How Credit Unions Can Capture Revenue from the Growth of Online Gambling

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How Credit Unions Can Capture Revenue from the Growth of Online Gambling

The online gambling market is growing as its activity has become more mainstream, and more states have passed laws allowing it. Although it was relatively common for credit unions to enable and accept transactions made in casinos before the pandemic, the restrictions that followed changed gambling behavior, resulting in a surge of transactions made on online gambling sites. This increase in online gambling transactions has made credit unions question how best to process and proceed within this burgeoning industry. While transaction volume is relatively small, between .2 to .5% of credit and debit transactions, these types of transactions have recorded an increase of up to 500%—significant insight into the growth opportunity of the market. On “C.U. on the Show,” Doug welcomes guest Karen Postma, vice president of risk analytics at PSCU, a CUSO payment processing firm. Karen has more than 25 years of experience in card processing and more than 20 years exclusively supporting credit unions in their credit and debit transactions and helping them mitigate fraud and risk.

Karen explains how online gambling can give credit unions an additional opportunity for income, but there may still be barriers to entry for those unfamiliar with the space. For example:

  • The legality of online gambling varies from state to state, which can be tricky to manage across state lines.
  • There may be a perception that these transactions are “riskier” than traditional “card-present” transactions.
  • Credit unions may feel online gambling goes against their commitment to promoting financially sound decision-making and protecting their members’ overall financial wellness. 

Karen explains why credit unions should discuss these concerns and explore entering the market as an opportunity to capture additional revenue and better serve the evolving needs of their members who are turning to online gambling for entertainment. As she cites, entry could help credit unions get a leg up and compete in the market, as fintech companies are already allowing these types of transactions and gaining the income and customer relationships that could advance the credit union movement instead.

To further address credit union hesitation, Karen talks about the holistic approach PSCU and other providers are implementing to mitigate risk, such as advanced authentication, and how the card processing infrastructure has matured overall to support the demand for digital transactions. Stream the full episode to hear more and learn:

  • The demographics of members participating in online gambling and how credit unions can improve their service experience to meet their needs
  • The importance of having internal discussions to determine where your credit union falls on the spectrum of acceptance of online gambling transactions
  • How credit unions can proactively establish controls to manage risk, as online gambling and other online transactions such as peer-to-peer transfers and trading crypto increase

Listen to the conversation here.

Karen Postma and PSCU are not affiliated with or endorsed by ACT Advisors, LLC. 


Audio Transcription (pulled from the podcast)

Doug  

My guest on today’s podcast is Karen Postma, vice president, Risk Analytics, at payment processing CUSO PSCU. Karen focuses on project implementation for PSCU’s strategic client base, including analytics and fraud mitigation. In this episode, we talk about online gambling—including its legality, pandemic-related growth, and why it’s an area your credit union should consider exploring. 

Karen, welcome to “CU on the Show.” We’re delighted to have you join me today, here to talk about the activity in online gambling. And we’ve never talked about something like this before, so I’m quite excited to hear what you have to say. Tell me about your history in working with the credit union movement, and what sort of activity you’re involved in at PSCU. And what PSCU does.

Karen Postma  

Well, first of all, thanks for having me, Doug. I really appreciate the opportunity to have this conversation. I have actually been in payment processing for close to 25 years, a little under 20 of that has been in the credit union space. Prior to going to work for a CUSO, I actually worked for a national credit card issuer. And I was able to gain some experience there and so forth, but then had the opportunity to work for a CUSO. I’ll be very honest, I didn’t have a lot of experience with credit unions at the time and was pretty young in my career yet. But I quickly was able to understand the distinction between the national issuer I worked for and working for credit unions. And as I had that opportunity, and got to better understand that space, it really resonated with me personally, as we look at people helping people and really trying to do what’s best in our communities. And so, almost 20 years later, here I am, and still working with credit unions and trying to ensure that credit unions have everything they need to be successful and serve their members. And it’s something that I think once you get in this space, and you truly understand the impact that happens from a member and community perspective, it’s really where you want to stay.

Doug  

I firmly agree. Tell me a little bit about what activity you are focused on at PSCU.

