Sunday, July 24, 2005

The Perfect Poker Product

Online card rooms, and the associated money transfer companies such as Neteller, hold a lot of money. Unlike most financial institutions, they do not provide any sort of guaranteed return on the deposits held.

Party Poker claims to have five million customers. If each of those customers maintains an average of just $100 in their account, that equates to half a billion dollars of cash sitting in the Party coffers. All interest earned on that money goes straight to the Party bottom line and gives no benefit to the player. On a lesser scale, the same is true of any online site.

For the casual player who does not maintain separate poker funds - cashing out when they win, depositing to play when their account runs dry - this is likely to be an insignificant issue. The loss of interest on a few dollars which rarely lies long in their account for long is likely to be trivial.

However, a substantial number of players take poker seriously enough to focus their efforts on building a bankroll. For even a moderately committed player, the bankroll could easily run to several thousand dollars. For a serious online player, tens of thousands of dollars is a realistic sum. Most of which will be deposited with poker rooms or Neteller.

Presently the only value they derive from this bankroll is the ability to make bigger bets.

A bankroll is simply a segregated sum of cash which is used to fund participation in cash games or tournaments. This bankroll will vary over time, with the intention being for the long term trend to be upwards.

The size of the bankroll dictates the level at which a player can safely play. The bigger the bankroll, the bigger the bets they can make. Higher risk allied to superior skill should, if the cards fall evenly, lead to higher rewards.

The greater the bankroll, the more confidently a player can approach a higher stakes game. Entering a high stakes game with an insufficient bankroll would expose even the finest players to the risk of going bust. Poker is a game of hot streaks and cold decks, where variance takes its toll. So a cash reserve is a must.

As the bankroll grows the player will initially derive little tangible reward for his efforts. The growing pot of cash simply serves as the foundation for a progression through the betting scales.

If the player were to frequently skim off any profits, the bankroll would fail to grow and they would find themselves stranded at the lower limits - lacking the resources to step up to a higher level.

Building a bankroll is a long term process which assumes similar characteristics to more mundane financial endeavours. Patience, commitment, restraint, are all needed to make the effort to grow the bankroll, whilst resisting the temptation to spend the profits as they accrue.

Alongside these long term traits, runs a more immediate demand - the bankroll must be swiftly accessible. Poker swings cannot be forecast, and money may be required at any time. Therefore the bankroll cannot be invested in shares, or locked away in long term deposit accounts.

The simplest way to fulfill these requirements would simply be for Neteller, or the poker rooms, to offer interest on deposits held. This would indeed be a welcome step forward.

However, paying interest on deposits does have drawbacks.

Receiving interest can incur a tax charge. In the UK a higher rate tax payer would pay 40% on any interest received.

One product which has gained popularity in recent years, and which combines the long term outlook of bankroll building, with tax efficiency and instant accessibility, is the current account mortgage, also known as an offset mortgage.

An offset mortgage uses cash reserves to reduce the interest charge on the outstanding mortgage, rather than pay interest on the cash reserve.

For example, a person with a £100,000 mortgage, who had a cash reserve of £5,000 would pay interest on only £95,000 of their mortgage. They would receive no interest payment on the cash reserve. The cash reserve is generally accessible instantly, or at very short notice.

This mechanism is both tax efficient and advantageous in interest rate terms, as mortgage rates generally tend to be higher than current account rates. The long term benefit is that the outstanding loan reduces more quickly as the cash reserve grows, thus reducing the mortgage repayment term.

Were Neteller or some other online wallet provider to offer such a product, there would be genuine benefits for participants.

Most crucially, for the average poker player, it would lock in a little value with every win, and minimise the temptation to squander any windfalls.

By tying the bankroll to a long term financial product, players would gain some extra financial benefit from every winning session, but the mechanism for delivering this benefit is such that there is no way of translating it into an immediately wasteful alternative. (Online craps anyone?)

It would also be the perfect way to defuse a million household arguments.

"Are you playing poker AGAIN!?"

"Yes darling, and thanks to poker we will own our home four years early."

Here's hoping!!

As the industry matures, more associated products will certainly be developed. There's no compelling reason why poker related financial products should not be part of this development.


N.B. For a broader overview with a US slant, see the always excellent Scurvydog.

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