Steve Talks to Betfair Australia CEO Tim Moore-Barton

Therefore it would seem logical that the licensing, in Asia, of a regulated and tax-racing industry levy paying entity such as exchange Betfair could assist in stemming the lost revenue.

It is understood that Betfair has recently approached the Hong Kong Jockey Club about offering Hong Kong racing on the Betfair site with Betfair committing to payment of a voluntary race field fee.

Thus I sought an overview from Tim Moore-Barton, chief executive officer of Betfair Australia.

Moran: Could the licensing of Betfair, especially in Asian jurisdictions, be reasonably expected to siphon some wagering from illegal platforms?

Moore-Barton: “Yes, in the case of Hong Kong, the benefits to the HKJC in capturing turnover that currently goes through Citibet to instead go through Betfair include removing the existing integrity blind spot and providing a race field fee back to the HKJC. Even if run as a trial, this has to be the type of initiative the Anti-Illegal Betting Task Force should be exploring, as the South Korean professor said (at the Asian Racing Conference) ‘you need carrots as well as sticks’ and none of the sticks are stopping Australian punters from betting with Citibet.

“In essence, Betfair’s combination of a complex betting interface where winning customers are welcome; it’s attractive and known odds and the ability to trade at competitive pricing, attracts a niche of sophisticated, price sensitive customers to Betfair who cannot be serviced elsewhere other than by illegal off-shore wagering operators.

“Given this uniqueness, licencing Betfair would only capture activity back from illegal offshore exchanges (for example Citibet), not from existing licenced fixed odds operators or totalisators. In fact, however, a vibrant betting exchange has consistently been shown to grow turnover in fixed odds and tote pools so there would be a positive impact to legally licensed tote/fixed odds operators in the region.

“In countries which currently prohibit Betfair from operating, or where racing jurisdictions choose to not allow Betfair to offer their product into countries where Betfair is already licenced – customers only choice is to bet with illegal offshore operators. This creates a loss of product fees back to the relevant racing body, creates an integrity blind spot, provides no customer protections and opens up major AML/CTF (anti-money laundering and counter-terrorism financing rules) concerns.”

Moran: What evidence is there, especially in Australia, that Betfair stimulates turnover all over the wagering board including via TAB?

Moore-Barton: “Because Betfair is the only licensed betting exchange in Australia and provides a unique service to a unique set of sophisticated customers, the prices on the exchange are generally referred to as the truest price of an outcome likely to occur. In racing circles the exchange is often referred to as ‘the market’.

“Given this uniqueness, bookmakers taking risk (both on-course and fixed odds operators) all use Betfair prices as an input into the prices they are willing to offer customers. For example, going into the betting ring and looking at on-course bookmakers’ stands will show they all use Betfair. Similarly, customers use Betfair (either directly or through price comparison sites such as dynamic odds or punters.com) to shop around for price.

“This reliance on Betfair to inform price for both the buy (customer) and sell (the wagering operator), has shown that when Betfair is down (i.e. due to maintenance for example), then industry wide turnover is down. Consistent examples of when Betfair has had a planned or unplanned outage show that this effect is a 17 per cent drop in total turnover excluding Betfair. A vibrant betting exchange ensures a vibrant wagering ecosystem which benefits not only customers and other wagering operators, but most importantly benefits the racing and sports bodies that receive product fees and governments who receive taxes.”

Moran: In the wake of recent Asian Racing Conference discussions, what do you believe racing administrators have to do to protect and/or grow current wagering revenues and what can be done in possibly harnessing illegal turnover?

Moore-Barton: “In a digital world consumers will always gravitate to the most attractive product. Financial transaction blocking, and IP blocking has been shown time and time again to be ineffective. This is a major factor in the federal prohibition in the US being repealed – it is a well known fact that billions of dollars is bet with offshore operators despite a federal ban.

“Like many other industries (for example music) there needs to exist a licenced offering at a suitable price point (e.g. Spotify or iTunes) to compete with the illegal offshore product which can undercut legal products given they pay no taxes or return to industry (e.g. various illegal Bit Torrent sites).

“Racing administrators must recognise a highly taxed environment stifles innovation and provides illegal operators an advantage in offering superior products and experiences. Understanding the different segments of racing punter and the attractiveness of different wagering models is essential to growing turnover and capturing it through licensed channels.”

Moran: Does Betfair have any of its own data about the size of illegal (or that should read untaxed) betting operations?

Moore-Barton: “Citibet, an illegal betting exchange, continues to operate allowing Australian customers to bet on global racing, including Australian racing. Due to the lack of transparency and regulation, it is difficult to gauge the full extent of Citibet activity, however research suggests Australian racing volume on Citibet ranges from 10 to 20 times that on Betfair, which implies a volume of at least $11 billion – $23 billion in FY17 on Australian racing.

“At the lowest estimate of 15 per cent activity coming from Australian residents, that equates to $2.6 billion of leaked volume from Australian customers. In terms of revenue leakage, assuming these customers bet via Betfair, this equates to approximately lost product fees to Australian racing bodies of $31 million and $7m in lost GST to the Federal government”.

Moran: What are the implications of the recently introduced POCT (point of consumption tax)?

Moore-Barton: “Australia has one of the most heavily regulated taxation and compliance landscapes for wagering operators in the world. Betfair pays on average 51 per cent of its net wagering revenue in fees and taxes (product fees, GST and wagering taxes) before any operating costs, including payroll taxes. This tax burden increased to 66 per cent for South Australian residents due to the additional 15 per cent Point of Consumption tax introduced last July. That’s 66 cents in every dollar that we have to pay but Citibet don’t.

“Betfair has been forced to increase its commission to customers in jurisdictions that have high rates of tax or product fees. A recent example of this is Racing NSW who increased their product fees in July 2017. Without a pricing increase product fees alone from Racing NSW would have represented 64 per cent of Betfair’s net wagering revenue (before GST and wagering taxes), and therefore Betfair was forced to increase the commission charged to customers.

“As a result of this price increase, and to illustrate the impact an increased fee or tax can have on a low margin operator such as Betfair and its customers, Racing NSW’s growth year on year has now slowed. In fact, its main competitor, Racing Victoria which is far more competitively priced is growing at a significantly higher rate than Racing NSW.

“This clearly shows Betfair’s customers are price sensitive and react to a price increase. Unfortunately, some of Betfair’s most profitable winning customers have stopped betting on Racing NSW racing, moving their activity off-shore which has resulted in lost revenues for Betfair and Racing NSW. The POC represents yet another incremental layer of tax that puts licenced inshore operators at a distinct disadvantage to illegal offshore operators.

Moran: What are the implications of the recent US supreme court ruling, overturning the federal ban on sports gambling?

Moore-Barton: “The US court ruling validates the well-known fact that the federal prohibition (through the UIGEA) has not stopped US residents from wagering online, and that sport and racing would be better to embrace online wagering, regulate it, and capture turnover through licensed channels.

“This then provides a revenue stream to racing through product fees, closes an integrity blind spot, enhances customer protections and puts in place better protections against AML/CTF. Given the size of the market all wagering operators will be scrambling to best position themselves to gain scale quickly. The complexities of the US market with multiple stakeholders, and interaction between them, will no doubt provide an interesting and unique back drop as to how this plays out.”