Is Fantasy Sports the Next Industry to Be Derisked?

WASHINGTON — Banks and credit card companies are being dragged into a war on fantasy sports betting and soon they may have to decide if it's worth their while to let their customers use credit and debit cards to place wagers with FanDuel and DraftKings.

So far, they've given no indication that they would stop extending credit to and processing transactions for the fantasy sites' customers, but a class-action lawsuit filed in New York Wednesday against some of the biggest names in retail banking and payments could change their thinking, said Daniel Wallach, a gaming lawyer with Becker & Poliakoff.

Financial institutions "are risk averse and a suit like this could make these companies wary of doing business with daily fantasy sports companies," Wallach said. "They could be on the hook for a great deal of the damages that are being alleged."

Wallach said that the New York suit could be just "the tip of the iceberg," and sure enough, on Saturday, banks and payments firms were added to class-action suit in Florida against FanDuel and Draft Kings.

At issue is the legality of placing bets through FanDuel and DraftKings, the two biggest players in the fantasy business. Though fantasy sports was exempt from a 2006 law that essentially banned online betting in the U.S., it has drawn the ire of some regulators.

The most outspoken opponent of fantasy gaming has been New York Attorney General Eric Schneiderman, who earlier this month called FanDuel and DraftKings "the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country" and warned the firms in a letter that they were running illegal gambling operations.

DraftKings responded in a statement on its website saying, "We strongly disagree with the reasoning in his opinion," and later filed a temporary restraining order along with FanDuel, which was denied. However, the firms were granted an emergency hearing that is scheduled for Wednesday.

Joseph Kelly, a business law professor at the State University of New York in Buffalo, said that banks may not want to wait for New York's State Supreme Court to determine if DraftKings and FanDuel are running illegal gambling operations before cutting customers off from the sites.

"Right now no one knows whether daily fantasy sports are illegal, but until we have the hearing … it is still uncertain," he said. "If I were a bank I would get the heck out of New York immediately, if not sooner."

The daily fantasy sports websites rely on credit cards to facilitate the transactions with players making deposits from their line of credit and then being debited back any winnings. If a player's winnings exceeded a certain amount, they can also opt for the daily fantasy sports companies to issue them a check.

Under the Unlawful Internet and Gambling Enforcement Act of 2006, fantasy sports were given a carve-out as a game of skill rather than chance and therefore considered legal. However, some have argued — including Schneiderman — the element of chance in daily fantasy sports where contests are won and lost based on players' individual performance during a single game, rather than an entire season, rises to the level of gambling.

"Good poker players often beat novices. But poker is still gambling, and running a poker room — or online casino — is illegal in New York," Schneiderman wrote in an op-ed in the New York Daily News on Thursday.

Banks and payments firms were pulled into the fight Wednesday when a fantasy sports player filed a class-action suit in Southern District of New York against a range of financial firms, alleging that they are facilitating illegal activities. It claims that JPMorgan Chase, Capital One Financial and Merrick Bank violated the law by extending credit to fantasy sports users. It also alleges that American Express, MasterCard, Visa, Vantiv and Paysafecard.com ran afoul of the gambling laws for facilitating such transactions or processing payments.

Seven of those eight firms were also named in the Florida suit, filed by two fantasy sports players in U.S. District Court for the Southern District of Florida. Also named in that far-reaching suit were PayPal and Google Capital, as well as major professional sports leagues and broadcast networks.

Whether fantasy gaming is ultimately deemed legal or not, the broad crackdown could prompt financial firms to simply "derisk" customers of fantasy firms, just as they have cut ties with payday lenders, money-services providers, cryptocurrency firms and other business lines that are deemed to be high-risk, experts say.

"If you are a bank and cannot enforce a transaction because it was void from the beginning, how are you going to recover that money from the customer," said Sarah Jane Hughes, University Scholar and Fellow in Commercial Law at the University of Indiana. "That is as risky as it gets."

However, others say it's too soon to determine if banks are poised to derisk fantasy sports players.

"Just because a class-action lawsuit states something is true doesn't meant it's true," Steve Kenneally, vice president for payments and cybersecurity at the American Bankers Association, said in an email. "This type of wagering has only been 'illegal' for a week since the New York AG made his announcement and it is likely that there will be appeals of the AG's decision and his interpretation of the law."

Jeff Ifrah, an attorney and founding partner at Ifrah PLLC, said in an email: "I suspect this will be dismissed in short order. The problem with this lawsuit is that it seeks to recover funds on behalf of losers from the folks who purportedly won those funds. But the bank and processor defendants in the case are not winners or losers and are not proper parties to this case."

Ben Knieff, a senior analyst at Aite Group who specializes in retail banking and payments, said it would difficult "to find the banks or processors liable considering the activity appears to be technically legal — not in line with the spirit of the law, but to the letter of the law seemingly OK."

He added, however, that he would not be surprised if the court ruled otherwise. "The Southern District of New York is one of the toughest jurisdictions in the U.S.," he said.

FanDuel started restricting New Yorkers from participating in paid contests on Nov. 17. DraftKings reportedly continues to operate in the state.

"We maintain, unequivocally, that FanDuel has always complied with state and federal law," a statement on the company's website says.

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