PayPal Move Deals Latest Blow to Online Casinos

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LOS ANGELES (Reuters) – The odds for the success of online casinos, under fire as credit card providers refuse to accept their transactions in growing numbers, grew longer on Monday when Internet payment services provider PayPal Inc. said it too would exit the business.

 

 

PayPal’s departure stems from a deal, reported earlier, in which online auction house eBay Inc. would buy PayPal for about $1.5 billion in stock.

 

“In view of the uncertain regulatory environment surrounding online gaming, eBay plans to phase out PayPal’s gaming business after the transaction closes,” the companies said in a statement.

 

“Gaming providers who use PayPal will have ample opportunity to find alternative payment solutions.”

 

PayPal, which provides cash settlement services, was a minor player in the online UFA gambling industry, but had flagged the business as a major area for future growth, said Bear Stearns analyst Jason Ader.

 

The company’s decision not to become a player follows moves by a string of major credit card issuers, including Bank of America, Fleet, MBNA and Chase Manhattan, who all said they would exit the business.

 

In one of the biggest recent departures, Citibank, which controls about 12 percent of the U.S. credit card market, said it also will stop processing such transactions.

 

Legal issues, coupled with concerns that some cardholders might refuse to pay such charges, led many of the credit card issuers to decide the business wasn’t worth the risk, analysts said.

 

The legal status of online gambling is still ambiguous in the United States, but jurisdictions generally treat casino-style online gambling as illegal.

 

The exodus of major credit card issuers led Bear Stearns to pare back its growth forecast for the industry to an estimated $4.2 billion in revenues for 2003 from a previous forecast of as much as $5 billion.

 

As a result of PayPal’s exit, Bear Stearns will probably reduce its 2003 estimates by another 5 percent to 10 percent, Ader said.

 

“This really confirms our belief that all the cheerleaders of Internet gambling are going to end up being wrong,” Ader said. “Companies, when given the choice, are going to pursue legitimate business rather than illegitimate.”

 

None of the major U.S. casino companies have domestic operational online gaming sites, with most reluctant to enter the arena for fear of jeopardizing their U.S. gaming licenses. Among the major players, MGM Mirage is the most bullish in the arena, pursuing a venture in the Isle of Man off the British coast.