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Author : Ben Wickens (ScottishBen on THF)
Article Written : 22nd October 2006
I was going to call this article "Online poker accounts as banks and the creation of credit - help please from those with a background in economics". But i thought what is starting to strike me more and more as one of THE most important things we need to know and campaign about in connection with poker sites just wouldnt get anyone reading it if i called it that. So please read this, think about this and if anyone has a background in economics they can maybe confirm or deny that I have got economics i studied 13 years a go a little muddled.
Scandals in the Poker World
I will start with two recent scandals of the poker world and explain how they wouldnt have happened if ALL firms did what I propose and then go into the theory of it and then hopefully you guys will give feedback and whether you think that this is something we should try to push with the poker sites...
OK few people have heard of Jet Set Poker but it is a small site that had quite a loyal following. Anyway recently they did not just pull out of the US they shut up shop. They did this with no warning and whilst I cannot confirm this absolutely I do not think that people who had money in the site got their money back. I know I had money in the site (i deleted it from my old pc when i moved down south and there is no way for me to re-install it to get at the cash even if this could be done) It is possible that some people will get paid but I do not think I will. This is really shitty - as for my own cash its peanuts - i dont care about it that much but the principle sucks as far as I see.
Second few of you will have heard of Check and Raise Poker but it is part of the same network that Poker Room is on. They had a promotion for a WSOP event. Just before the event they did not honour the tickets saying something like "we thought there would be a greater uptake in members as a result of the promotion than there was ..." The tickets were won a decent while before the event. Whilst they did promise to refund the cash value of the ticket eventually to people they did not refund expenses that had been incurred in booking hotels/flights for the event.
Whilst some of the issues with jetset need to be confirmed the basic point I am making is that cash in poker accounts should be treated like cash in banks and have some degree of seperation from the poker site in question. Now some sites do this poker stars for example (uses Royal Bank of Scotland I believe) but many do not. If they did do this then a) if a site couldnt honor a promotion it would be something that would be apparent instantly (no delay involved) b) if a site stopped trading or became bankrupt then players would be guarenteed their money back rather than being at the bottom of the tree.
Poker Economics
I just want to deal with some of the economics behind why its such a big issue. In economics there is such a concept as the "creation of credit" in the context of a bank say someone puts 10000$ into a bank. Lets say the bank has plenty of other assets. On average the bank knows that in a given year the person will only draw 10% from this amount. The bank can then lend 90,000 to some other people. But it does not end there because when these people borrow the money they put some of it in their bank
And of what they put in their bank they will only draw on x% and so on in ever smaller amounts.
The bottom line is that a cash injection of 10,000 could add 20,000 or more into circulation in some sense. This is known as the creation of credit. I am not describing it well because its something i learned in school which was a very long time ago.
In the context of a poker site say that the site gets 2000 people putting 100 in. They know on average that say of this $200,000 only about 50,000 will be withdrawn and that many of those that bust will redeposit (say 85%) This is guess work but the exact figures are not too important. The company decides that it will use this 150,000 as in effect an interest free loan to fund a WSOP qualifier event costing them 50,000. They invest the rest in high risk short term investments.
Normally all this would go fine - the site would make enough profit to fund the 50,000 and the investment makes them extra profits and everyone is happy.
The problems are obvious
The problems though are obvious. You can probably remember of all those banks going out of business or shutting their doors in the 30s etc. (from history unless you are vvvvv old (no offense homeville jk)
Say if ohh the site goes bust, runs into cashflow problems, there is a scare on neteller so everyone tries to withdraw at once, or if a new law passes that stops them dealing with US people etc.
My point is that the poker market is too turbulant to allow this sort of thing to happen. Many small (and some large) sites do not have any "independance" of players poker funds and the funds are fair game for sites to "re-invest" as they see fit.
I have no problem with a site taking esimates of likely withdrawls, adding in a margin of error and investing the money (in large sites the amount is huge) in lucrative short term investments. So long as they keep them short term then the worst a player would get is "due to unexpected demand on withdrawals it has not been possible to honour your full withdrawl immediatly as we would normally do. We can promise that you will get the full amount in the course of the next two weeks and appoligies for any inconvenience caused" Not ideal but we have all practically waited this long for some banks to cash cheques so it is quite livable with. However if they invested in things of high risk their could clearly be problems....
When you look at what the site IS there is no reason why the bank account side has to be with the site. The site gets its fees when you play a tourney or a share of the rake etc the money does not need to be in their possession when it is not in play at a table. Whilst the likes of stars does maintain their independance from the "poker cash account" I am sure that the RBoS is paying them for the millions of cash its holding on their behalf or at least offsetting banking charges and a little bit more besides AND crucially the risk is not with the player (unless the bank busts) that the player will not get the money.
If a game had 100$ added then the site would need to add the 100$ to the winners accounts or put it in to be distributed to the eventual winners. If it did not do this it would be in effect using money that "shouldnt" be theirs to use.
Whilst some sites have this seperation they do not make too much of it and many do not. I think there is a strong case, particularly with small sites of starting to raise a fuss about this and of voting with our feet. otherwise we could end up looking stupid when a site runs into what could be at best cashflow problems and at worse bankruptcy.
You can comment on this article in this thread. Let us know in the thread if you know of any other good articles/sites which discuss the act.
Selected Article Thread Comments from this thread
From WickedRoller, October 23rd 2006
I also had money at JetSet -- I would be very surprised if I receive a check.
Scottishben - there is one thing you left out, the third partys' like Neteller, Moneybookers etc. The poker sites must keep their Neteller accounts funded. For the most part the funding is enough to cover day to day withdrawals - but occasionally the withdrawal requests will exceed the funded amounts. Those are the times a withdrawal may take several days to be completed.
I have been told that when the US law was signed Neteller increased the amount of funding they required. If a poker site could not meet that funding obligation.... bye bye Neteller. This was probably in direct response to the poker rooms future inablility to collect checks from US players.... leading to a severe cash flow problem.
If I remember JetSets statement (the one that disappeared in the middle of the night) it said something about inablilty to meet future obligations ---- sounded like Neteller had discontinuted JetSets account - and without Neteller JetSet could no longer run their day to day operations
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