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FanDuel and DraftKings just lost a big payment processor

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A big blow to DraftKings and FanDuel

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Vantiv Entertainment Solutions, a payments processor for daily fantasy sports sites DraftKings and FanDuel, told the companies this week it would stop processing wagers and would exit the space amid rising legal tensions, according to The New York Times. It's unclear what percentage of total payments Vantiv processes for DraftKings and FanDuel, which control more than 90 percent of the daily fantasy sports market. However, Vantiv's exit illustrates the mounting toll the companies face as numerous states continue to designate the activity illegal online gambling.

Daily fantasy sports is a hyper-accelerated form of wagering money on sporting outcomes dependent on the performance of real athletes. Because players don't have control over the outcome of a game, a handful of states like New York, Illinois, and Texas consider the activity gambling akin to online poker, which was banned by the Unlawful Internet Gambling Enforcement Act of 2006. DraftKings and FanDuel disagree, choosing instead to call daily fantasy sports a game of skill because players choose which athletes to wager on. That designation would exempt the activity from the 2006 ban.

"To date those arguments have been unsuccessful and/or rejected."

"As you are aware, an increasing number of state attorneys general have determined that daily fantasy sports constitute illegal gambling," wrote Jonathan Ellman, Vantiv's senior vice president and chief revenue counsel, in a letter obtained by The New York Times. "Although in recent weeks DFS operators have raised numerous arguments to the contrary, to date those arguments have been unsuccessful and/or rejected."

Vantiv appears caught in the middle of a battle between legislators and companies like DraftKings, whose executives have made it clear they intend to fight New York and other states in court despite how along it may take or how much it will cost. Vantiv first notified DraftKings and FanDuel back in November that it would stop processing payments in New York after Attorney General Eric Schneiderman filed a cease-and-desist order intending to shut the sites down. However, a series of legal back-and-forth's resulted in both websites being allowed to operate in the state while the trial continued.

Vantiv may have faced steep fines for working with DFS sites

Vantiv at that point asked a New York State Court judge to decide whether it could continue working with daily fantasy sports sites. Yet more legal battlegrounds arose, in Illinois and then Texas just last week. According to The New York Times, legal experts say payment processors are responsible for ceasing transaction activity with unlawful gambling operations or risk heavy fines. Vantiv did not respond to a request for comment. Without a payments processor, DraftKings and FanDuel could lose up to $40 million in annual business in New York, which houses the largest pool of daily fantasy players at 1.2 million users, according to research firm Eilers & Krejcik Gaming. PayPal, however, is still an active payment processor for the daily fantasy sports market, according to a person familiar with the companies.

DraftKings says the company hasn't heard from Vantiv regarding its decision to stop working with daily fantasy sports sites, adding an air of confusion to the ordeal. "We are not aware of what Vantiv may or may not have told other industry participants about its plans," David Boies, a DraftKings lawyer, said in a statement. "However, to be clear, first, Vantiv has not told DraftKings that it plans to cease fulfilling its contractual obligations as of ‘Feb 29, 2016’ (or any other date). Second, Vantiv is under court order to continue to fulfill its contractual obligation to DraftKings."

The company says it wants firmer ground to stand on before it considers working with DraftKings and FanDuel again. "As payments experts in the online gaming space, Vantiv will continue to work with stakeholders for a long-term solution to the ongoing DFS controversy," Vantiv's letter said. "When there is better clarity and long-term certainty around the regulatory and judicial landscape related to DFS, Vantiv may decide to resume processing these types of payment transactions."

Update at 6:10PM ET, Friday, January 29th: Added comment from DraftKings.

Update at 3:45PM ET, Wednesday, February 3rd: Updated the headline and first paragraph to reflect the fact that Vantiv only processes deposits and does not process payouts for FanDuel.