A payment processing company that handles a significant number of transactions for the two dominant daily fantasy sports companies notified the operators this week that it would no longer handle their payments and in fact was leaving the industry altogether. It is perhaps the biggest blow yet to an industry that has been pummeled by legal challenges in recent months.
Vantiv Entertainment Solutions, the processing company, told its daily fantasy clients, which include FanDuel and DraftKings, that it would “suspend all processing for payment transactions” related to daily fantasy sports in the United States and its territories on Feb. 29.
The company cited the unfavorable opinions that have been issued by state attorneys general in recent months. Seven states, including Mississippi on Friday, have concluded that daily fantasy games were a form of gambling or were illegal under their current laws.
“As you are aware, an increasing number of state attorneys general have determined that daily fantasy sports (‘D.F.S.’) constitute illegal gambling,” Jonathan Ellman, chief transaction and marketing counsel at Vantiv, wrote in a letter obtained by The New York Times. “Although in recent weeks D.F.S. operators have raised numerous arguments to the contrary, to date those arguments have been unsuccessful and/or rejected.”
Mr. Ellman did not return a phone call for comment, nor did the spokesman for the Cincinnati-based company, Andrew D. Ciafardini.
“We are not aware of what Vantiv may or may not have told other industry participants about its plans,” David Boies, a lawyer for DraftKings, 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.”
A spokeswoman for FanDuel said the company had no comment.
The daily fantasy sports sites do not handle players’ deposits and withdrawals, leaving that to payment processors like Vantiv. Without them, sites like FanDuel and DraftKings are essentially unable to operate.
It is not known what percentage of payments Vantiv handles in the industry, but it is seen as a major player. PayPal Holdings Inc. also processes payments for daily sports companies.
If another company does not step in to handle the tens of millions of dollars in transactions, or if major banks and credit card companies follow Vantiv’s lead, it could have crippling consequences for a $2 billion industry under siege by state attorneys general across the nation.
“We are aware of Vantiv’s recent decision to discontinue processing payments for Daily Fantasy Sports services,” PayPal spokeswoman Martha Cass said in a statement. “We continue to review and consider ongoing developments in relation to daily fantasy sports.”
Sarah Jane Hughes, an expert on banking and payment systems, said Vantiv was a dominant player in the online gaming industry and its abandonment of daily fantasy sports was a severe blow.
“This is a game changer because I’m not sure who will touch this industry if Vantiv won’t,” said Hughes, a professor at the Indiana University Maurer School of Law.
Legal experts have said that under the Unlawful Internet Gambling Enforcement Act of 2006, when a state says that a sports website is offering gambling services unlawfully, the onus is on payment providers like Vantiv to prohibit restricted transactions or risk steep civil or criminal penalties. The companies then have to decide if they are willing to risk losing retail businesses like Amazon and others that provide online services.
Players of daily fantasy sports assemble their own teams of professional athletes and engage in competition based on the players’ statistical performances in games. The recent spate of attorney general opinions that have acknowledged there is an element of chance in daily fantasy sports appears to have shaken Vantiv’s belief that the games were not violating the law.
“Vantiv remains firmly committed to the online gaming and fantasy gaming segments,” the Vantiv letter said. “As payments experts in the online gaming space, Vantiv will continue to work with stakeholders for a long-term solution to the ongoing D.F.S. controversy. When there is better clarity and long-term certainty around the regulatory and judicial landscape related to D.F.S., Vantiv may decide to resume processing these types of payment transactions.”
In November, Vantiv, a publicly traded company, told its daily fantasy sports clients that it must stop accepting players from New York in light of the cease-and-desist order from the state attorney general, Eric T. Schneiderman, who said daily fantasy sports contests constituted illegal gambling under state law. In December, Justice Manuel J. Mendez of State Supreme Court granted that request from Mr. Schneiderman. But hours later, an appellate judge granted FanDuel and DraftKings a stay of that decision, allowing them to continue to operate while their appeal was being considered.
In a lawsuit subsequently filed in New York State Supreme Court, Vantiv said it was caught in the middle of conflicting court rulings and asked a judge to decide whether it could continue its work for daily fantasy sports companies.
In its filing, Vantiv said it could not comply with both a temporary order from a Massachusetts judge that it process payments for DraftKings customers and a preliminary injunction from a New York judge that bars DraftKings from doing business in that state. It has resulted in a “substantial uncertainty,” Vantiv argued, over what the company should do regarding payment processing.
Last week, the Texas attorney general joined New York and Illinois, saying that daily fantasy sports are not legal under its state law. These rulings have prompted FanDuel and DraftKings to initiate costly and probably lengthy litigation.
With Texas accounting for more than 5 percent of those companies’ players, FanDuel and DraftKings are at risk of losing more than 25 percent of their customers, according to Eilers & Krejcik Gaming, a research firm focused on the gaming industry.
New York, with more than 1.2 million customers, is the largest market, and the companies will lose a combined $35 million to $40 million annually, according to Eilers. Illinois is the third-largest market, with 6.7 percent of the industry’s customer base.
As important as a customer base is for daily fantasy sports, it is perhaps rivaled by the ability to collect deposits.
“I don’t know if it was a regulator or a shareholder,” Hughes said, “but something spooked Vantiv to bail out of what was certainly a very lucrative business.”
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