Balancing new and existing players in the iGaming industry

The gaming industry continues to evolve, and with technological advancements it has moved from centralised game parlours, betting shops, and casinos to decentralised betting in your home or from your smartphone.

In a decentralised world, it is increasingly harder for iGaming operators to compete effectively and to turn a profit. Adding new players while retaining existing ones is a balancing act that not many operators seem to be getting right. It is a delicate balance, and can significantly impact revenues.

Types of iGaming operators

The growth-share matrix gave us a solid foundation on market performance and product portfolio management for any sort of company. In short, a company needs ‘stars’ that can assure the future, ‘cash cows’ that provide the funds to build towards that future, and ‘question marks’ that could eventually become stars, as current stars turn into cash cows and then ‘dogs’.

The same can be said within iGaming, however with iGaming there is the added factor of differentiating between new and existing players, and tailoring marketing efforts to have a healthy mix. Research has repeatedly identified the following 4 strategies that are used by companies, including iGaming operators, to handle the delicate balance between signing up new players with maintaining existing ones.

1. Running in place

These are operators that rely heavily on new acquisitions making upwards of 90% of their player base. In contrast, only about 10% are existing players.

Marketing spend in acquisitions is understandably high in these situations. Any effort to encourage existing players to spend real money aren’t necessarily effective, so as such operators seem to be ‘running in place’. While there is a frantic pace for the iGaming operation to keep up, this doesn’t result in significant uptick in their revenue.

Reasons for this could be:

  • It’s a new operator and is in its ‘question mark’ phase, requiring capital investment with an eye on the future.
  • Marketing efforts for acquisition aren’t focused on the ‘right’ type of new players such as those who will stick with the operator and continue to spend (‘active players’).
  • Too many acquisitions, indicating too much spend not balanced with organic revenue growth from existing players.

2. Rising stars

These are the iGaming equivalent of ‘rocket companies’. Healthy revenues, coupled with growth at breakneck speed. The key for these operators is that most of them earn 30% to 60% of their revenues from existing ‘active’ players, indicating the operator has succeeded in engaging existing players effectively and thus establishing a foothold in the market.

The other underlying reason is that getting loyal players to try new games and promotions is easier and cheaper. Unfortunately, not every ‘running in place’ operator is guaranteed the opportunity to become a rising star someday. It requires a combination of a unique iGaming product, an effective acquisition strategy, cost management, and staying ahead of the competition.

3. Top performers

Top performers have reached their full potential. An overwhelming number of these operators derive more than 70% of their revenue from existing players, which is the direct result of effective player engagement and low player churn.

They have also learnt to acquire the ‘right’ type of new player, meaning they have a tried-and-tested acquisition strategy that optimises marketing spend. This will keep acquisition costs minimal while continually adding new players to their brand.

Top performers have essentially reached full potential for the iGaming product in question. Implying eventual decline is inevitable, however for the medium term, they’re generating significant revenue at low cost, resulting in a great bottom line. As such, these operators are at the liberty to innovate and use their ‘cash cow’ products to experiment with other ‘question mark’ and ‘star’ products.

4. Legacy operators

These operators usually have a long history in the industry, notably online counterparts of established land-based casinos or online brands that have been around forever. They are still making a lot of money, and derive close to 90% (or more) of their revenue from existing players. They cost less to run, and continue to add to the operator’s reserves.

However, legacy operators often find it difficult to grow any further, with new acquisitions only contributing to about 10% of revenue. The product appears to be nearing the end of its life cycle, meaning existing players could be about to jump ship. If they do, this will drag the revenue numbers down.

The operator in this instance, needs to prepare for the eventuality of either revamping the iGaming product or rebrand it, and launch an aggressive acquisition campaign to revitalise their player base. Sometimes, legacy operators simply choose to retire certain categories of products and switch their focus to a particular type of game, such as slots, card games, or sports betting only.

Next best action

Any operator in the iGaming industry will in due time pass through these four stages (sometimes reiterating them) until it becomes a legacy operator. However, with a suite of products in their portfolio, an operator can work on retaining existing players and switching them to other products or upgraded versions.

The strategies used to keep a healthy balance between sustaining the influx of new players and increasing the lifetime value of existing ones need to be recalibrated for every phase of a company’s growth. This should be an ongoing process that occurs in every department of the organisation, and which leads to the implementation of different approaches that help maintain a mix of new and existing players, while providing a way for retaining and switching players as the market evolves.

The 4 biggest AML4D risks for iGaming companies

June 2017’s introduction of EU Directive 2015/849, better known as the 4th Anti-Money Laundering Directive (AML4D), brought about a sea of change in the way iGaming companies treat risk – and it’s vital that compliance professionals bring themselves up to speed.

While all of the items on the AML4D list are important, here’s a list of the 4 biggest risk factors that compliance teams have to watch out for and deal with:

1. PEPs as owners, beneficial owners, or people of significant control

One of AML4D’s risk guidelines warns that when compliance professionals are contemplating getting involved with a company, they should be on the lookout for any possible associations that the proposed client or business partner might have with politically exposed persons (PEPs). Finding out if the company itself, its owners, directors, or persons of significant control (PSCs) are PEPs is crucial.

There are a number of third-party databases that allows subscribers to access updated data on PEPs. This helps identify any possible connections to companies owned by, or which have ties to, individuals who could be compromised by their positions of, or proximity, to power.

2. Cash-rich industries

Under the AML4D guidelines, companies should avoid becoming involved with businesses that “have links to sectors that involve significant amounts of cash,” and/or their beneficial owners.

To understand why, it is important to understand that cash is hard to trace and is therefore favored by money launderers. Cash transactions are one of the simplest methods to launder dirty money or transform ill-gotten gains into money that appears above-board or “clean”. It is for this reason that criminals tend to work with or through firms that have a high turnover in hard currency and/or their beneficial owners.

