DraftKings & FanDuel May Lose Payments Provider

by Raymond Pucci 0

Caught in the crossfire between the daily fantasy sports industry and state regulators, Vantiv is experiencing a crash course in risk management. At stake is the future survival of the annual $2 Billion (and counting) US Internet sports gaming marketplace. The two major players, DraftKings and Fan Duel, are satiating the thirst of avid fantasy sports fans by offering daily pools of Internet wagering for beginners and experts alike. Vantiv is the sole payments processor that provides the technology necessary to operate the online fantasy sports wagering. In recent months, at least 7 state Attorneys General are claiming these are Internet gambling sites and therefore illegal. The industry counters, saying fantasy sports are games of skill, given that athlete performance knowledge and quantitative skills, not simply luck, are needed to participate.

Vantiv Entertainment Solutions, a payments processor for daily fantasy sports sites DraftKings and FanDuel, told the companies this week it would stop processing wagers and payouts and would exit the space amid rising legal tensions, according to The New York Times. It’s unclear what percentage of total payments Vantiv processes for DraftKings and FanDuel, which control more than 90 percent of the daily fantasy sports market. However, Vantiv’s exit illustrates the mounting toll the companies face as numerous states continue to designate the activity illegal online gambling.

Daily fantasy sports is a hyper-accelerated form of wagering money on sporting outcomes dependent on the performance of real athletes. Because players don’t have control over the outcome of a game, a handful of states like New York, Illinois, and Texas consider the activity gambling akin to online poker, which was banned by the Unlawful Internet Gambling Enforcement Act of 2006. DraftKings and FanDuel disagree, choosing instead to call daily fantasy sports a game of skill because players choose which athletes to wager on. That designation would exempt the activity from the 2006 ban.

DraftKings says the company hasn’t heard from Vantiv regarding its decision to stop working with daily fantasy sports sites, adding an air of confusion to the ordeal. “We are not aware of what Vantiv may or may not have told other industry participants about its plans,” David Boies, a DraftKings lawyer, said in a statement. “However, to be clear, first, Vantiv has not told DraftKings that it plans to cease fulfilling its contractual obligations as of ‘Feb 29, 2016’ (or any other date). Second, Vantiv is under court order to continue to fulfill its contractual obligation to DraftKings.”

Consider this ongoing battle to be a “play under booth review.” While awaiting states’ legal action and pending trial dates, the game is still on for fantasy sports, fittingly enough as Super Bowl 50 approaches. However, the tradeoff for Vantiv is to decide between being embroiled in possible legal action versus providing their technology services to a very lucrative target market.

The legal actions initiated by the states’ Attorneys General could be seen as a defensive play, given that fantasy sports betting represents a major competitive threat to the lucrative state lottery systems and sanctioned casinos, which seemingly have reached market saturation. With time still left on the clock for fantasy sports players, possible outcomes are long, legal battles or an agreed upon settlement, with maybe even the states ultimately getting a piece of the action.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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