Lotteries, raffles, and competition websites where players can gain a massive ROI with a miniscule ante have an obvious appeal. Who doesn’t like getting free money? Following consumer demand are business owners and entrepreneurs like you who see the earnings potential on the business-side of lotteries.
Getting your site set up with a lottery payment gateway that works where it’s supposed to (more on that down below) is the most difficult part of creating a functional business in this industry. We’ll make it as easy as possible by outlining some points for you to consider before submitting lottery merchant account applications and guiding you towards successful approval.
Lotteries are NOT the Same as Gambling
Lotteries and sweepstakes are not the same thing as gambling or casino games. We like to group all of these together under the same umbrella, but they are treated differently by banks and laws.
What is a sweepstakes?
What sets sweepstakes apart from casino games or gambling is that it can be entered for free. If you want to offer sweepstakes to site visitors, you must provide the option of entering for free. Usually, the stipulation is that free entries must be physically mailed in, which usually deters people from doing it. This is the greatest differentiator between the two and can ultimately be the deciding factor in whether a payment processor shuts you down or not.
For sweepstakes, participants will place their stake (essentially, a bet—unless they enter for free) and the winner will “sweep the stakes”, taking the entire amount of money staked. There are variations of sweepstakes where entries can be completely free, and no formal payment needs to be made to create the winning amount. Things like shopping sprees or winning a free phone can be the prize for a sweepstakes.
You’re more likely interested in the lottery portion, not the sweepstakes criteria. Sweepstakes are used more as an incentive to make purchases, not really as an entire business model.
What is a lottery pool business and how do lotteries differ from gambling?
Lotteries are games in which tickets are sold in the hopes of gaining a prize, usually monetary. This differs from gambling in that the risk is a bit lower—but still there and still high. Gambling runs on high-risk stakes, betting any amount with the odds stacked against the player with the purpose of gaining exponentially more back. But that risk for gambling goes both ways: if the player does win, then the house has to pay up, respecting the game’s rules. For lotteries, the rules are much stricter. Usually tickets are a set price, players can buy multiple tickets if they want, and the amount they win depends on how many tickets other players buy. Once a player wins, they do get paid minus fees and taxes, so there’s always something left over for the business.
Lotteries and sweepstakes are still high-risk businesses and will require a high-risk merchant account to function properly.
How do lotteries differ between states?
Not every state in the US offers a lottery, and some states even offer joint lotteries where players can buy tickets in another state and win. However, this is limited to retail stores. Online lotteries are an entirely different story, and only 8 states offer online lottery ticket sales: Michigan, Pennsylvania, Georgia, Illinois, Kentucky, New Hampshire, North Carolina, and Virginia.
Some states don’t offer their own for religious reasons, others do it because they don’t want competition for successful casinos operating there. So how does this affect you? Each state has their own rules for lottery businesses. You’ll need to make sure you understand each state’s lottery laws and gambling laws to some extent. This helps you keep your business clean and operating only where it should.
For example, Alabama prohibits the formation of a state lottery, gambling, and casino games except for on some Native American territory. In this case, it’s best not to operate a lottery site in this state due to how strict its rules are. You can use the link above to search for more state lottery laws and gambling laws. Familiarize yourself with the gist of them to get a clearer idea of where you should focus your business operations.
More and more states are opening up their rules for online lottery sales along with e-commerce gaming and gambling operators. It’s also important to know that international lottery sites can potentially sell in all 50 states. Opening up shop in Malta is a great way to get your foot in the door and operate internationally, including running your site in the states and gaining a multi-currency payment gateway.
The Challenges You Can Expect to Face When Getting a Lottery Merchant Account
Not all merchant service providers will offer accounts for lottery businesses. Merchant accounts for lottery sales are wrapped up into igaming accounts because lotteries and sweepstakes are offered in addition to casino games, usually. That’s one challenge you might face if you are attempting to only offer lottery tickets to customers. The solution might be to keep your business model clear and strictly outline your operations for the acquiring bank, otherwise they might assume your business is a higher risk.
Get your company licensed
The first step no matter what is to get your company licensed. Merchant accounts are broken down into two categories: coded and non-coded. Only licensed gaming businesses can have coded merchant accounts, and that Merchant Category Code (MCC) is 7995. Feel free to do a little research of your own about that code to improve your account expectations and negotiations with your online payment gateway provider.
Secure as many payment methods as possible
The more ways for players to pay, the better your business will be. The most common type of payment is through credit cards (though regulations, at least in Europe, are changing that towards debit and bank transfers). Merchant account providers are also more willing to provide credit card processing that debit card processing.
If you are assigned an MCC of 7995, then you won’t be able to process debit cards for the most part. Many banks deny transactions with that code because of the risk associated with it. That doesn’t mean that all banks deny it, but many do. Depending on your business, you could argue your way into falling under MCC 7800, which is for government-run online lotteries.
Having said that, you should still offer Visa and Mastercard debit card payments as a method for your site. In fact, debit cards are more secure because it relies on actual funds. This pay be a point to assert when negotiating with acquiring banks.
Ensure your lottery merchant account is OCT-enabled
OCT stands for Original Credit Transaction and allows merchants to send funds directly to a player’s preferred credit or debit card payment option. It allows for PCI-compliant direct money transfers without the need for a user’s sensitive bank account info.
Payments can be made via ACH or mailing a check, as well. ACH is more secure than sending a check, making wire transfers, or credit/debit payments. They can also be much faster. The difference comes down to what your account offers as a payout option and what the customer prefers if given the option. Note that ACH is only available in the US.
You need a debit and credit merchant account
Most providers only allow credit in the amount a customer spends, meaning you need to pay out via the debit account. Lotteries are high-risk to banks because of the potential for loss. They way in which these banks and processors combat that risk is forcing you to pay out with money that you actually have. You do have some credit, though. For example, if a customer spends $10 and wins $1000, the bank isn’t going to want to loan you the remaining $990 so you can pay the customer. They want you to take care of that on your own. That’s what the debit account is for.
What to Look for in a High-Risk Merchant Account Provider
In addition to the above, you should use a payment processing solutions provider that offers protection against chargebacks and fraud. Security is one of the most important aspects of operating a high-risk business, both for you as the online business owner and for the bank processing your transactions. Ensure you have protection against betting fraud, friendly fraud, and chargebacks as well as secure payouts and incoming payment processing. High volume caps are another point to negotiate. With a lot of incoming traffic, you want to make sure your account can handle it all without faltering.
To get help setting up your lottery merchant account, get in touch with our agents who specialize in your industry. We’ll get you set up securely and fully operational quickly with customizable APIs for your lottery pool merchant account.