The high cost of betting with house money

Action 24/7 boasts of being the only independent local sports betting in Tennessee this “continues to dominate the industry with innovative practices such as same day payment and cash withdrawals. On the surface, it has the makings of an outsider story in which the hometown hero thrives on his ‘buy local’ appeal, despite the competition from industry titans DraftKings, FanDuel, and BetMGM, among others. But it seems that the 24/7 Action story is less of an outsider story and more of a top dog carving out new income-generating opportunities.

[Updated 2/4/21: Editor’s Note: Better Collective Tennessee, LLC owns the website Sports Handle and is a registered vendor in Tennessee. It is an affiliate marketing company that receives commissions when persons sign up for legal sportsbooks that include, among others, BetMGM, DraftKings, and FanDuel.]

Sports betting is an operation of the executives of Advance Financial, the Nashville-based “flexible loan” or colloquially “payday lender” with more than 100 physical locations across Tennessee. At the beginning of January, Advance Financial’s money transfer company became a approved supplier of the Tennessee Education Lottery Corporation. CEO of Action 24/7 and promoter is Tina Hodges, also President and CEO of Advance Financial. Patrick Conroy, Managing Director of Action, is the CFO. Chief Operating Officer Andrew Jacks is a former Senior Director of Advance Financial. Although Action 24/7 flyers appear in Advance Financial storefronts, these dual business interests may or may not be known to the general public.

In addition to shared leadership, Advance Financial has created an apparent overlap between the company high-risk loans and sports betting activities. For several months, Action promoted its “cash deposit and withdrawal services,” for a fee of $ 2 per transaction, to soften the appeal of its brand with a tangible element that was partially absent – the ability to withdraw. money – in Tennessee’s digital-only sports betting market. (Bettors can deposit money into competing sports betting accounts using PayNearMe stations from CVS and other establishments, but not withdraw this way.)

Of course, these deposit and withdrawal features are fully realized through and dependent on the state’s Advance Financial physical locations, which can conveniently take on the role of a sports betting ATM when needed. And while – at least on paper – Hodges can be precise in characterizing Action 24/7 as “a separate and new business enterprise”, on a practical level the advantage of this enterprise is that it creates two avenues of fundraising. : one is as a lender obtaining loan interest, and the other as sports betting profiting from the juice (or “vig”) of its bets in a business where the overwhelming majority of punters are losing money. money over time in return for entertainment value and occasional big winnings.

Choose your poison

While the association between sports betting and financial lender may be the first of its kind, the practice of borrowing money to seek potential profit within the same industry as the lender is not unusual in the capitalist society.

For example, people with a basic knowledge of the stock market have probably heard of buying stocks “on margin”. “Margin” is the money an investor borrows from a broker and, for the hopeful investor, a means of increasing stock purchasing power and returns on investment.

But the risk is double-edged; if stocks accumulate, the money lost can far exceed an investment made up of only personal funds. Conceptually, trading stocks on margin is similar to betting on sports with borrowed funds.

Both involve high-risk investments motivated by (often misguided) ambitions to accelerate financial gains. And each is stamped with a guarantee to the lender – the “house” – of repayment plus interest and fees. While the margin trader bets on his ability to choose profitable investments, the consumer debtor bets on his ability to choose which team wins a game or covers the point spread.

How it differs

However, unlike the beneficiary of a payday loan or flexible loan, an investor who trades on margin does so on a short leash. Margin trading is a highly regulated business. Federal regulations apply uniformly to all states. Federal regulation of the small loan industry has been proposed, but so far an unsuccessful effort, based in part on well-funded lobbying efforts To avoid regulation.

Specifically, investors looking for margin must deposit a minimum of $ 2,000, or 100% of the purchase price, whichever is less, and investors must maintain an equity balance of 50%. the price of the securities they are trying to buy.

For example, someone who wanted to buy 100 shares of a stock at $ 50 a share would need $ 2,500 in personal equity, and the remaining $ 2,500 would be covered by margin. If the stock goes up 10%, the investor benefits from $ 500 instead of the $ 250 if the investment consisted only of personal funds.

The same goes for losses. If the stock price drops 10%, instead of a loss of $ 250, the investor ends up with $ 500 in the red and still has to repay the borrowed amount plus interest. Furthermore, the margin requirement is continuous. If at any time the investor’s equity falls below the margin requirement, the broker can immediately – with or without notice – access and sell as many of the investor’s positions as is necessary to bring the account in. compliance.

As the broker has continuous and immediate access to the borrower’s existing securities, the risk of non-payment or late payment is virtually non-existent. In a typical payday loan transaction, borrowers give lenders access to their deposit account by means of a post-dated check, but this does not guarantee that these funds will be sufficient by the due date. By failing to pay on the due date, the borrower incurs additional costs to pay for a “rollover” period to extend the deadline.

Flexible loans often follow a similar path: by paying the minimum, you will pay off the loan over a long period with interest rates of up to 279.5% per annum. The result is often a never-ending cycle of debt. The payday loan industry generates about $ 400 million per year interest and fees from Tennessee customers, most of whom are low-income and, within months, end up paying more fees than the principal borrowed.

To imagine this already high-risk scenario unfolding as funds are deposited into a sports betting account raises consumer protection concerns in Tennessee. Whether it is more of a sportsbook encouraging bettors to finance their bets through high interest loans, or a high interest lender encouraging borrowers to bet on sports, the most likely outcome is is the same: a high risk that more consumers get stuck in a never-ending cycle of debt.

Local danger

Sports betting charges players a commission – vigorish (or “juice”) – on every bet they take. Usually 10%, the vig is what secures the house’s long-term wins and bettors’ long-term losses. Not surprisingly, most sports bettors lose money in the long run. They are already at a disadvantage by being taxed on each bet; there is no reasonable argument to suggest that betting with funds tied to (up to) a 279.5% APR loan (in the case of flexible loans) will improve the loan repayment outlook. Rather the opposite.

The consumer pays fees and interest on the loan in addition to the vig on a sports bet. Not only will Advance Financial continue to profit from its high-risk loans, but it will also benefit from the strength it garners from sports betting borrowers. Thus, Action 24/7 adds a significant and worrying level of secondary risk to an already high risk transaction.

Tennessee’s transition into the legal sports betting market has been encouraging as it sets a precedent for its neighbors to the south. Certainly, Action 24/7 deserves to be recognized for having become the first and only local bookmaker in the state. But his novelty as a local guy needs to be seen in context: his affiliate business of providing high-risk loans to vulnerable consumers alongside his sports betting business is also novel – and dangerous for Tennesséens.


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About Johanna Gooding

Johanna Gooding

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