Credit Card Roulette

Comparing gambling to alcohol or tobacco is common, but there is a much better analogy: Credit cards.

A meme was created during the height of the daily fantasy sports legalization debate after operators started comparing DFS to everything from bowling to a spelling bee.

We, as an industry, like to use analogies (and I’m a repeat offender), but the analogies often come up short or completely miss the mark.

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Online betting is often compared to tobacco by its opponents (more recently, it was deemed the next opioid pandemic). Supporters will usually soften the analogy to alcohol, a product that has severe negative impacts for some but is seen as relatively harmless and can increase the enjoyment of a gathering when it's used in moderation — much like gambling.

Both comparisons make sense, considering their vice status. But there is a much better analogy: Credit Cards.

The Credit Card Comparison

There are many similarities between gambling and credit cards, the most obvious being that irresponsible use can get you into loads of financial trouble.

That said, I will focus on the underlying mechanics of the two industries.

Credit card companies generate revenue in a few different ways:

• Merchant fees

• Cardholder fees

• Penalties

• Interest

While there isn’t great data beyond the general categories, credit card companies generate a significant portion of their revenue from the interest collected from a small number of users.

A study by the Federal Reserve Bank of Philadelphia suggested that about 60% of credit card issuer profits come from only about 15% of their cardholders who carry balances.

A 2022 report from the Consumer Financial Protection Bureau (CFPB) indicates that consumers who carried debt from month to month (estimated to be about 45% of cardholders according to Federal Reserve data from 2020) paid 94% of the total interest and fees charged by major credit card companies.

That “a lot from a little” aligns with sports betting and online gambling data.

In its annual reports that look at every bet placed at licensed New Jersey online gambling sites, Rutgers University found the following:

“Top 10% players gambled more money on more bets across more days on more sites than all other casino gamblers.”

According to the Rutgers study, the top 10% wager, on average, is 33 times more ($711,287) than the other 90% ($21,496). Those numbers are even more stark when you look at the median, $258,844 vs. $750.

The Guardian reported on the UK Gambling Commission’s findings in 2020 that betting firms heavily rely on VIP customers, with 83% of deposits coming from 2% of one firm’s customers.

Or consider this story from earlier this year:

“DraftKings and FanDuel rule the US sports betting roost, but over several months earlier this year, Fanatics leaped into the conversation in New Jersey. Fanatics even displaced DraftKings as the number two operator for a single month.

“Everyone wondered how Fanatics did it and why their surge was limited to New Jersey.

“The answer was a VIP. A single bettor was able to upend the market and skyrocket Fanatic’s market share from low single digits to 23.5% in March and 31.6% in April.”

Or, as Regulus Partners reported:

“It is not uncommon for online gambling businesses to generate 25-40% of revenue from the top 1% of ‘VIP’ actives, with a Pareto Curve even within that cohort.

“We can therefore infer that the ‘1%’ spends c. 66x more than everybody else per capita, including regular users.”

The point is that gambling operators get a large percentage of their revenue from a small number of players. I’m not passing judgment on whether that is good, bad, or somewhere in between or if these customers are problem gamblers or high-rollers; I’m just pointing out the reality of the situation.

But another reality is that, unlike credit cards, the gambling industry doesn’t introduce much friction until a customer starts spending a lot of money. Credit cards seem to have the opposite problem: They introduce a lot of early friction, followed by massive increases in extended credit.