Just months after eBay Inc. (NASDAQ:EBAY) spun off PayPal Holdings, Inc. (NASDAQ:PYPL), the payments company is re-entering territory they’ve long since avoided. The company used to steer clear of the American online gaming industry, but that era is coming to a close, putting a huge source of revenue up for grabs.
Since the 2003 merger between EBAY and PYPL, PayPal chose to disassociate itself from online gaming. Gambling web sites are notorious for fraudsters, second only to those carrying pornographic content.
Fraudulent attacks nearly sank the company in the early 2000s, but they managed to cross that hurdle using an ingenious algorithm. Incidentally, that algorithm birthed a whole new business for PayPal’s original founder.
Now that PayPal is trading under their own ticker again, the company is ready to bring online gaming back into the fold.
PayPal Holdings, Inc. Approves Gambling Merchants
PayPal’s re-entry into the U.S. gambling world was done quietly. The company has a ban on all gaming activity unless the merchant is pre-approved by PayPal, which means these web sites went through a formal review process.
In a statement to CNBC, the company said: “PayPal is launching a pilot program to support four leading real money gaming (RMG) operators to offer PayPal as a way for gamers to fund their online accounts with these merchants.” (Source: CNBC, September 15, 2015.)
The program is an excellent test balloon for new revenue streams. Online gaming is a small market, but could grow exponentially if more states move towards legalisation. PayPal’s upper management appears confident that regulatory decisions could swing their way.
“We are launching this pilot now that we are able to fully comply with the evolving laws surrounding RMG in the United States as well as the requirements of our payment partners,” the statement read.
“As a global payments provider, PayPal’s goal is to give people safe and simple ways to pay for the things they want, so long as we can comply with applicable laws.”
Online Gaming as a Revenue Stream
According to research from Morgan Stanley, the U.S. online gaming industry could be worth $5.0 billion by 2020. The one roadblock is legalisation. Right now the only states where online gambling is allowed are Delaware, New Jersey, and Nevada. (Source: Morgan Stanley, September 10, 2014.)
For the month of July, online gaming in New Jersey brought in just $12.0 million in revenue. That’s million with an “M,” a long way off from the $5.0 billion target.
If you’ll pardon the pun and allow the alliteration; it’s certainly a gamble. But a smart one. Online activity is just a natural part of life now, and location-specific activities are a thing of the past. People will inevitably demand the right to gamble whenever and wherever they choose.
Casinos generate $70.0 billion in revenue each year, which goes to show how much people love to gamble. There’s an intoxicating atmosphere to casinos, but many people are simply there for the adrenaline rush of betting. If they can achieve the same thrill from the comfort of their homes, they will.
PayPal is the forerunner of all digital payments system. Its partnership with eBay really cemented its foothold into the online transaction territory. With all the conjecture over digital currencies and extinction of paper money, PYPL’s future looks bright.