By Kamran Hedjri
PXP Financial
Editor's Note: This article originally appeared in Fintech Times on Sept. 21, 2021. Copyright (c) by PXP Financial. Reprinted with permission.
In the United States, constitutional laws allow states to create, implement and enforce their own individual regulations. This is because every U.S. state is considered its own sovereignty, and the unique characteristics of each state, such as demographics, population and social standards, warrant unique law—on top of the countrywide federal laws. For a country as large as America, this makes sense. After all, from coast-to-coast and throughout the middle of America you can find different climates, environments and cultures to the point where they almost feel like different countries entirely.
But for businesses hoping to operate across the entirety of the United States, much like they would in any other country, this becomes a challenge. Gaming and sports betting is no exception, as each state has its own set of laws and regulations that merchants and payment service providers (PSPs) need to follow.
The simplest solution to navigate this climate is for the payment providers and merchants to work together, but in order to do so while ensuring there is no friction with the service of either, trust needs to be established. And to establish that trust, the payment provider needs one thing: knowledge.
As each state has its own individual regulations to follow, licensing processes for both merchants and PSPs can be expensive, time consuming and complex. When entering into new states, new licenses are required for both parties, but there is no universal price for these licenses. It is set by the state and between merchant and provider licenses, one is more expensive than the other.
To address those complexities, PSPs and merchants have been forced to take a different approach to complying with regulation, as required by each state. For example, New Jersey only allows withdrawals from closed-loop cards, which places a limitation on the end-user’s access to play. It also requires that cash be caged in a safe place at the casino, exchanged for tokens that must be used to play instead, requiring another step in the payments process.
In contrast, throughout states such as Michigan, prepaid cards are not accepted at all, so there is a limitation on which closed-loop cards can be used. Some states take regulation further still, such as Tennessee, which explicitly forbids gambling merchants to accept credit.
All of these examples highlight the challenge for gambling merchants and payment providers alike when it comes to expanding into new states. This means that when moving a payment system into a new state, some of the process will have to be changed, and the merchant will have to be prepared for the friction this could cause customers.
However, the regulations don’t exist within a vacuum. They are the result of a complex payment environment across the United States that merchants need to know how to navigate and be compliant within. The issues, instead, come from the difficulty of doing so. From the high costs of manpower and time required to understand a new market it can sometimes feel like entering a new market is not worthwhile. But it is.
Successfully addressing the challenges of state-by-state regulation can allow gaming merchants to open up new customer bases, and payment providers with local knowledge can help speed up the journey. A payment provider can take on all the complexities of understanding the payment ecosystem in the United States so that the merchant can focus on providing an engaging customer experience.
Fraud is another factor to consider when dealing with separate regulations per state. The issue of fraud obviously creates friction for any merchant, and risk systems need to be put in place to attempt to prevent any malicious activity.
However, with the different regulations of each state and some states only just opening up to allow gaming and sports betting within them, both the state and new merchants in the area are prime targets for hackers.
We have already seen this play out in two states as they have begun to legalize gaming and betting. In Pennsylvania, the state had to work closely with various payment schemes to understand the actions that needed to be taken to prevent fraud cases. Likewise in New Jersey, which saw a dark period where fraud levels rose after launching new regulations in 2013.
Both states have made progress when it comes to combating fraud, but challenges still remain (especially in newly regulated states) as new security regulations are introduced and gaming operators struggle to implement fixes in time.
So, what is the solution that PSPs can offer to merchants to successfully reduce the friction caused when entering a new state? The answer is to be adaptable and prepared. By delivering a full payments gateway that is flexible in what it offers, PSPs can easily adapt it to the needs of the merchant in each state, making expansion a more seamless process.
The payments gateway can also include security processes to fight against fraud, although depending on the severity, having a standalone system to manage this is also a possibility. While incorporating anti-fraud measures may increase payment friction, providing a more secure service would lead to a better experience for customers overall.
However, the best way that payment providers can reduce the friction of moving into a new state and help merchants comply with regulators is by showing that they are dependable and a provider that can be trusted. The ecosystem is a complex one, but by advising merchants and showing that, as a provider, you are ahead of the game and can adapt to any situation the state puts forward, the challenges associated with moving into new markets can be kept to a minimum.
Working with customers to empower them with advice and information is one of the fastest ways to build trust and ultimately provide a better experience for customers. When you give them actual and relevant information that helps the merchant, trust is indeed created and friction is lost. 
Kamran Hedjri is the CEO at PXP Financial. Hedjri has more than 20 years of experience in holding C-level roles in the fintech and payments industry. He has built companies across the payment value chain in Europe, North and South America. Visit the PXP website at https://pxpfinancial.com, or connect with him at linkedin.com/in/kamranhedjri.
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