Karen Postma  

Yeah, so I have had the opportunity to work at PSCU for almost five years. I am in the risk analytics area, which is our risk and fraud Management area at PSCU. At PSCU, we are a payments processor along with a digital provider for a number of credit unions throughout the United States. So we work with extremely small credit unions up to the largest credit unions in the U.S. providing these services. Within my direct responsibility I have the opportunity to work on the analytics and fraud mitigation. So understanding fraud at a transactional level at a holistic level as well as putting in place measures that will prevent the transaction but also prevent fraud that happens outside of the transactions. So in the last several years, we’ve seen fraud shift from that transactional environment to more of an account takeover; the fraudsters are overlaying technology. As we look at data and bots, and that sort of thing, fraudsters are implementing those. So we’re really trying to take a holistic approach to fraud prevention so we can ensure credit unions have the latest and greatest technology and cannot only compete in the market with some of the big banks, when it comes to products and services, but also fraud prevention, because that’s a key to allowing the money to stay within the credit union so they can invest.

Doug  

And that is the perfect handoff to talking about online gambling. So walk us through a bit about the history of online gambling becoming legal and what you’re seeing across the credit union movement in this specialized area.

Karen Postma  

Yeah, so as you said, I think it’s important that we kind of take a step back and kind of look at gambling in general in an internet space. It was back around 2006 or so that Reg GG came into play, which is the Unlawful Internet Gambling act. At that time, yes, we used the internet, but it isn’t what it was today. We didn’t necessarily have a whole bunch of internet gambling transactions. And what we did see back then, a lot of it was foreign. There were preventive measures put in place to prevent money laundering and all those kinds of things. And the key to that act is really the word unlawful. It was very difficult to understand what unlawful meant. So a lot of financial institutions took the broad brush, a spurt approach, hey, I’m just going to block all internet gambling transactions. Back then, from a classification perspective, we had one what we call merchant category code that allowed us to do that; it was a set it and forget it kind of thing. I’m going to fast-forward us to 2018. Again, lots of things have changed from a technology perspective. And the Supreme Court then ruled it was unlawful to block internet gambling transactions in general, outside the state of Nevada, and so a number of states since then have put in place state laws that have allowed internet gambling. The thing is, it’s very difficult to kind of understand state by state, because each state is a little bit different. But in general, you have over 30 states that have already allowed internet gambling. So that supersedes some of those hesitations and regulations we saw at the federal level.

Doug  

So for most credit unions, this is an issue that is either here or coming soon. Is that right?

Karen Postma  

Yeah. And I would say that the kind of tricky thing that I think maybe stumped some credit unions is that a lot of the state laws only apply when you’re in that state. So if you live in a state, one of the seven states—there’s only seven states that have not at least some limited legislation in flight right now, or have enacted—let’s say, you live in one of those states that just says hey, we’re not touching this, it’s still unlawful. If you have a member that is either living or goes on vacation there, or is in one of those other states, their state laws apply, not necessarily yours. So this is where it becomes very tricky to manage. The great thing is, the merchants that effectively have been audited and are set up to be able to conduct this follow these rules and regulations on the back end; they can understand from your IP address and all of those kinds of things where you’re at, what the state laws are, those sorts of things. So there are controls being set up at both the Visa and MasterCard level that allow us to be able to have the opportunity to comply with your state and federal laws, but also allow your members to transact. So there’s been a lot of work done since 2008 in the infrastructure to allow these transactions.

Doug  

In the last couple of years, there’s been a couple of changes that have happened in the world that have caused us to change our behaviors a little bit. I’m not sure if that may have happened to you or not Karen, but it certainly happened to me. So how has the activity in online gambling changed pre- and post-pandemic?

