Risky business: 3 kinds of risk online casinos face (and how to manage them)
Risk management is counterintuitive — planning for something you hope won’t happen. But it’s a necessity for every business, online casinos and sportsbooks included. What risks do online casinos and sportsbooks face, and how can they manage them?
Do a quick search for risk management strategies and you’ll find countless articles offering variations on the same theme. But they’re nearly all generic, applicable to every business in every industry; what specific risks do online casinos and sportsbooks need to prepare for?
Read through to the end for an in-depth, detailed look at the risks that online casinos and sportsbooks face, and the strategies they use to manage them.
A tale of three casinos
Take the example of David. David rushed to open an online casino as soon as it was legalized in his home country in Latin America. Business boomed at first — the early stages of a new market are heady days — but then the problems started piling up. He’d pinched his pennies on site development, leading to slow loading times and interruptions in the middle of game rounds, and his customer support team wasn’t trained well enough, leading to player frustration and — inevitably — churn. In a few months (like many first-time online casino brands) David went from boom to bust.
Andre is far different from David. He partnered with a reputable software developer for his platform and loaded it up with games tailored to his target audience’s taste.
But he did make one mistake. While his players were bet-happy, the incoming president wasn’t. Andre had ignored a groundswell of cultural conservatism that ended up with a far right-wing president — an event that was always on the radar but he’d chosen to ignore.
Between having his brand blacklisted and the president banning the country’s banks and payment processors from supporting transactions with offshore casinos, Andre was left with just a fraction of his former base.
Our last example is Alvin. Alvin built a smooth-running operation in a politically stable market. Monthly meetings with risk management personnel kept him informed of anything on the horizon he might need to worry about.
But not everything can be predicted. A housing market crash sent ripples and then waves through the economy, leading to mass layoffs, hyperinflation, and an overall recession. Alvin’s players didn’t have the disposable income they’d used to. His company was heavily leveraged — not a bad thing in itself — but when sales came up far short of their targets three quarters in a row, he knew it was time to throw in the towel and file for bankruptcy.
You’re probably asking what any of them could have done. Just read through to the end of the article and you’ll have plenty of options if you come up against the same problems they had.
What risks do online casinos face?
In general, risk management strategies follow a similar pattern. They go something like this:
- Identify the risks you face.
- Analyze how, when, and where they could happen.
- Rank them in order of potential threat.
- Assign responsibility for a team member to keep an eye on each potential risk.
- Monitor your business closely to ensure
- Respond quickly and decisively to adverse events.
It’s fairly intuitive. But the way that this will pan out will depend on what kind of risk it is you’re looking at. The category of the risk weighs heavily on how much — if anything — you can do about it.
There are three main types of risks that businesses face:
Operational risks are the most preventable. These are the risks of having hiccoughs in your daily business processes, so the better run your business is, the lower your risks are. Operational risks are dealt with by optimizing processes, establishing clear responsibilities, and providing ongoing training and monitoring.
Every time you make a decision about the future of your business, you incur some strategic risk.
You have to be prepared for the fact that you might have chosen something that doesn’t work out. Strategic risks are events like a market failing to develop at the rate you anticipated when you first entered it. Companies handle strategic risks by accepting a certain level of risk and creating contingency plans in case those events come to pass.
External risks are not only beyond their control, they’re often beyond your ability to predict. In iGaming, the most common external risks are the often mercurial moods of regulators, though the industry isn’t immune to other disruptive events.
As mentioned above, there’s always a risk that one of your business processes might not go according to plan — or even a few of them; different kinds of day-to-day risks can swirl together into a perfect storm.
The main operational risks that online casinos face are technical and compliance issues.
Software glitches — whether they originate from your platform, your game providers, your payment service providers, or elsewhere — are the stuff of nightmares. Loading errors during gameplay, for example, or dropped connections during deposits or withdrawals can instantly torpedo your casino’s reputation.
These can go from the mundane to the massive. A dropped session mid-spin is irritating for the player and the support team the player contacts. A technical error that allows six or seven players to hit a massive jackpot in a timeframe when only one should have been awarded is a financial catastrophe. In the latter case, the casino will have to put the payouts on hold while they carry out an internal audit to find out what exactly happened, as well as who’s liable for the payout (the casino or the game provider).
Many operational risks come down to the necessity for maintaining clear lines of communication between casinos, software providers/aggregators, and game providers.
For example, just like video games, new slots are most popular when they’re first released. Some providers do a soft launch, first releasing a game through only a few choice casinos. While this is a great marketing opportunity — play it before your friends do — it’s also when you’re most likely to discover something’s gone wrong with either the game or the integration protocol.
If you get players primed for a soft launch but technical glitches (on either your side or the provider’s) leave them unsatisfied, you’ll have to manage the fallout.
Compliance offers a constant risk. Operators don’t just have to satisfy initial requirements. It’s also not enough to follow guidelines; you have to stay on top of them.
Say, for example, you run a sportsbook called Frankie’s, which has staked its reputation on offering the fairest odds around. Most of your marketing material comes with the tagline “Bet on Frankie’s,” pun intended. But then your regulator announces that promotional material can no longer appeal to compel, command, or recommend that players bet (they have to make the decision for themselves). On top of that, the edict comes into force at midnight tomorrow.
Barring a grace period, if you want to stay within the terms of your license and avoid a fine, you’ll have to get the marketing team to burn the midnight oil rewriting every piece of ad copy you’ve got.
