How Online Casinos Work

There may be several readers out there who believe that the process of operating an online casino is a simple one; think of a (usually kind of stupid, let’s be fair) name, throw together some game software and watch the money roll in.  It is obviously true that online casinos do not have the sorts of costs associated with their operation as do land-based casinos, buy by no means is the process of owning or operating an online casino cheap or instantly profitable.  

The fact of the matter is that online casinos must go through a plethora of hurdles and endure a plethora of upfront costs just to get themselves operating.  In addition to that, it is still an investment that carries with it the potential to lose money as there will be no guarantee of players.  Despite all of the tremendous promotions (though not as many as before) that a player may take advantage of, several players tend to be fairly loyal to anywhere from one to a handful of online casinos.  

Of course, that can happen for several reasons, and not all of them actually have to do with the specific casino in question.  For example, a player may win at a particular casino on one of his or her first visits to that casino, or perhaps profit on a no-deposit bonus, and as a result, the player is rightfully left with the impression that he or she can win at that particular casino.  In fact, a player can win at any online casino provided the casino is legitimate and pays its winners, but people tend to equate past experiences with future expectations and, as a result, will often continue to frequent an online casino at which they have won in the past.

That’s a bit of a hurdle for any new online casinos looking to break into the market, which is why such casinos will often have to offer player-lucrative and aggressive promotions in order to attract new players.  Of course, all of these promotions come with a potential cost, especially when players discover methods by which those can be beaten.  

Let us not get ahead of ourselves, though.  In this piece, we are going to investigate all of the implements that go into the creation and startup of an online casino and take an in-depth look at all of the steps that go into same.

Licensing:

Strictly speaking, online casinos are not licensed before anything else because such licensure usually involves using approved and certified software, of course, the casino must first have such software in place.  In other words, at least theoretically, there must be a casino that could theoretically be immediately prepared to operate as a going interest before it can be licensed.  A licensing country or jurisdiction is generally not going to license a casino that exists only as a concept.  

Licensing in the United States:

The first thing that we should get out of the way is the fact that most U.S. players do not play at an online casino that is actually licensed in the United States.  The reason for that is very few U.S. States have actually legalized and regulated online gambling in any form. Online poker is legal in Nevada, whereas Delaware and New Jersey have the full gamut of gaming available online.

These states have a few different criteria in place with respect to who may have a license.  Perhaps the most restrictive criteria is the fact that the company must somehow be tied to a land-based casino in order to be approved by the state.  In other words, many of the online casino providers with which you may be familiar do not actually operate in a state-regulated environment within the United States and, in fact, could not do so even if they wanted to.  

Furthermore, these entities are also required to report their revenues to the states in question and pay taxes on those gambling revenues according to whatever is mandated by the state in question.  That is not a trait that is shared by the online casinos that operate with licensing outside of the United States because they are not regulated by any of the states in any fashion whatsoever.  

As we have discussed elsewhere on our family of sites, that does not necessarily mean that they are operating outside of the law in a particular state, though in many cases, the operators themselves generally are. However, none of their physical operations (or employees) actually work within the United States in any way whatsoever, so the states are very limited in terms of actual enforcement.  To wit, there’s really nothing they can do about them.

In that sense, actual licensed and regulated online casinos in those states in which they are patently legal are beneficial to players because a player who is not paid his or her winnings does have a Division of Gaming (or some equivalent) to whom they could report the casino in question.  As a practical matter, though, these casinos would not want to have their licenses revoked, or have fines imposed upon them, so they would not do anything that runs afoul of Gaming.

It is possible that online gaming will spread to additional states, and while many proposed pieces of legislation to legalize and regulate online gambling (Washington and Pennsylvania are two examples) have died legislative deaths (not been acted upon) the push is there in many states to legalize and regulate online gambling.  One can assume that, throughout the next several years, we will see legalized and regulated forms of online gambling (with licensing in individual states) spread across the country.

Once again, very few online casinos operate in a fashion in which they are licensed within the United States through a particular state.  Furthermore, even those online casinos that may not operate throughout the entire United States, but are licensed and regulated on a state-by-state basis in only those states that have specifically legalized online gambling.  In fact, there are measures in place to ensure that players playing through these casinos are physically in the State in which the online gambling is licensed and regulated at the time they are playing, however, residents of any state are allowed to play there provided they are physically in the state in which it is legal at the time they are playing.

