How One Bank Tackled Online Gambling Friendly Fraud

With the growing wave of online gambling, community bankers are grappling with associated “friendly fraud” claims, where customers dispute legitimate transactions to try to recover losses. Williamstown Bank in Williamstown, West Virginia, is one of them, having recently handled a situation with a customer who was seeking protection under Regulation E. 

The customer disputed a staggering $140,000 in gambling losses through DraftKings, an American sports betting operator. She claimed her phone had been hacked, disputing nearly 800 ACH transactions made from her bank account to DraftKings over the previous 60 days.

“Whether it’s online gambling, bitcoin or romance scams, people are out there trying to make a quick buck,” says Sharon K. Anderson, president and CEO of $225 million-asset Williamstown Bank. “And when they realize it’s falling through, it’s easier to blame the bank and say that ‘This isn’t something I did’ than to be accountable for it.” 

Online gambling on the rise

Community banks are witnessing a surge in friendly fraud. Friendly fraud’s connection to online gambling is especially concerning, as consumer misinformation about Reg E protections may encourage false claims. 

Such fraud risks are becoming more frequent as the online gambling and sports betting market becomes more mainstream in the U.S. Total revenues for the industry are expected to reach $26.8 billion in 2025 and double by 2033, according to iGaming Today.

“As it becomes more mainstream, we see increased risk for fraud related to gambling,” says Scott Anchin, senior vice president of strategic initiatives and policy for ICBA. In some cases, he adds, people are making intentional fraudulent claims. In other cases, people are making claims because of misinformation about what Reg E allows.

Navigating Reg E claims

Banks must resolve Regulation E disputes within a strict timeline, including a 10-day period to investigate and provide a provisional credit to the customer, and up to 45 days to complete the investigation. If the bank can’t verify that a claim was authorized, the credit would stand. 

“It’s a relatively short timeline,” says Anchin, “especially when you think about all the information that they have to exchange before they issue that provisional credit.”

A significant risk for community banks is the potential financial loss associated with extending credit to customers who may default. Banks are also required to allocate resources to investigate claims efficiently within a tight timeline.

In the case of Williamstown Bank, each of the customer’s roughly 800 disputed charges had to be processed separately, which required a substantial effort. 

“We were about 99% sure that these were friendly fraud and that she had legitimately committed these transactions, because we could look back at her history,” says Anderson. The customer also had posted substantial deposits to her account from DraftKings over the prior eight months. 

Banks need to be mindful of potential reputational harm when investigating cases of friendly fraud, notes Phillip Buffington, a partner with the law firm of Balch & Bingham LLP in Birmingham, Alabama.

When a valued customer disputes a few small-dollar transactions, the bank risks greater reputational harm by not providing the credit promptly, delaying the investigation or failing to communicate effectively with the customer. 

“It’s hard to quantify reputational harm, but if you’ve got a customer who’s talking bad about you in a small community, that harm can be pretty significant,” says Buffington.

Partnering with online gaming platforms

After receiving signed affidavits from the customer on the disputed transactions, Williamstown Bank reached out to DraftKings. The bank quickly found out that the customer had also filed friendly fraud charges with the gaming platform, and DraftKings was willing to work with the bank to dispute the claims. 

DraftKings provided geo-tag information on the transactions made from the customer’s mobile phone, showing that they all occurred within two miles of her home. They also were able to show that the disputed transactions came from the same IP address and were made at or near the same location as the winning transactions the customer had made in the months prior that she did not claim as fraud.

“They were able to give us all of the information that we needed to go back to the customer and say, ‘We know these are legitimate charges,’” says Anderson. 

It was after that conversation that the customer admitted she had a gambling problem and that she had read on an online forum that she could dispute the charges using Reg E. The bank was able to withdraw the provisional credit in full and close out the customer’s account.

While banks need to move quickly to investigate, they should also consider seeking legal advice and be thoughtful in their approach. Especially for relationship-driven community banks, conversations with customers about gambling losses that turn out to be authorized can be awkward to say the least.

“There’s a lot at stake in some of these cases, and they’re often very emotionally charged issues,” says Anchin.