Daily fantasy sports betting (often known as DFS) may seem like harmless fun, but it can pose big risks to payment providers and other financial institutions that enable these online game websites to operate. Because of the large volume of funds moving through these websites and lack of regulation, they are at high risk for fraudulent or illegal activity.
In this article, we’ll discuss the potential risks involved for payment providers enable transactions for fantasy sports.
What are fantasy sports?
Fantasy sports are a type of online game website that allows fans to pay an entry fee to place bets against a sports book or opponents by estimating the performance of real-life athletes during real-life sporting events.
Participants can win a share or all of the predetermined pot, based on the athletes’ statistics. A portion of the entry fee goes to the provider, and the rest goes to prizes. Prizes are typically paid the day of the victory to encourage participants to shift their winnings to the next game.
Some examples of fantasy sports websites include DraftKings, FanDuel, Yahoo DFS, Underdog Fantasy, and PrizePicks.
Why fantasy sports sites are vulnerable to illegal activity
Although it seems a lot like gambling, fantasy sports betting is not typically categorized as gambling because it’s not based on chance. Instead, fantasy sports betting is considered to be skills-based: it requires a strong understanding of the sport, past statistics, player performance, and game strategies.
This is precisely why DFS was exempt from gambling regulations under the Unlawful Internet Gambling Enforcement Act (UIGEA) passed in the U.S. in 2006, and why DFS isn’t regulated by FinCEN like casinos. DFS companies are responsible for self-regulation. However, under AML regulations, financial institutions may still at risk for regulatory action if they see suspicious transactions on DFS sites and fail to report them.
Additionally, financial institutions that take on merchants doing business in this high-risk activity may need to have more stringent AML programs in place, since these programs must align with the level of risk that they take on. Although the regulations at the government level could be open to interpretation, other authorities, including card schemes, certainly keep a close eye on transactions in fantasy sports businesses.
When combined with the large amounts of money flowing in and out of DFS sites on a daily basis, the lack of government oversight and reliance on self-regulation increase the risks of other illegal activity, including money laundering, identity theft, and collusion.
3 types of risks associated with fantasy sports
There are three types of risks that payment providers should pay special attention to if they wish to include fantasy sports in their portfolios.
- Reputational risk – Negative publicity or customer complaints related to unfair play, monetary loss or other issues that could harm the reputation of associated payment providers. This type of risk can negatively impact customer loyalty and retention.
- Legal and regulatory risk – Because regulations concerning gambling, gaming and online transactions vary between jurisdictions and change constantly, processing payments for fantasy sports platforms carries a regulatory risk.
- Chargebacks – Customers may feel that they have not received the value they expected from their investment in fantasy sports, resulting in disputes and chargebacks.
In addition, if merchants fail to pay out to customers that win on their sites, financial instituions may be responsible for fulfilling these payment obligations, resulting in financial loss.
Negative media exposure regarding fantasy sports
In 2015, the U.S. Department of Justice and the Federal Bureau of Investigation (FBI) began looking at whether daily fantasy sports sites were violating federal law. However, in the past few years, most of the court activity related to fantasy sports sites in the U.S. has been at the state level.
In some areas, courts have been asked to make a determination: Is fantasy sports betting actual gambling or not?
A case in New York brought in 2015 by the State Attorney General against two daily fantasy sports (DFS) providers was finally settled in 2022 by the New York Court of Appeals. The case alleged that DFS contests violated the state’s constitutional prohibition on gambling. The appellate court finally ruled that DFS contests are not gambling under state law.
Some court cases in the U.S. have arisen because companies like DraftKings, a large fantasy sports company, have expanded their operations from DFS to sports betting operations.
In Texas, DraftKings Sportsbook is now illegal, while its DFS operations are still legal in the state. However, there are some states, including Hawaii, Montana, Idaho, and a few others, where fantasy sports betting is not even legal.
Also worth considering, DFS has been associated with potential health risks, according to a study published by the National Insitute of Health National Library of Medicine. DFS is considered a type of micro-betting, which the study says is related to severe problem gambling and impulsivity, and also puts young people, especially high school students, at greater risk of developing gambling problems.
Mitigating risks associated with fantasy sports betting
As questions surrounding the legality of fantasy sports betting continue to arise, with carrying regulatory response from state to state as well as in different countries, it can be challenging for payment providers to keep up with which activities are legal or illegal at any given time. This presents significant risks for payment providers. If your business includes merchants dealing in fantasy sports or you’re considering adding this type of merchant to your portfolio, you should be aware of the potential risks.
EverC can help to identify merchants that are potentially involved in suspicious or criminal activity, even when their activity is purposely hidden. Our technology leverages AI for increased speed and precision in detection rates, enhancements to features and tools, and unmatched customization capability, for solutions that that allow you to meet your business goals while aligning with your RBA and industry priorities.
