Gambling on a Payments Win

  Few industries have more at stake in their choice of transaction-processing technologies than gaming. To flourish in the hyper-competitive, $42 billion sector-which is supported by millions of annual credit and debit card payments initiated by gamblers at hundreds of casinos across the United States-it is essential that casinos offer customers the quickest and most convenient means of accessing cash. Casinos also must make accurate, split-second decisions on the creditworthiness of gamblers.
  Casinos' specialized payment needs are triggering a demand for enhanced hardware, software and services-including card-processing systems, online authorization and settlement networks, shared databases, multi-function cash-dispensing terminals and card-swipe devices-and proving to be a magnet in attracting vendors of all sizes to the sector.
  Major U.S. merchant acquirers and payment processors, including Atlanta-based Global Payments Inc. and Las Vegas-based Global Cash Access-which is majority owned by First Data Corp.-as well as smaller, niche companies that focus exclusively on the casino industry, are releasing new technologies in an attempt to strengthen their foothold in the increasingly lucrative market.
  As legalized gambling has spread in the past 20 years, fueled in large part by states seeking new tax revenues, so have gross gambling revenues-the amount of money wagered minus the winnings returned to players. Gross gambling revenues at commercial casinos, excluding cruise ships and Native American gambling facilities, escalated to $26.5 billion in 2002, up from $18.2 billion in 1997 and just $9.6 billion in 1992, according to the Washington, D.C.-based American Gaming Association and New York-based research firm Christiansen Capital Advisors Inc. (chart, page 20). An additional $14.2 billion in gross gambling revenues were generated at casinos on Native American reservations in 2002, the last full year for which data are available, Christiansen Capital reports.
  Processors wouldn't discuss their margins with CCM, but casinos are a very profitable area for payment-services providers, says Gwenn B?zard, senior analyst for Celent Communications, a Boston-based financial research firm.
  "Companies are charging significant fees to cover the increased risk from participating in the sector, and there is a lot of money to be made," he says.
  No source could tell CCM exactly how many credit and debit card transactions occur at casinos. But King of Prussia, Pa.-based Money Centers of America Inc., a casino processor, estimates that 40% of casino activity is supported by credit, be it on general-purpose cards, in-house credit programs or other forms.
  Incentive
  And with the American Gaming Association reporting that 51 million persons-or roughly one-quarter of the U.S. population over 21-visited a commercial casino in 2002, and that 85% of Americans view casino gaming as an acceptable activity for themselves or others, up from 79% a year earlier, an already active sector is positioned for further expansion. Payment-services vendors clearly have a strong incentive to design additional products to differentiate themselves from competitors.
  "We're investing heavily in research and development to design new technologies to help casinos run more efficiently," says Diran Kludjian, executive vice president of Global Cash Access, which supports more than 1,000 casinos worldwide. "Those casinos that embrace technology will move up to the next level, and those who don't will lag behind."
  Global Cash Access last year released QuikPlay, a patented transaction process that supports debit card acceptance at slot machines. Casino patrons initiate payments by swiping their debit cards through terminals next to the machines and then keying in withdrawal amounts. The user also must key in the debit card's personal identification number.
  Credits, based on the amount of a withdrawal, are automatically transferred to the slot machine, or players may choose to have a bar-coded ticket with the withdrawal value dispensed from the terminal. Users then can insert the ticket into any slot machine for playing credit, or use the ticket to obtain cash from self-service devices. Fees, including surcharges, are the same as for automated teller machine transactions at casinos.
  QuikPlay is being used in 123 slot machines at a casino on a Native American reservation in Southern California, and Kludjian says he expects six to eight more gaming locations to deploy the product this year. The process was developed in a joint venture with Reno, Nev.-based International Game Technologies, a leading slot-machine manufacturer.
  "Gaming properties are trying to get as much money as possible onto the floor as seamlessly as possible," says James G. Kelly, executive vice president and chief financial officer of Global Payments. "And because you're dealing with large dollar transactions, there is a greater challenge to protect the property from fraud stemming from check cashing, credit card cash advances and ATM transactions."
