Itai Pazner examines the lay of the land, as regulated operators reel from tax rises and restrictive measures, whilst unlicensed operators continue to thrive.
Writing for iGaming Expert – Pazner urged operators, regulators and lawmakers to fix a creaking system.
Every market eventually reaches a breaking point – that moment where taxation and restrictions make regulated operators uncompetitive or imposes overly tight restrictions on consumers. However well-intentioned these are, they push players away from the regulated environment and towards the black market.
That breaking point isn’t theoretical. There is an optimal rate of tax somewhere around 20% and 30%, where operators can still offer competitive offers, promotions and advertise the products, and the taxman reaps the most he can for the public purse.
After that, the regulated market starts shrinking as it becomes uncompetitive. The black market comes in and flourishes and tax take goes down, while operators start slashing costs across too many functions to remain profitable businesses.
Make no mistake, reduction of costs also means a reduction of personnel costs, including staff who can deal with problem gambling identification and treatments, compliance and other matters that are very important for regulated market operators. When a company needs to reduce its cost base aggressively, it does so across the board.
Drifting out of balance
In most US jurisdictions, regulation today leans far more toward proving operator suitability and compliance with technical regulatory requirements than a focus on protecting players. I believe this is part of the American way – people are free to use and spend their money in whichever way they choose. But that is also due to the history of the industry and the fundamental aim of it, which was keeping organised crime out of gambling. However, with generally fair and balanced taxation, there might not be enough funds for states to channel enough towards problem gambling prevention and treatment.
In Europe, the situation is flipped. High taxation has become a default political instinct. In the US, where many states started with modest low teens tax rates that European operators could only dream of. Yes, there are exceptions like New York, where taxes are extraordinarily high and operators struggle to remain profitable. But those are outliers. Europe, by contrast, has allowed high taxation to become the rule.
Watching the recent UK Select Committee hearing was a reminder of how far the debate has moved away from balanced analysis. Casino games are painted as inherently harmful; racing and betting shops as wholesome national institutions. MPs oscillate between calling bookmakers important community assets and implying they cater to “drug addicts and homeless people.”
This isn’t policymaking, it’s narrative-building.
And operators don’t help themselves. Too often, when governments propose new rules, the industry shouts “black market.” before offering any real data or solution. Politicians then dismiss the warnings as scaremongering – even though, in markets like Germany and the Netherlands, black market channelisation is absolutely a real and growing problem.
Taxes, bonuses and player frustration
When taxes rise, operators have a few levers to deal with this in order to remain profitable. They can reduce operational cost (OPEX); reduce bonuses and marketing; and, in more extreme cases, they reduce RTP (return to player), which is essentially the “pricing of the games”. Usually, they would apply a mix of the above that they believe is optimal and minimises the impact on players. That makes perfect economic sense.
A regulated operator in a high-tax market may be able to return 5–10% of GGR to players in offers. Unregulated operators routinely give 20–30%. That’s not a small difference. It’s the equivalent of selling, say, a shirt at a 30% discount versus 10%. The shirt with the 30% discount is coming from an overseas brand – sometimes even a recognised one – but maybe there’s a risk it won’t come. But if it’s that much cheaper and looks more or less the same, many people will take the risk.
The second lever that has a direct impact on players’ experience is a reduction of RTP. If a regulated operator reduces RTP to absorb additional tax and an unregulated operator gives a higher RTP, experienced players will notice this very quickly and, in many cases, go to the game that offers them better value/return.
If the real direct impact of tax is mainly on bonuses and RTP, then the secondary effect of excessive regulation is actually angering customers.
Intrusive, mandatory source-of-funds checks and artificially low stake or deposit limits are driving far more players away than taxation alone.
Self-imposed limits? Those are fine. In fact, they’re a good responsible gaming tool. But blanket mandatory limits, set the same for a college student and a high-earning 50-year-old, simply don’t reflect real life.
Add to that the frustration of repeated document requests, bank statements, salary slips – a process most people would never hand over to a gambling operator – and you create a funnel straight to the black market.
We see it clearly in the UK with the rise of “non-Gamstop” casinos. Many players self-exclude in a moment of frustration or after a bad session; later, unable to reverse it, they search for alternatives. The alternatives are always unregulated.
The unspoken deal that regulators need to honour
Everyone throws around channelisation numbers – 8-10% leakage in the UK, perhaps 30-50% in Germany and the Netherlands. These are guesses, but educated guesses.
What frustrates me is that the real data is obtainable. With modern web analytics, affiliate tracking and player behaviour tools, regulators could measure leakage far more accurately. But they don’t. And they rarely work closely with the industry to measure the effect of tax and restrictions on channelisation. The industry has a wealth of data and the tech expertise to help them realise what the real impact is and help them find and shut down illegal operators.
Higher taxes are politically inevitable. Every government needs more revenue; gambling is an easy target. Most operators have accepted that reality.
But if regulators want to increase taxes, then they must hold up the other side of the bargain: protect the regulated industry by stamping out the black market.
That means going after suppliers that support unlicensed operators, affiliates that promote them, and payment channels that enable them. The UK Gambling Commission has begun making moves in this direction, but only recently, and there is a lot more work to be done.
There is no such thing as a sterile environment – but clear channelisation KPIs should be set and measured by the regulators. When changing tax or adding restrictions, they should measure the effect on channelisation and leakage to the black market. Then you can see if the changes are balanced and enforcement is strong enough. In such a market, you can raise taxes, limit marketing and tighten controls without losing channelisation.
But no country has truly achieved this balance, and many aren’t even trying.
What good looks like
Italy provides a useful example: relatively high taxes, strict advertising rules – but a healthy, competitive regulated market and relatively little black market migration. Why? Because Italy didn’t suffocate player choice or impose limits that insult the intelligence and lifestyle of the average user.
Spain, to its credit, has shown something equally important: flexibility. It introduced tough advertising restrictions, monitored their impact, and then adjusted them. Regulation doesn’t need to be rigid to be effective.
We are not going to eliminate problem gambling entirely, just as we will never eradicate black market supply. But we can minimise both by finding a balance built on three principles:
- Data-driven policy – use data rather than emotional arguments.
- Flexible regulation – be willing to amend rules when they don’t achieve policy goals.
- A competitive regulated market – one with product quality and friction-free play to keep players where they are safest.
The goal is not zero harm and zero leakage – both are impossible. The goal is optimal harm reduction and optimal channelisation. In other words: balance.
That balance is achievable. But only if we stop pretending that the regulated gambling industry operates in a vacuum and start designing policies for the real world.