3. Business interests or dealings in certain high-risk sectors

The AML4D guidelines stratify corruption risk levels according to certain economic sectors. Insofar as the assessment and avoidance of risk is concerned, under the AML4D guidelines not all industries are equal.

Of particularly high risk is business involvement with companies or beneficial owners who have links to sectors that are associated with higher corruption risk such as construction, pharmaceuticals and healthcare, arms trade and defense, extractive industries, and public procurement.” Extra caution is advised when dealing with these industries.

iGaming companies are advised to ensure that they have solid due diligence procedures in place to ensure they are well aware of the sectors in which any potential partners or customers operate.

4. Adverse media reports from credible news outlets

The AML4D guidelines suggest keeping an eye out for negative stories about potential business partners or customers in the press, in particular news items which include allegations of criminality or terrorism, whether proven or not. Likewise, if any company, or its beneficial owner, or anyone significantly associated with the company is reported to have been subject to an asset freeze due to criminal proceedings or allegations of terrorism or terrorist financing, this should set alarm bells ringing for compliance professionals.

However, while such stories can be a clear warning that a potential customer or business partner might be a compliance risk, the EU guidelines also recommend that you “determine the credibility of allegations on the basis of the quality and independence of the source data and the persistence of reporting of these allegations…”. Fake news is a very real problem today and news sources should be evaluated before given credence to. Keeping up-to-date with reputable news media reports can provide you with the timely, high-quality information that you need in order to make the most well-informed and risk-averse decisions possible.

AML compliance is vitally important

The importance of compliance professionals being up-to-speed on the new AML4D regulations cannot be understated. There is no room for error. Failure to adequately comply with AML regulations could result in regulatory penalties, bad press, and a massive loss of consumer trust. No iGaming company can expect to withstand the fallout of failing to comply with AML4D.

What the AML4 Directive means to iGaming operators

The gaming industry, in particular the remote gaming industry, is undergoing a paradigm shift in the way it complies with EU regulations, after a comprehensive update to the regulatory framework.

EU Directive 2015/849, better known as the 4th Anti-money Laundering directive (AML4) came into force in June this year, and is intended to remove ambiguities relating to the legal position of the gaming industry. It also makes a number of recommendations to member states. As of 26 June, all EU member states were required to have implemented the new directive – a far more complex set of obligations than its predecessor.

Before AML4, iGaming operators weren’t explicitly dealt with under the AML directive, however most member state’s local authorities still made certain AML procedures obligatory to their licensees. In most cases these requirements were relatively simple, if expensive, to satisfy. Under AML4, however this has changed drastically. The risk assessments required of the Fourth Directive are of an entirely new intensity and could prove to be a step too far for some iGaming operators.

So what is changing?

In order to fulfill these new obligations, iGaming operators will need greater in-house expertise in order to compile a full risk profile for each of their customers, as well as to change their application of AML according to the various risk approaches identified, instead of a one-size-fits-all approach.

Operator’s reactions to the new Directive have been mixed, and initially some are even expected to cease operating in the EU as a result. However, the situation is expected to stabilise once AML4 becomes the norm.

Creating and implementing a company-wide anti-money laundering program has become a requirement which will demand advance planning to execute successfully. Taking a proactive approach to the planning and implementation of AML strategies, policies, and other requirements is advised.

Changes to Customer Due Diligence (CDD) include the following:

  • iGaming operators, as providers of gambling services are obliged entities and therefore subject to all requirements of obliged entities
  • As an obliged entity, an annual compliance report must be filed with the regulator
  • CDD is required by casinos where customers wish to bet or collect winnings of €2,000 and over, whether carried out in a single transaction or over several transactions
  • In the event where verifying the identity of the customer has not been conducted for other reasons previously, this will indicate the checkpoint at the lifetime total of €2,000 in the account
  • An AML program including policies, training, record keeping, on-going monitoring, and risk assessments to determine the level of due diligence is likely to become a factor for review by the relevant competent authority

Emphasis on a risk-based approach

The Directive emphasizes a risk-based approach to money laundering at every level, in particular the level of due diligence required on customers and business partners/suppliers. Each operator will need to thoroughly identify and assess which transactions and which geographical areas represent the highest risk.

Some other requirements that must be included in a complete AML strategy are as follows:

  • Assigning a qualified MLRO (Money Laundering Reporting Officer)
  • Staff training which covers an awareness of the provisions of the Directive, recognition of potential money laundering activities, and how to proceed in such a case
  • Having a suspicious action/transaction reporting procedure
  • Appropriate due diligence measures on the identification of customers, partners, suppliers,
  • A special emphasis on the identification of UBOs (Ultimate Beneficial Owners)
  • Having a clearly defined Customer Acceptance Policy

Reaching beyond EU borders

These requirements will need to form part of an Anti-Money laundering strategy, irrespective of whether the license jurisdiction of the company is Malta, UK, US, or any other EU member state. Companies with majority-owned subsidiaries located in other countries, where the minimum AML requirements are less strict than those of the Member State, must implement the requirements of the Member State at those subsidiaries.

Technological flexibility

AML4 allows operators to use technology in a more flexible manner in order to fulfill their obligations. One way it does this is by allowing the use of video conferencing as part of the Know Your Client (KYC) procedure, which was previously not permitted. This could have the effect of incentivizing operators to become fully compliant.

A step towards pan-EU iGaming regulation

Notwithstanding the clearly daunting challenges of initial implementation, AML4 will almost certainly end up a part and parcel of the regular operation of any iGaming company. Although there is still no clear central standard, nor a single application of these requirements for the iGaming industry, the promulgation and implementation AML4 may lead to a more uniform approach by the national regulators.

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