Imagine your job is to process millions of transactions every day. To add pressure, you face increasing scrutiny from regulators. Then, to add fuel to the fire, you need to consider potential lawsuits. And this is for just doing your job. This is the reality for the payment processor community who support the sweepstakes gaming industry.

In the second article in a five-part series, we explored the barriers to sweepstakes growth in the U.S. In this article, we explore the crucial role payment processors play in the sweepstakes ecosystem and consider the risks they face, and scrutinise how they navigate the increasing legal and regulatory challenges.

The role of payment processors in sweepstakes

Sweepstakes operators rely on payment processors to handle purchases of virtual currencies or other items that often double as sweepstakes entries. These transactions are critical to the industry’s business model, enabling players to buy packages that include entry opportunities while following the “no purchase necessary” rule through alternate methods.

Payment processors, however, are more than facilitators; they are gatekeepers. Their ability to verify customers, process payments securely, and ensure compliance with anti-money laundering (AML) laws is fundamental to the industry’s operation. Yet, this essential role exposes them to unique risks.

The complexity of a payment processors role means they need to ensure compliance with AML laws through several measures:

Customer Due Diligence (CDD): Verifying the identity of customers using documents, data, or information from reliable sources.

Transaction Monitoring: Continuously monitoring transactions to detect and report suspicious activities.

Sanctions Screening: Checking customers against global sanctions lists to prevent transactions with prohibited entities.

AML Compliance Officer: Appointing a dedicated officer to oversee AML policies and procedures.

Regulatory scrutiny and legal challenges

Because the sweepstakes industry occupies a grey area of law, payment processors frequently face regulatory challenges. For example, recent class-action lawsuits in Florida, Kentucky, and Alabama have named payment processors as co-defendants, accusing them of enabling allegedly illegal gaming activities.

Howard Glaser, global head of government affairs for Light & Wonder, warns that vendors and funders who think there’s no risk may need to reassess. He says that more states are likely to follow Michigan’s lead in clamping down on sweepstakes operations. Glaser’s concerns reflect a growing trend of regulators targeting not only operators but also the financial systems that support them.

The Michigan Gaming Control Board (MGCB) targeted operators such as VGW and payment processors who support their activities. As states strengthen AML compliance and consumer protection, payment processors face mounting pressure.

Navigating compliance challenges

Payment processors need to balance risk reduction with fair but strict onboarding and monitoring processes. To offer services, many regulatory bodies require sweepstakes operators to show their adherence to both . This includes due diligence, such as verifying the legality of the operator’s business model, ensuring transparency in marketing practices, and monitoring transactions for signs of fraud or money laundering.

“Payment processors are under extremely strict controls,” said Michelle Cohen of Ifrah Law, during a panel at G2E 2024. “They don’t just turn on sweepstakes operators because they’re getting business. It takes months to get onboarded, and the compliance checks are often more rigorous than those for traditional iGaming.”

Challenges remain despite these measures. Inconsistency in state laws will always hinder compliance. Currently, a robust AML/KYC program is too expensive to implement. This further consolidates the market, as smaller processors may find it difficult to compete.

Lessons from daily fantasy sports

Daily Fantasy Sports (DFS) allows players to create fantasy teams based on real-life athletes and compete in short-term contests, often daily or weekly. Unlike traditional fantasy sports, which span an entire season, DFS offers immediate results and frequent opportunities to win. An example of this would be that in a DFS football contest, participants could select a lineup of NFL players and earn points based on their real-life performances in that week’s games.

The rise of daily fantasy sports (DFS) in 2015 mirrors the challenges faced by payment processors in sweepstakes. DFS payment processors dealt with considerable uncertainty and scrutiny because of the rapid growth in what was a liberally regulated industry. Varied and shifting regulatory frameworks forced many states to implement clearer structures by legalising and regulating DFS. By realising the economic potential of DFS, not only did more consistency benefit stakeholders but also addressed public pressure and concerns about accountability and fairness.

Matt Kaufman, managing director of Eilers & Krejcik Gaming, noted: “The sweepstakes industry is at a crossroads, much like DFS was. Regulators are catching up, and payment processors need to ensure they’re on the right side of that evolution.”

Much like the rise of esports, sweepstakes future depends on how it can adapt and thrive in chaos and change.

These parallels offer a roadmap for sweepstakes gaming. As states introduce clear regulations to ease the burden on payment processors, stability within the industry will bring substantial growth. Until then, it is vital for payment processors to tread carefully in this shifting regulatory environment. The thrill, excitement, and anticipation of gambling are all part of the human experience, but it is crucial to balance vigorous player protection against state specific regulations.

So, as players indulge in sweepstakes, payment processors must find their feet to navigate this sophisticated dance. Align innovation with compliance to ensure seamless transactions while complying with an ever-evolving regulatory framework.

The path forward

The sweepstakes industry will double its value by 2025. Projections for the sweepstakes casino market, valued at approximately $3.1 billion in 2022, see growth at a rate of 31% per year, reaching $6.9 billion by 2025

This will undoubtedly bring a more complex environment for payment processors to regulate. The path forward will only be smooth if regulators, operators and payment processors collaborate. A sustainable future can only exist if relevant stakeholders get together to form a unified framework. The good news is that US lawmakers recently proposed a new framework for internet gambling. The bad news is that these proposals require urgent action, otherwise, the sweepstakes industry will remain high stakes for all involved.

Being an unsung hero and a scapegoat all in one sum up the current climate for the role of a payment processor in the sweepstakes industry today. Of course, it’s a vital role, but one that comes with monumental risk.

Soon, states will have no choice but to ramp up enforcement. As they do, state regulators will unpack and scrutinise the entire ecosystem. To avoid the crosshairs, payment processors must tread carefully. Now is the time for everyone involved to communicate to avoid unnecessary scrutiny and misinterpretation.

The fourth article in this five-part series will examine whether the industry is at a crossroads, debating whether its growth is sustainable or headed for a regulatory reckoning. You can read article one, exploring the rise of sweepstakes gaming in the U.S.

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