Payment processors targeted in Florida gambling lawsuit

• Key insight: Florida AG James Uthmeier is targeting payment processors and card providers in attempts to shut down alleged online gambling platforms.
• What's at stake: Banks and payment companies could see additional risk exposure from prediction markets, which face similar allegations across multiple states.
• Expert quote: "If I'm a bank, I'm waiting on the edge of a knife. ... It's, 'We've been doing banking illegally' or 'We've missed out on billions.'" —LegitScript's Andy Bayley

Payments processors are beginning to face scrutiny over their involvement in gray-area financial markets as state regulators continue to file lawsuits against firms that they allege to be illegal gambling platforms.

Florida Attorney General James Uthmeier announced the filing of two lawsuits against the operators of two major online "sweepstakes" platforms, and the payment processors that enable them, on Aug. 16. The complaints allege that the defendants, Stake and VGW, are operating illegal online gambling enterprises that violate Florida's gambling laws.

"Defendants operate illegal online casinos in the state of Florida," Uthmeier alleged in both of the filings. "They call them 'sweepstakes' casinos as if that's some sort of talismanic cure-all. But if it looks, swims and quacks like a duck, it's a duck."

Worldpay (owned by Global Payments), Trustly, Yodlee, Praxis Tech and Breeze Labs Payments were all named as defendants across the two filings, which alleged that the payment processors "provide the financial infrastructure necessary to facilitate and process gambling transactions." The payment companies did not immediately respond to requests for comment.

As regulators continue to crack down on gray-area financial markets like sweepstakes casinos and prediction markets, the risk is no longer stopping at the operators themselves. The Florida sweepstakes casino case could cause regulatory scrutiny to extend to financial institutions connected to the controversial platforms.

Major card providers are also being targeted by Uthmeier, as he sent cease-and-desist letters to Visa, Mastercard and American Express regarding "facilitating payments for online gambling businesses" in June. None of the three card providers were named as defendants in the two August lawsuits.

Andy Bayley, director of risk and policy for payments compliance company LegitScript, told American Banker that the Florida sweepstakes casino lawsuits speak to a larger general trend of liberalization in the gambling industry hitting its limits.

"A bunch of folks that were operating in parallel to that liberalization are starting to hit their stride just as the states are really starting to ramp up their own operations and building out their enforcement criteria," he said. "If you look at that preemption clause with the CFTC, that really relies on a court holding that there's a proper commercial value associated with a swap or event contract, and we have previously seen other states start to attack that."

Bayley said that the parallels between sweepstakes casinos and prediction markets, which have also been subject to debate over their legitimacy, are "hard not to acknowledge" as state-level litigation ramps up.

"It speaks to the states reaching out and saying 'We're willing to call a spade a spade,'" he said.

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Earlier this week, Connecticut became the latest state to sue prediction market platform Kalshi for operating without state-level gambling licenses. "Sports event contracts are no different than sports betting and are not magically shielded by federal law from Connecticut's commonsense consumer protection laws," Connecticut Attorney General William Tong said in a statement.

The crackdown comes at a time when banks have yet to formally enter the prediction markets space, but major players such as JPMorganChase and Goldman Sachs have publicly expressed interest in prediction markets in the past. However, JPMorganChase was recently reported to have debanked prediction market platform Polymarket due to regulatory concerns last fall.

For banks, payment processors and card providers, the question of entering the predictions market boils down to the size of the opportunity compared to the potential headwinds, which include regulatory tussles and concerns over consumer protection, insider trading and market manipulation.

"If I'm a bank, I'm waiting on the edge of a knife," Bayley said. "There's a lot of binary risk. It's, 'We've been doing banking illegally' or 'We've missed out on billions.'"

Bayley said that he has "almost no doubt" the underlying issues behind the state-level lawsuits will be escalated to the Supreme Court, but doesn't know that even that will completely settle the question. "The Supreme Court, in the past, has been reluctant to make sweeping changes to a lot of things so they may make very narrow changes," he said. 

Federal regulators, such as the Commodity Futures Trading Commission (which has publicly declared exclusive jurisdiction over prediction market platforms and counter-sued multiple states in favor of prediction markets), are contributing to additional regulatory uncertainty.

"The CFTC, as it exists currently, will fight this pretty hard," he said. "Their own authority is on the chopping block."