Already under a growing legal and legislative assault, the daily fantasy sports industry was dealt a new blow Friday when Citigroup said it would begin blocking New Yorkers’ debit and credit card payments at the two largest sites, FanDuel and DraftKings.
The decision by Citigroup came just a week after a major payment processor for fantasy sites said it was withdrawing from the market, citing legal uncertainties. In a statement, Citigroup said it would block the payments until the New York courts ruled on the legality of daily fantasy sports.
Together, the actions, coming amid the New York attorney general’s efforts to have FanDuel and DraftKings shut down as illegal gambling sites, threaten the financial lifeblood of the industry. In essence, Citigroup provides money through its cards, while the other financial institution, Vantiv, processes the bets. Citigroup’s action was first reported by Bloomberg News.
The legal questions in New York have also led Major League Baseball to put DraftKings on notice: According to two people with knowledge of the matter, Major League Baseball has formally notified the company that it reserves the right to terminate its exclusive marketing agreement with the sport if the courts find daily fantasy to be in violation of New York law.
And agents from the IRS division of criminal investigation and the FBI are examining how fantasy games affect problem gamblers, according to a gambling addict who was interviewed.
These developments underscore the rapidly sinking fortunes of an industry that just four months ago seemed to be a sure bet.
With no government oversight, the companies recruited players by the millions, many of them young, lured by an ever-expanding buffet of online contests as well as an expensive, inescapable advertising campaign that made winning big seem easy.
Then the tide began to turn. The commercials all but vanished. States began investigating. In recent weeks, three states have joined New York and Texas in calling the games gambling.
The situation is deteriorating to the point that some experts wonder about the survival of the industry as it exists — whether it can outlast the very lack of regulation that allowed its untrammeled growth.
“We are shocked at how quickly this has cascaded with the ongoing viability of this industry now in question,” Eilers Research, an independent firm that studies online gambling, wrote in November.
The daily fantasy sites had staked their future on the premise that their games were not gambling because they involved more skill than luck, obviating the need for government regulation. This distinction was laid out in now contentious federal legislation in 2006. In this environment, some new companies began marketing games with most of the skill removed. One site offered to pick fantasy teams for its customers. Another allowed customers to bet on whether a professional basketball player would make his next shot.
“Without a doubt, I have not heard or seen any attorneys general or federal prosecutors advocate that this isn’t gambling,” said Mark Brnovich, Arizona’s attorney general and a co-chairman of the gaming committee at the National Association of Attorneys General.
The daily fantasy industry’s troubles began shortly after DraftKings and FanDuel blanketed the nation with an advertising campaign that coincided roughly with the beginning of the NFL season last year. At its peak, the companies spent a quarter of a billion dollars combined, airing almost as many ads as there were minutes in the day, according to iSpot.tv, which tracks national television advertising.
“As the fantasy sports industry became more ubiquitous, the questions were inevitable: Is this something that is legal? Is this something that should be regulated?” Daniel L. Wallach, a lawyer and a gambling consultant, said. “What the advertising spend at the beginning of the NFL season really did was create not only a lack of sympathy but a vulnerability that didn’t exist a year ago.”
DraftKings and its chief rival, FanDuel, are fighting back on different fronts. They are waging a costly legal battle in New York, where state Attorney General Eric T. Schneiderman had called their daily fantasy games illegal gambling and ordered them shut down.
Until the legal dispute is resolved, the sites remain open. FanDuel issued a statement Friday about Citigroup’s action, saying, “We are grateful that there are various payment options and companies that allow their customers to make their own decision about what fantasy sports they can play.” DraftKings had no comment.
The industry received a lift Thursday when Rhode Island’s attorney general, Peter F. Kilmartin, ruled that daily fantasy sports was not a game of chance. But he added that at a minimum, “a high level of regulation should be established to ensure criminal elements do not infiltrate the game, youth participation is barred, addiction issues addressed.”
Where FanDuel once said regulation was not needed, it now says that the industry should “be regulated with smart but tough consumer protections so our fans can feel confident they are protected.” The company also said that when customers indicate that they have a problem, “we remove them immediately from our site and prohibit them from playing.” This year, it said in a statement, at least 21 states are expected to introduce fantasy sports regulation.
DraftKings said it had made changes “that allow players greater control in order to enhance user experience and promote responsible engagement.” The company cited features that allow players to set limits on deposits and frequency of play.
David Boies, counsel to DraftKings, said his client was working with legislatures and attorneys general across the country to ensure that “thoughtful consumer protections” were in place.
“DraftKings is one of the leaders in the industry in adopting consumer protection,” Boies said.
The industry has by no means won over many critics, even with its avowed openness to regulation. Keith Whyte, executive director of the National Council on Problem Gambling, said the industry could have avoided many of its problems by acting more responsibly.
“I can’t speak for the fantasy sports industry. I can only say that when we’ve engaged with them, they have recognized that there are customers of theirs with problems,” Whyte said. “We have offered our help, and to date they have not embraced it fully.”
Federal agents are examining the impact of fantasy games on problem gamblers. Agents from the IRS and FBI in Florida interviewed Josh Adams, a gambling addict in Alabama, after The New York Times in November profiled his problems with fantasy sports. According to Adams, the agents questioned him about the nature of his addiction and how fantasy sports ads had affected him.
“They were trying to get evidence from a person who experienced some harm by playing daily fantasy sports,” Adams said.
Schneiderman, the New York attorney general, cited Adams as part of the effort to shut down the sites.
“You can’t have unregulated gambling without running into problems,” he said.
Paul, a gambling addict who asked that his last name not be used, said he almost cried when he read Adams’ account because it was so similar to his. He said he had finally managed to stop gambling on poker and blackjack when a friend introduced him to fantasy sports.
“One of my friends was playing online fantasy,” said Paul, “and he sent me a link, and the deal was he gets a free entry and I get a free entry.”
That reignited his interest in betting, he said, and soon he found himself borrowing thousands of dollars on credit cards.
“If you look at my transaction history, there’s one day where I deposited $5,300 — lost — then deposited again a few hours later.” He said he later deposited $10,000. “If that’s not an indication of problem gambling, I don’t know what is.”
Asked why he played that first fantasy game when he knew he was a gambling addict, Paul said, “I didn’t think it was gambling.”
Like Josh, he said he no longer played fantasy games.
“The Achilles’ heel for the industry is clearly problem gambling,” Wallach, the gambling consultant, said. “You are talking about people who may have become problem gamblers and lose their life’s savings — that’s the dark side of gambling.”
DraftKings and FanDuel insist that fantasy sports contests are not addictive and that adequate controls are in place. Matt King, FanDuel’s chief financial officer, said in an interview several months ago that he was not aware of any young people who had developed gambling problems playing fantasy sports. Even so, he said, “we are clearly very focused on making sure that everybody in the industry operates with the highest degree of integrity.”
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