  Indeed, technologies and services aimed at fraud and risk reduction are important components of vendors' product portfolios. Global Cash Access, for instance, is promoting its ability to provide access to its Central Credit reporting agency that holds data on the credit history of 14 million casino players.
  When a customer attempts to get a line of credit in a casino, the gaming location can call into the Central Credit database and check the individual's history of paying back funds to other casinos before deciding how much credit it will offer. About 400 casinos are part of the system. Users pay a monthly fee for the service.
  Global Payments, meanwhile, has a customer testing its new VIP PlayerNet product. PlayerNet provides real-time player-related transaction history to participating casinos, involving lines of credit, outstanding balances, level of play, non-guaranteed check-cashing activity and reported derogatory information.
  Casino cage operators can garner credit data almost instantaneously by clicking an icon on their personal-computer screens. Global Payments is developing an enhanced product offering that may guarantee payment and assume all risk on high-level lines of credit.
  Meanwhile, Money Centers of America-which recently merged with processor iGames Entertainment-is issuing cards that provide players with up to $10,000 of credit, and also is guaranteeing the funds.
  To initiate a transaction, casino patrons swipe the card through an Internet-connected terminal and key in the amount of credit being accessed. Money Centers then transfers the funds electronically from its own account to the casino. When the marker, or amount owed, comes due-typically in seven, 14 or 30 days-the player's bank account is debited and payment is sent to Money Centers through the automated clearinghouse (ACH).
  Compensation for Risk
  Because it is assuming all cardholder risk, Money Centers charges casinos between 8% and 12% of the amount of the marker, according to the length of the loan. The company issues lines of credit based on its proprietary scoring model.
  "The typical acquirer solution model is high volume and very low margins," says Christopher Wolfington, Money Centers chairman and chief executive. "Our niche is to offer solutions to casinos for which we take on risk, and for which they are willing to pay more than commodity prices."
  Money Centers supports activity in 22 casinos, but Wolfington says its customer base will increase to more than 80 locations this year when Money Centers completes its planned acquisition of Chex Services Inc., a Minnetonka, Minn.-based provider of casino cash-access services.
  Among Chex Services' newer products is ChexGuard, an electronic check-guarantee and authorization program. Testing was recently completed for ChexGuard, which originally was developed by Visa USA and then enhanced by Chex Services and Wells Fargo & Co. It now is being used internally by Chex Services before being rolled out to casinos, says Jim Welbourn, president and CEO.
  During a ChexGuard transaction, check data are electronically sent through Visa's processing network to the bank from which the check was drawn. Chex Services then approves the transaction if there are sufficient funds in the check writer's demand-deposit account. The company is responsible for all bad checks and receives fees from casinos for each transaction.
  "Casinos are a very attractive market because the volumes are much greater than at retail locations," Welbourn says. "There might be more transaction risk, but that is outweighed by the higher activity levels."
  Much of this risk inherent to casinos results from the increased frequency of fraud attempts and not a lack of safeguards, says Jon Pitts, director of credit/cage operations at The Riviera Hotel and Casino in Las Vegas.
  Casinos are tempting targets because they are 24-hour operations, and criminals are aware that personnel often are not as alert to fraudulent activity in the middle of the night, he says. Perpetrators also have a greater variety of payment operations as targets, and are less likely to attract attention by initiating large transactions.
  "A mom-and-pop store will be reluctant to fulfill a $5,000 transaction," Pitts says. "But at a casino we do it all the time."
  The Riviera is increasingly leveraging advanced products and services in an attempt to reduce risk, add efficiencies and generate greater income, Pitts says. The casino, for instance, is among the more than 100 properties accepting Global Payments' VIP Preferred Card to authenticate check cashing and speed the disbursement of funds. Gamblers obtain the card by applying at the casino; approved customers can be issued cards on the spot.