Outside of the United States:

When it comes to determining the jurisdiction through which an online casino wishes to be licensed, that decision is usually going to be predicated upon a few factors.  One of those factors, in fact, is whether or not they wish to be allowed to accept players from the United States (as many jurisdictions do not allow online casinos to accept U.S. players).  There are other criteria that are necessary to gain licensing in other jurisdictions, as well, for example licensing and reporting requirements may be more stringent to garner licensing in certain jurisdictions than they are in others.  

In this section, we shall take a look at the different licensing jurisdictions and highlight some of the more stringent regulations they have in place that may determine whether or not an online casino wishes to license itself there.  Once again, while we acknowledge that licensing, strictly speaking, is not the first thing that a prospective online casino does, the licensing requirements of a particular jurisdiction will play a large part in the development of an overall online casino as it has to make sure that it operates within the parameters that will lead to its approval:

• Alderney
• Antigua and Barbuda
• Costa Rica
• Gibraltar
• The Isle of Man
• Kahnawake
• Malta

How This Relates to Operators

When it comes to an online casino company deciding under what jurisdiction they wish to license themselves, if any at all, looking at the licensing requirements of each individual jurisdiction is an important first step to building an online casino for the following reasons:

1.) Market

The first reason is that an online casino wants to ensure that it can operate and/or advertise within the markets that said casino wishes to target.  For example, if an online casino company wishes to advertise and offer its games to residents of the United Kingdom, then undoubtedly, they will want to ensure that they pursue licensing in a jurisdiction that is, ‘Whitelisted,’ by the UK in order to ensure they will be allowed to advertise to its citizens.  

Furthermore, there may be certain markets that a particular licensing jurisdiction directly prohibits operators from operating within, so if that is going to be one of the potential target markets for an online casino, then they will want to ensure that they are licensed by a jurisdiction that allows them to operate within the target market.  

2.) Systems

Generally speaking, a prospective online casino company has to have its systems fully in place before it attempts to secure licensing, otherwise it will not be licensed and any application fees that are paid by that casino will effectively be money that has been flushed right down the toilet.  It is for that reason that an online casino company must ensure that it acquires systems, such as software, that is going to be approved by the licensing jurisdiction of its choice.

Furthermore, the prospective online casino is going to need to have its software certified fair by an independent testing agency that is accepted by the licensing jurisdiction.  To wit, there is no reason to pay to have your software tested by an agency when such tests will not be accepted as proof of fairness and randomness in the jurisdiction in which you wish to be licensed.  With respect to this sort of thing, a prospective online casino, upon determining what markets in which it desires to operate, will then do research to determine what software will be approved in the target jurisdiction as well as what testing agencies are approved in the jurisdiction to certify the games as fair.

Alternatively, if an online casino wishes to deal in a, ‘Rogue,’ way or with shady software, then they will likely either pursue no licensing at all, or alternatively, will get themselves licensed in Costa Rica as Costa Rica basically has no requirements of any kind whatsoever.  

3.)  Financial Protocols

While an online casino can be started much more cheaply than their land-based counterparts, there should be no doubt that a significant investment is made by online casinos in terms of their display, licensing software upon which to operate, getting licensed through a regulatory jurisdiction and also paying fees therewith associated.  Additionally, online casinos must also have money with which to pay the players and must be able to maintain operating costs until such time that they are actually making money off of the players.  

The various regulatory jurisdictions have different protocols in place for how the money of an online casino’s players is to be secured.  These jurisdictions may have differing requirements from Costa Rica (with no requirements whatsoever) all the way to The Isle of Man (which necessitates that an online casino always have deposits, bonuses and winnings readily on hand in one of only three methods.)  When a company decides to start an online casino, that company must decide how much regulatory oversight it is willing to endure in this regard, and furthermore, whether or not it has the cash on hand to not run afoul of whatever regulatory framework is in place concerning the security of player funds.

Furthermore, there are other financial considerations at play for online casinos.  For one thing, some jurisdictions only have licensing and application fees whereas other jurisdictions impose a tax upon the revenues of online casinos operating within their jurisdiction.  In at least one case, there is a minimum annual tax that would apply regardless of whether or not an online casino would have revenues that, on the basis of a percentage of those revenues, would meet the minimum tax required.  It is for that reason that a prospective online casino must look at the different tax structures and do a cost/benefit analysis to determine whether or not they believe that the revenues they will acquire (based on the power of their licensing) are worth the amount of taxes that have to be paid on those revenues.  