Karen Postma  

So that’s a very fascinating question, because I think anything we talked about in a pre- pandemic, post-pandemic kind of world. And so gambling in general is not any exception to that. And quite honestly, it’s one of those areas in which we have seen a really, really big shift. And so think about pre-pandemic, as a credit union did you have members that went to your local casino or on vacation did gambling in a casino? I’ve been working with credit unions, like I said, for almost 20 years; I don’t know any credit union that said, oh, nobody can necessarily gamble in a casino. From that perspective, 2020 hits, we’re not going anywhere, nobody’s going to a casino. Nobody’s doing anything, right? And so all of a sudden, you have these laws and rules and legislation that came into play in 2018. You’re starting to build out that infrastructure for allowing internet gambling; you’re not getting any gambling activity coming to the casinos. And so people look to the internet—just like they did when they look to buy their groceries, buy their clothing, buy your household cleaning supplies that were sometimes hard to find. And so they looked to the internet for their entertainment as well. And so we saw a huge shift from card present and those kinds of things into a card not present internet gambling activities. So PSCU actually did a study around the level of increase. And if you compare February of 2020, which was really right before the pandemic really, to February of 2022, in the debit space we saw a 500% increase in internet gambling transactions and in the credit space, a 300% increase in transactions.

Doug  

Wow.

Karen Postma  

Yeah, it was huge. Now, I don’t want to mislead anybody, because the volume of internet gambling transactions in general is still fairly small when you look at it. In the debit space, it’s about a half a percent of your overall transactions, and in the credit space it’s like two-tenths of a percent. But it’s the level of increase that we’re really looking at from a trending perspective, as PSCU does a lot of research from the aspect of what’s up and coming. What do we need to watch out for and where are those growth opportunities for credit unions? And this is a space we really felt was imperative to share. Because it’s, like I said, from a volume perspective of transactions, it’s super small. But that growth gives us some insight that this might be an area we want to explore now versus later so we can capture some of that revenue stream.

Doug  

Yeah, your members are doing it somewhere. So you talked about the volume, you talk a little bit about the fraud issues that, I assume, are what’s keeping some credit unions away from the space.

Karen Postma  

Yeah, and whether it’s reality or perceived is kind of a question, right? So as credit unions, not only do we want to do the best for our credit union, but we feel like there is a component of us overseeing financial wellness for our members as well. And so I think, between the perception and please hear me, there is fraud in this space, right? I’m not gonna say there isn’t because there’s fraud everywhere. But I think there’s a bigger perception of fraud, combined with the need to protect our members from a financial wellness perspective, that has credit unions pulling back and saying, oh, this might be a little bit too risky. And again, I asked the question, prior to 2020, did you feel that casino transactions were risky? Or did you prevent those? And more than likely the answer is, yeah, we felt they were kind of risky but we have controls in place, we still allow them to happen. Just like all of our transactions, pre-pandemic to post-pandemic, you have to look at gambling in the same manner; you’re just switching the avenue in which these transactions are taking place. But when it comes to fraud, right, I do want to highlight that in a post-EMV world, our industry has done a lot of really great things to help prevent internet fraud, right? Because one of the things we all heard, as we were looking to migrate to EMV was oh, in Europe, all the fraud shifted from card present to card not present, right? And so that’s where it exploded. So watch out for that. A lot of the things that we’ve done in the industry, we’ve overlaid technology such as machine learning, artificial intelligence, advanced authentication in that card not present space. And so financial institutions in general are still in this kind of component, do I enroll in these advanced authentication protocols or don’t I? My advice is yes, you do. You do it before the fraud actually comes. So you can see riskier types and I air quote “riskier,” types of transactions coming down the pipe, whether it’s online gambling, it’s crypto, P to P—all of those are coming down that online channel. Before it becomes a problem, take advantage of these advanced authentication avenues that we have put in place as an industry to get a leg up. Now, is it going to prevent all of it? No. But it creates another barrier. It creates another data point in us to capture data to be able to understand your member of that transaction. And in a much better, deeper way to make more intelligent decisions.

Doug  

Tell me about the demographics of the member that is engaging in online gambling.

Karen Postma  

Honestly, it’s hitting every demographic that you do, every age demographic. However, I will say the one thing that in my almost 20 years of working with credit unions that I have heard time and time again is, oh, we need to break that barrier of appealing to the younger generation, we need to lower the average age of membership, right? And I can tell you, this is one of those areas in which it is extremely pivotal that credit unions actually take a look at this. When you start to break down the younger generation, and I could actually bucket it very large—under 50—this is going to be your age group that is going to be doing those transactions I just talked about. Probably about five years ago, if I would have said, hey, I’m buying crypto, people would have probably looked at me a little cross-eyed. Today, it’s commonplace across multiple age demographics. When we break down internet gambling, in particular, you have that under 35 kind of bracket, but you still even have a fair chunk in that 35 to 50 age bracket as well. And again, part of it has to do with the shift in behavior and how we make transactions. But it also has to do with a lot of the advertising we’ve seen a lot of the merchants that have come into play. So some of the more popular merchants, which would be like DraftKings and FanDuel—we saw advertisements during the Super Bowl.

