gods of all tx's. These are the guys who actually receive all the money being sent in and manage the disbursements of all tx's. Most of these guys don't even have a processing company. They just say wether or not a merchant is worthy of such an account.

They also mandate restricitions and requirements based on federal guidelins. Such as x amount of funds to back whatever they might be shipping in the que. So if FT says, we have 2 million in withdrawls this week, the underwriting bank says, we can, or can't cover it.

Most of the time those funds are really all just on paper. Sure, the fees and commissions are transferred so people get paid, but base premiums are all justs sitting in a big account somewhere waiting for their disbursement back to consumers, issuing banks and merchants.

Ancillary aspects:

Now there are a million other things I could talk about but to get into the meat of how a tx works it goes like this. You swipe your card. Immediately there has to be an authorization, or pre-auth as so commonly used in the industry. That pre-auth is obtained only one way. Visa and Mastercard each have a point of entry. It used to be called a MIP (Mastercard Internet protocol) and VAP (Visa access point). There are only about 3 of each in the world. And are owned or "leased" by 3 organizations each. Everyone else who provides this service must rent those locations from those banks that own them. As I had said before some processors don't own their own "rails" so they must rent from others that do. Such as Trans Union, or some other giant. What this shows is how many people must get paid on any certain transaction. I think the average last I counted was 15. Once the auth is obtained, the transaction goes along the rails from the merchant to your issuing bank, back to the settlement bank and then closed.

And one little tidbit which I find interesting. Just to show you how monsterous Walmart is... They built and own their own processing, issuing, and settlement bank. They did this because they wanted to save money on tx's, and well, because they could. To date, they use it privately. This was not done with the blessing of either Visa or Mastercard.


I'm trailing off as I am trying to work as I type this, and I'm sure I fucked it up a little, but let's get back to where we started. Which is my take on this little article here and how it relates to people getting their money off of sites.

To determine the validity of the seizure, you have to breakdown the law. Which is the UIGEA. This law is bogus on so many levels, it's almost comical. For one, it does not outlaw, or ban internet gaming. It doesn't make online poker illegal. It does however, make it illegal to transfer monies for the purposes of online gaming. However, it is almost unenforceable.

The siezure becomes applicable if the government can show that the only way to get them out is to wire the money back to its depositors. Which is entirely the case. How does that effect those that have money coming to them then?

Well, for one, it's going to be a while til you get your money. Unless of course, FT or Stars has a slush fund somewhere that hasn't been seized. Or, if they can find another processor. I'm working on that btw :)

With the advent of Franks proposed bill, and several conversations I've had with some folks, I would guess that this is nothing more than a money grab happening before the bill gets turned around. Once it happens every cent will be taxed. So why not hang on to it before they an make that happen? Make sure that nothing gets transferred out before they lose the ability to tax it?

The other possibility here is that the site themselves are making interest on this money. And it's a huge number. I'm sure the sites have no issue with not having to pay. Of course, the underwriting banks could, and probably do have verbiage in their contracts that disposes of earned interest in the event of government interferance.

Even without the interferenance, logistically, it's always been an issue for getting money out and in to these sites. With the above explanation of how these tx's actually work, you can see the dilemna. That is, the underwriting banks have to guarantee these payments while they float into space. This is why a year ago, the new processor put a two week hold on all payments. The issue there was that there was too much in the que, and they just didn't have enough to cover the liabitliy.

So they had to wait for the first batches to clear. Kinda like a bottle neck of liability. So if they have enough to cover say 30mil, that's about all they can let out at any given point. With 90 million people playing this game, it's very believable to think that the threshold could be reached on a weekly basis.

I could talk about the seedy part of this as well. How the banks could collude with the sites to ensure x amount was earned in interest before sending off. It could also be that this time of year (think WSOP), most are pulling out to go and try to live their dreams. And the banks just can't hanlde the volulme. But the bottom line here is that you will not lose your money. You will eventually get it. It may just take some time.

I haven't necessarily been diligent in editing this post. I hope it makes sense. I have people here and I'm working!!! Give me a break! No time to proof read!


jjok said...

good god...... I'm completely oblivious when I pay for my burrito with a credit card.

edgie212 said...

So, let's talk deposits instead of withdrawls...I was thinking of throwing some cash into PS for a big WSOP qualifier. Is that a bad idea right now? What are the implications of PS giving me spending money and a seat if I get it?

DrChako said...

Your knowledge of this stuff (and of internet porn) is quite impressive.

Now, how do WE make money off it?


Fuel55 said...

Bayne we need a synopsis.

Shrike said...

Just a mountain of stuff here. *shudder* Fuel is actually right (for once!) ...


Riggstad said...

There are two issues getting money on to sited right now.

The first is obviously having a processor willing and able to process those funds. The second is your issuing bank.

Most will block the deposits on their own.

They just don't want the implications of a federal fork in the ass.

As far as getting money off the sites, The feds have already seized 30mil that was slated to be pushed out. So I can't see any other processor out there coming to the table just yet.

And the ones that do... well, Full Tilt and Stars beware.

Drizztdj said...

Bravo sir.

And Target also owns its own bank for the reasons you mentioned.

PokahDave said...

Awesome post....what do you think will happen later on in the year?

Riggstad said...

The bottom line here Dave, is that there is way too much money to be made for someone not to step up to the plate.

The feds may mandate another bull shit rule which will ruin any attempt from a reputable processor from being able to provide service to the sites, but someone will figure out a way.

Assume this seizure is nothing more than a back door raid of poker sites. Complete extortion is my read.

However, until this law is reversed, this cycle of the feds breaking peoples balls will continue.