Other financial considerations may include whether or not the company in question is, or would ever want to be, a publicly traded company.  If so, then they want to make sure that they are licensed in a jurisdiction that would give them access to the exchange upon which they would want to be traded, or upon which they already are being traded.  

Furthermore, to some extent, most (if not all) jurisdictions require an online casino company to have some sort of physical presence within the licensing jurisdiction, and, of course, there will be costs that go along with that.  There will also be employee costs associated with the day-to-day operations of the online casino, and those costs can themselves differ based upon the wage requirements that are inherent to a particular jurisdiction.

Conclusion:

Licensing is the first question that a prospective online casino should be concerned with as the entire casino, at least in the beginning, needs to be built around getting licensing approval within the desired jurisdiction. Furthermore, it is the licensing jurisdiction that gives the casinos the ability to operate within certain markets, and perhaps, that excludes the casino from operating within other markets.  

There are many individuals, especially in the United States, that are of the impression that the regulation of online casinos is largely a, ‘Wild West,’ sort of situation, and that assertion is only partially true depending upon the jurisdiction in which the online casino in question is licensed.  For example, online casinos that are licensed in Costa Rica really can be, ‘Wild West,’ type casinos in the sense that they are really not accountable to any meaningful Gaming (or equivalent) authority and are largely free to do whatever they want to in their operations and with respect to player security and treatment.  Several operators who want to give the appearance of operating legitimately and in an above-the-board way, but who actually do not do either, will gain licensure in Costa Rica specifically for that reason.  

However, it should be remembered that the regulation of online casinos takes place within a framework that is a function of the government of whatever jurisdiction in which an online casino is licensed.  In fact, for many jurisdictions, a full reading of the regulations, and comparing them to the regulations of many states within the United States, would lead a player to the conclusion that the regulatory framework of these licensing jurisdictions and that of land-based casinos within the United States is not necessarily all that much different.  In some cases, those players would be right.  

For instance, The Isle of Man is just one jurisdictional licensor of online casinos in which it can be argued that their operating parameters to which an online casino must adhere are every bit as stringent as those of any state within the United States that offers land-based gambling.  Furthermore, those regulations can also be compared to those of the licensed and regulated casinos in the State of New Jersey, and with exception to the fact that New Jersey online casinos must be tied to a land-based casino in some way, the overall scope of the regulations is largely the same.

Of course, the regulatory framework of The Isle of Man and the complete absence thereof of a regulatory jurisdiction such as Costa Rica are complete opposites, and the other jurisdictional licensors of online casinos tend to fall somewhere within the two extremes.  It is for that reason that players would do well to use the information available at our family of websites to determine whether or not the regulatory framework in place within a given jurisdiction, and applicable to the online casinos licensed within that jurisdiction, are such that a player feels comfortable playing there.

Furthermore, casinos can (and often should) be looked at on a case-by-case basis.  To wit, just because an operator is licensed out of Costa Rica does not automatically mean that operator will be a bad operator who will treat players unfairly.  Though, in fairness, such does increase the likelihood that such will occur as the players have no actual remedy or Gaming entity to whom to air any complaints.  However, there are likely some perfectly good and reputable operators that are licensed by Costa Rica who simply found it easier to be licensed there rather than jump through the loopholes and deal with the regulatory frameworks of other licensing jurisdictions.

In fact, we cannot emphasize enough the importance of an individual doing his or her homework regarding the reputation of any individual online casino at which he or she is considering playing.  That is the primary reason for the existence of our family of websites, to give players a platform upon which they may interact with one another as well as to educate players on taking advantage of the best promotions and the best way to play various casino games, whether those games be online or land-based.  

In the future parts of these pages we are going to take a look at the other things that an online casino must do, and how they operate, both before and after securing licenses.  Some of the subjects that we will breach will include how they go about choosing software providers, how they go about having their software tested and certified as, ‘Fair,’ how they go about establishing relationships with payment processors, as well as any variety of other items related to the operation of online casinos.  

We thank you for reading and hope that you will take the time to read our other pages on this matter.