Digital Wallets and Gaming: A Brief Legal Outlook on a Frictionless Future
Cash was king. If there was any moment for the gaming world to make a definitive shift of transaction paradigms, the last two years’ rapid transition into a cashless and touch-free world may be it. The pandemic forced even the staunchest luddites to learn how to operate QR codes and adopt alternatives to physical currency. Brick and mortar gaming facilities, forever a citadel of paper money, minted coins, and ATM lines, are now accelerating their two-decade push towards making digital payment solutions ubiquitous in casinos and other gaming establishments.
Major industry organizations, casinos, and technologists have increasingly rallied around digital wallet technology to anchor the customer gaming experience. This alert provides a high-level assessment of some of the risks, benefits, legal considerations, and other observations on the gaming industry’s growing adoption of digital wallets.
What are digital wallets and how are they different?
Picture something like Apple Pay. A digital environment (e.g., an app) stores a user’s payment information, which they can then use for transactions through devices like a smartphone. Unlike physical prepaid cards, users can’t lose a digital card, and it allows the exchange of money in and out of the account, enabling users to cash out directly into their digital wallet. Unlike certain other prepaid cards or similar accounts, casino guests can also use these wallets to shop, dine, or pay for other amenities such as parking, tickets, spa treatments, etc. Gaming operators are calling this the “omnichannel approach.” Additionally, customers might enjoy lower transaction fees on digital wallet purchases compared to potentially more costly ATM fees. Finally, digital wallets might allow gaming companies to better integrate payment apps with loyalty and rewards programs and their related benefits.
Is this just a trend?
Nobody can force user adoption, but major gaming companies are embracing or developing digital wallet technology en masse as a new amenity to their guests. This includes installing modified slot machines and service kiosks to accommodate technology like QR codes and tokenized wallet transactions, among other notable updates to the analog gaming experience. Recognizing the consumer demand for these options, at the beginning of the pandemic, the American Gaming Association encouraged states and tribes to adopt its framework for regulating this technology. Regardless of whether they will become the dominant transactional medium in gaming, digital wallets are likely here to stay.
Is it safe?
The last few years highlighted the potential health and safety benefits of touchless transactions, and digital wallets are no exception.
On a security level, digital wallets are also designed with the intention of creating additional layers of authentication. While other payment methods may expose users to vulnerabilities like theft of passwords or account information, certain digital wallet payment solutions can enable access controls like thumbprint or facial recognition technology on user’s devices before they can access their wallet. Fraud reporting, mobile deactivation, and other alert features allow users to protect their accounts in the event of a lost or stolen device. This reduces the insecurity and safety issues attendant to physical cash and cards – a traditional source of concern (and overhead) for many gaming operators.
Nonetheless, digital wallets theoretically allow new access points to customer’s payment information, which creates obvious hacking concerns. These concerns are not unfounded and are consistent with more general hacking concerns in growing financial technology sectors, including the increased prevalence of blockchain solutions and cryptocurrency. Digital wallets have certain benefits to reduce this risk, including through tokenization. This process, which converts the customer’s payment data into a token – essentially a second, computer-generated virtual card number that attaches separate rules on where and how that token can be applied – new security layers and restricted use, is designed on some level to make digital wallets a less desirable target for hackers.
Industry stakeholders should keep a close eye on the legal and technological risk/reward of this technology in the coming years.
What say the regulators?
The industry’s push towards digital wallets should be a welcome development for regulators and law enforcement organizations, particularly those who oversee anti-money laundering (AML) laws and regulations. At the risk of oversimplifying, funds may be more easily tracked to their source, which obviates historical money laundering concerns in gaming about the uncertain origin of cash and other funds. Technology like digital wallets potentially eases compliance obligations by streamlining Designated Non-Financial Businesses and Professions (“DNFBP”) and gaming licensee reporting and record-keeping obligations, particularly as they apply to suspicious transactions or related activity.
Nevertheless, state regulators have taken a cautious approach to new payment technology in gaming facilities. Some view modern technology as inconsistent with primary goals of addressing problem gambling and maintaining the integrity of the game. As of last year, eight states had allowed some form of digital payment option for casinos. Only one casino in the U.S. has held itself out as fully cashless and that was only after significant efforts to obtain regulator approval. With ongoing cooperation between regulators and gaming operators and increasing familiarity with FinTech tools like digital wallets, we expect to see more openness to incorporating such technologies in the near future.
For the customer
Frictionless cuts in two directions. Ease of use will make gambling easier. Customers don’t have to walk back to the ATM, wait in line to cash out, and using physical coins and cash are a more direct reminder of exactly what the customer is wagering and spending. Some governments, including the UK, have outlawed the use of credit cards in gambling for this reason. On the same basis, customers may lose track of what they have spent, which underscores whether and how digital gaming solutions and equipment – wallets, kiosks, apps, slots, etc. – provide conspicuous enough notifications and updates for consumers to responsibly track their own activity.
Customers are also choosing to release some personal information to operators when they utilize digital wallets. This is something customers are becoming more and more accustomed to doing in order to reap the benefits of a more streamlined payment experience.
For gaming entities
Somewhat related to the hacking concerns described above, system outages can create unwelcome headaches for gaming businesses that increasingly rely on technology solutions like digital wallets. Malicious attacks by bad actors are probably a worst case, albeit not implausible, risk, but onsite hardware failures, facility issues like weak internet or cellular service, or technology updates might cause similar heartburn. Of course, cash can always serve as a backstop.
Finally, new management obstacles may arise through issues like “friendly fraud” – calling your bank to dispute a charge in bad faith – which may increase where digital payments become more ubiquitous. Customers unhappy with their results at the casino or who fail to monitor their own activity may dispute charges drawn from their digital wallets. Many digital wallet solutions are designed to prevent this, but stakeholders should remain cognizant of new areas where creating proper dispute resolution procedures and policies may be necessary.
Lack of clarity on token or account value
Token values that divert from currency value in a user’s account may create mutual confusion for consumers and businesses. Because there is a growing interest in accounts funded through cryptocurrency or technology like Bitcoin slot machines, for example, the variable and somewhat more volatile value of those currencies, versus fiat currency like the U.S. Dollar, may further add to this confusion. Gaming entities should accordingly assess any additional risk in this regard, from managing customer expectations, proper notices on account balances or token updates, or whether these features may complicate accounting or financial reporting obligations.
Digital payment systems face a wide range of legal obligations from AML compliance, to data security rules, to tax requirements, and a variety of state, local, and federal gaming, banking and finance laws and regulations. Thanks to ongoing regulatory updates and changes, compliance checklists shift as rapidly as technology.
Participating entities will also need to ensure they have ample fraud resolution frameworks and resources available consistent with applicable laws. They should be prepared to handle an increase in potential claims or investigations which were not an issue in a cash-only world. As stated above, creating a similarly adequate dispute resolution policy is also advisable.
There are other laws to consider in this context that some may overlook. For example, authorities like the United States Department of Justice enforces Title III of the Americans with Disabilities Act (“ADA”) (42 U.S.C. §§ 12181-12189) for businesses’ technology resources like mobile applications, websites, and loyalty portals. The same accessibility issues may apply to these new payments technologies, so related entities should ensure these resources are similarly compliant with these laws.
Stakeholders and other interested parties in the gaming industry’s evolving payment landscape should work closely with legal advisors to ensure they remain compliant as the industry continues to pivot. This should include a regular evaluation and update of terms and conditions for services and products surrounding or related to digital wallets, and an ongoing survey and assessment of the risks surrounding this technology, both legal and otherwise.