Licensing terms vary by jurisdiction, but usually there will be a list of countries where you’re not allowed to accept players. The same will go for software developers, game providers, and payment system providers. You’ll likely wind up with the world’s most complicated Venn diagram showing where you can and can’t accept players, meaning you’ll have to carefully manage your traffic and avoid any prohibited sign-ups (because regulators can, do, and will check).
In a similar vein, there are some markets where the only games allowed are those specified by the regulator, and even markets where regulators dictate exactly how much space on the screen a single icon on a slot can occupy.
Security, of course, is a constant concern. KYC checks are essential, both for anti-money laundering compliance concerns and combating the player fraud and bonus abuse that’s unfortunately prevalent throughout the industry. And every casino’s worst nightmare is a hacking breach, with the chance that cyber criminals could access your players’ personal data and funds.
How to manage operational risks
The best policy for managing operational risks is active prevention.
Employees need to be highly trained on all business processes, and subsequently monitored and checked (think of it this way: hackers only need to be lucky once, but you need to be lucky every day).
Set guidelines for employee behavior, when it comes to both ethics and operations, and make sure there’s a clear chain of communication where they feel comfortable and safe reporting mistakes and near misses. Assign team leaders to monitor their employees and conduct at least quarterly reviews of risk management performance.
For example, when you need to conduct an audit, constantly reassure the winning player that their money is on its way. Otherwise, you’re looking at one of the worst possible scenarios an online casino can face: a smeared reputation.
Keeping promises is the basis of almost all ideas of morality, and players need to trust that if they win big, you don’t disappear into the night. This tension can easily lead them to visit player forums the second they think they’re being denied their rightful winnings and shout from the mountaintops that you’re not running a casino — you’re running a scam.
Every time a business makes a decision, they incur a certain amount of risk; it simply comes with the territory. While you can minimize their odds of transpiring, oftentimes all you can do is mitigate the fallout.
Strategic risks arise when forming new partnerships, developing and releasing new products, investing in other companies, expanding into new markets, among other steps.
One common strategic risk that iGaming companies face is the decision to acquire a license or not (at Slotegrator, we definitely recommend that you do). License acquisition adds a significant cost to your starting budget, though the specific amount does depend on which jurisdiction you opt for; a license from Malta, for example, costs much more than one from Curaçao.
The cost of licensing is often a turnoff for new operators. But risk management is all about looking at the potential costs of something you hope won’t happen. Unlicensed operators can be blacklisted, have their facilities shut down, and be fined or jailed — all outcomes that will wind up costing far more than the initial license would have.
There are also the risks that come along with expansion. Careful research is always the first step when it comes to breaking into a new market, but there’s always a chance you could make a decision based on flawed data or make a gamble that doesn’t pan out — for example, if the selected target market doesn’t grow at the expected rate.
There are also constant financial risks. Financial challenges like taking on too much debt during an expansion and then struggling to pay it off when the expected returns fail to materialize can be extremely threatening. It’s also common practice to put spare cash to work instead of letting it sit around. This means investing in securities and shares in investment funds, which can always take a turn for the worse, especially in cases of global economic recession.
Partnerships can also be a source of strategic risk. In this case, it’s in your own best interest to partner with reputable, licensed, and longstanding software developers, game providers, and payment service providers.
How to manage strategic risks
The first step to handling strategic risks is to accept that they might happen. Then you need a specific plan for what exact steps you’ll take to prevent an error from becoming a disaster. If you launch a second brand focusing on the crypto casino space, but it doesn’t take off the way you expected, how much cash do you have to keep the new company going while you wait for marketing to bring in more players?
Force majeure, a black swan, an act of God — call it whatever you want, but sometimes you wake up to a different world than the one you went to sleep in.
Take Alvin’s example from earlier, when authorities in his target market suddenly began to levy an exorbitant tax. It’s based in a real saga, one that began in Kenya in 2019, when regulators announced a new tax regime based on turnover that a number of sportsbooks found simply unsustainable.
After some back-and-forth, a number of international brands simply pulled out of the market.
These low probability, high impact events can’t be predicted or even specifically prepared for. The best strategy is to reduce your overall vulnerability and keep your business as liquid as you can.
The COVID pandemic has probably already sprung to mind. No one in 2019 would have suggested their business design a contingency plan for the possibility a worldwide pandemic would cut off every revenue stream they had — but that’s exactly what happened, and countless businesses went under.
Sporting events around the world were canceled or postponed, breaking the back of sportsbooks everywhere — except for those that leapt into adaptation mode. They scoured the world for whatever sports were still running (including Belarusian football, sumo wrestling, reality TV, and marble racing) and added esports and virtual sports betting.
Worldwide casino closures decimated land-based profits, but organizations that branched out into live dealer games were more than able to ride out the crisis.
How to manage external risks
For these types of risks, there’s little point in trying to develop prevention strategies; they’re inherently beyond your control.
To mitigate the effects of external risks, one step you can take is to tend to your company’s financial health. Highly leveraged companies — those who finance a large part of their operations by taking on debt — can function perfectly well in a normal climate. But in the event of a major disruption, like Covid or the 2008 financial crisis, missing their sales targets for a single quarter can send them into a tailspin.
To find out more about how Slotegrator can help you start or expand your online casino business, get in touch for a free business consultation.
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