Doug  

Yeah, I noticed that

Karen Postma  

Right, it’s commonplace. It’s a common conversation. You go on ESPN, in their sponsoring segments within that realm. So these are things that are going to appeal to that younger generation. And if you’re going to have a card program, and you are specifically targeting a younger generation and really wanting to break into some of that millennial, even Gen Z kind of conversation, these are areas you’re really going to have to consider—rethinking how you think about them.

Doug  

Is there a lot of fintech activity in and around this space? Either supplementing or partnering with credit unions?

Karen Postma  

Yeah, I would definitely say from the perspective of fintechs, that’s been kind of the hot topic in conversation. When you talk to credit unions it’s where the major disruptors come from and so forth. And the fintech space is obviously there. I think what differentiates some credit unions from the fintechs in this space is, this is the fintechs’ everyday life, right? They’re online, they don’t necessarily have branches, they’re used to making decisions in a technological way. Versus from a credit union perspective, we’re kind of still making decisions from a very reserved aspect, risk mitigation component, and in that sort of thing, so fintechs are allowing these transactions, right, there’s no question about it, the conversation we’re having around whether we should allow online gambling or not, none of the fintechs are having it. It’s just yeah, of course, right? And so when we look at that, and we’re still over here trying to make a decision, or we’re limiting the dollar amount, or we are limiting the fact of whether we’ll even allow it. You get one chance with those younger generations. One thing I’ve heard time and time again, and I’ve seen study after study is, in those younger generations, changing financial institutions is not that big of a deal as it used to be. If I was 18 and I had to change my bank account and get new checks and do all of those kinds of things, that was a lot of work. It was easier to work through the issue than it was to change financial institutions. In today’s day and age, that’s not necessarily the case. And quite honestly, there’s the opportunity to supplement some of that transactional volume in other ways. So for instance, I have two 20-year-olds in my house, and both of them have their credit union account. But they also have a Venmo card attached to their credit union account. And so Venmo is getting the interchange on that transaction, not my credit union. So there’s ways from a fintech perspective that they’re going to allow those transactions if you don’t. So you’re going to lose out on the interchange, you’re going to lose out on income. And you’re quite honestly losing out on that opportunity to cement that membership and that relationship by making that younger generation supplement.

Doug  

If, in listening to this interview and thinking about this space, a credit union wants to begin to explore the area more, what should the next steps be?

Karen Postma  

Yeah, I think it’s kind of twofold. One is, you’re having the conversation internally to understand and get a good grasp of where you fit on that spectrum of yeah, let’s allow it and understand it and go forth or I’m not allowing it all. Figure out where you land, but then also work with your processor, like PSCU, to better understand the opportunity for fraud mitigations you have, understand the opportunity you have to enhance that experience for your members, and really get a good feel for what steps you can proactively put in place to allow that experience you want for your members.

Doug 

Awesome, Karen. Well, with that, I just ask for any final thoughts for the leaders of the credit union movement about ways to think about online gambling, as far as activities, anything in this space, particularly best of breed ideas? Just any comments, final comments, around that?

Karen Postma 

I would say, and I feel like I’ve said it during this interview, but don’t shut this down. I understand there might be some hesitation around internet gambling because of our history. Because of the perceived notion of fraud and perceived notion that you’re doing the best for your members. There’s a huge market out there for these transactions and people are doing it from an entertainment perspective. It’s not necessarily a bad avenue for members to be able to make transactions on and so I would highly recommend we look at being able to support these types of transactions to grow our portfolio and service our members in the way they want to be serviced.

Doug 

Thank you so much, Karen. Appreciate your service to the credit union movement and these forward-thinking ideas in an important area of growth. Have a great rest of your day. 

Karen Postma 

You too.


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