  During a transaction at a cashier's cage, the VIP Preferred Card is swiped through a card reader that is connected to a PC. The transaction is then sent through the Internet to Global Payments' host system in Chicago, which uses an online credit-scoring system for validation. Global Payments guarantees all approved transactions, removing casinos from the position of having to collect on checks that were returned for non-sufficient funds. Global Payment has issued more than 500,000 VIP Preferred Cards to casino patrons.
  The Riviera also is using "Cash and Win," Global Payments' credit card-based, cash-advance system to dispense funds to Visa, MasterCard, American Express and Discover cardholders. Users initiate transactions at self-service terminals that dispense tickets signifying the transactions were authorized. They then take the receipts to the cashier's cage and show identification to receive cash. The procedure is designed to reduce administrative work and shorten lines at the cashier's cage.
  "We're moving to be as technologically advanced as possible to keep expenses down," Pitts says.
  Some casinos also are moving to cut operating expenses by issuing prepaid payroll cards to employees. While the stored-value card is becoming a more popular method for companies in all industries to deliver wages to unbanked workers, casinos are a particularly attractive market because the odd hours kept by many workers make it difficult for them to receive and cash paper checks promptly, Chex Services' Welbourn says.
  Chex Services' payroll card enables employees to withdraw funds from Visa-branded ATMs and initiate signature- and PIN-based debit transactions at Visa merchant locations. The product also allows cardholders to avoid hefty check-cashing fees that can exceed $15.
  The vendor does not charge casinos to participate in the program, but employees must pay a monthly $2 maintenance fee, $1.50 for an ATM withdrawal and 50 cents for a point-of-sale transaction. In addition to employee convenience, casinos replacing checks with payroll cards avoid the expenses associated with distributing paychecks and replacing lost or stolen checks, which can cost $20 or more.
  Chex Services also is giving casinos the option of issuing prepaid cards to patrons as a safer means for storing their winnings. Rather than leaving locations with large amounts of cash, customers can receive stored-value cards that enable them to withdraw the funds from automated teller machines.
  In yet another card initiative, Global Cash Access is issuing magnetic-stripe products to patrons with approved credit lines that enable the cardholders to access their available credit from 1,200 GCA terminals in casinos. Cards are issued after GCA runs the applicant's name through Central Credit and its other casino databases and receives authorization.
  The transaction authorization process takes about 15 seconds and GCA underwrites all cardholder risk. Casinos are charged a fee for the service, and consumers pay 6.95% of the amount of the credit. The system is aimed at casinos without in-house credit departments or those that haven't offered credit to mid-level players.
  'Wired Like Crazy'
  Analysts expect more card-based programs to proliferate over the next several years, with reward systems and biometric identification technologies likely to become popular.
  "Casinos are wired like crazy, so there is plenty of opportunity for more products, including affinity and loyalty cards that can be tracked with automation," says O.B. Rawls, president of Hypercom North America, a unit of Phoenix-based Hypercom Corp., a leading POS terminal vendor. "More gaming companies also are exploring ways to support debit transactions at the slot machine, which is one of the most original applications for the terminal."
  The current environment, however, is making it difficult for another payment technology-the smart card-to gain a foothold in casinos. Smart cards, which contain microprocessor chips that store data, typically cost $1 to $2, compared to about 25 cents for a mag-stripe card. Smart card acceptance also requires chip-reading terminals that can cost several hundred dollars each.
  "Casinos have a significant magnetic-stripe card infrastructure in place, so it's a cost issue in providing smart cards to them," says Randy Vanderhoof, executive director of the Smart Card Alliance, a Princeton Junction, N.J.-based multi-industry organization promoting the adoption of smart cards in North America. "If there is a need to have the intelligence at the card level rather than the host level, the smart card would meet that requirement."
  Chip cards are more likely to be adopted by locations seeking a single card product to support a multitude of gaming and hotel applications, such as room service and bar access, as well as casino-related functions, he notes.
  Indeed, with casinos increasingly adopting new technologies to support a variety of payment-related applications, some analysts expect smart cards eventually to be incorporated into the gaming environment. It would be a natural evolution for a sector that is not shy about accepting new products and concepts.