Prediction Markets Payments & Banking

Prediction Markets Payments & Banking

Prediction markets do well to extend iGaming offerings and in most cases predictive markets are a form of peer-to-peer betting (P2P betting) with the iGaming operator acting as a matching service between the buyer and seller. This can be a direct one-to-one arrangement, or powered by a liquidity pool using an Automated Market Maker (AMM).

This kind of proposition gambling allows the operator to take a commission, without facing the risk of paying out a prize (which is instead paid by the seller in the case of a winning bet).

However, payment processing for prediction markets has historically been challenging. The perceived risks of frauds and chargebacks make many traditional payment processors averse to this market  

What are Prediction Markets?

Prediction markets are the exchange-traded platforms where buyers bet on the likelihood of future events. Sometimes called 'outcome betting', prediction markets are usually a form of P2P gambling, with the operator taking a commission for matching the buyers and sellers.

One element of prediction markets is the 'wisdom of the crowd'. This is the theory that a large number of people forecasting the outcome of an event will tend, on average, to predict it correctly.

An example of this is in sportsbook betting, where the favourite horse among gamblers is most likely to win the race.

Who Operates Prediction Markets?

Prediction markets are generally offered by two kinds of operators, either as an extension of traditional sportsbook betting or as a 'pure-play' predictive market exchange.

Sportsbook Operators

Many traditional bookmakers offer a list of specials betting markets, including forecasts of political events and elections, as well as more novelty markets like TV shows, awards ceremonies and non-sports competitions like the Eurovision Song Contest.

It's often the case that these markets still involve placing a bet directly with the bookmaker. However, some bookmakers operate a P2P betting exchange, which is closer to the 'true' sense of a prediction market.

Pure-Play Operators

Pure-play prediction market operators are true P2P gambling exchanges where sellers list or 'lay' proposition bets and buyers bet or 'back' them.

Depending on the platform, this can be:

• Direct one-to-one P2P proposition bets i.e. one buyer and one seller
• Aggregated AMM markets with pooled liquidity

AMM markets aggregate the 'lay' offers from multiple sellers, allowing buyers to 'back' as much or as little as they want, and improving the general liquidity of the process.

How Do Prediction Markets Function?

In direct proposition gambling, the seller makes an offer at a certain value, based on the perceived likelihood of a future event with a yes/no outcome. For example, a seller might 'lay' an offer of £0.50 that a specific candidate will win an election.

Buyers can choose to 'back' that outcome by buying multiple stakes at £0.50 each. If they are correct (i.e. the backed candidate wins) the buyer usually receives £1.00 per stake.

A consequence of this is that the 'lay' price represents the expected probability of the outcome - that is, a lay price of £0.50 represents a 50% chance of that outcome occurring.

Prediction Market vs Gambling

As mentioned above, a 'true' prediction market is a P2P platform where the operator acts as a middleman or broker, essentially matchmaking the buyer with the seller.

However, some operators do provide direct proposition betting (i.e. player vs house, instead of peer to peer). In this arrangement, prediction betting is closer to traditional gambling than a form of social or community betting.

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Different Types of Predictions

Here are five of the main types of predictive markets offered by industry-leading platforms:‍

1. Sporting Event Outcomes, Results and Statistics

Where betting is offered via a P2P exchange (e.g. Polymarket or Novig) it can fall under the definition of a prediction market, as opposed to traditional sportsbook betting.

Many of the propositions offered in this way relate to statistics other than the simple win/lose outcome, such as possession, goals scored and player discipline.

2. Elections, Legal and Political Outcomes

Political outcomes are a popular market for predictive betting. This can include forecasting which individual or party will win an upcoming election, as well as the outcome of similar events like landmark legal cases.

3. Cultural and Entertainment Predictions

Cultural events like the Oscars or the Eurovision Song Contest are another common predictive market. Buyers back their chosen nominee or competing country, or may bet on alternative propositions (e.g. whether a country will score any points at all!)

4. Company and Technology Forecasts

Similar to backing an election candidate or award nominee, buyers may back a particular outcome in a company's upcoming financial statement or annual general meeting.

5. Economic, Environmental, and Social Events

A broad spectrum of other propositions, including betting on the weather, economic indicators like interest rates and inflation, and all kinds of specific social predictions.

Top Prediction Market Platforms

There are many prediction market platforms worldwide, and processing payments internationally is one of the major challenges of operating in this industry.

Some of the market leaders include:

• ‍Kalshi: Wide-ranging platform spanning culture, crypto, elections, politics and sports.
• ‍Manifold: Huge diversity of markets including culture, politics, sports, technology, social predictions and 'fun'.
• ‍Novig: Futures betting platform specifically focused on sports.
• ‍Polymarket: Broad-spectrum prediction market with propositions on sports, politics, technology, cryptocurrency and more.

New York City has become a significant hub for predictive markets operators. Kalshi, Novig and Polymarket all have their headquarters there, while Manifold is based in Austin, Texas.

How to Process Payments for Predictive Markets

By their nature, predictive markets are fast-paced. Operators need to process payments quickly and reliably, in order to facilitate both buyers and sellers in real-time.

This is especially true for in-play markets (i.e. betting on live events) where delays to payment processing can prevent transactions from completing before the likelihood of a particular outcome has already changed.

For multinational platforms, there are extra issues arising from foreign exchange rates, access to international banking rails and cross-border security.

Predictive Market Payments and Banking

All of this means predictive market platforms need to work with a reliable banking partner dedicated to providing the quality of service required by the iGaming sector.

Xace predictive markets offering has the capability to accept deposits in more than 100 global currencies (with 11 currency IBANs), with access to Swift, SEPA and local payment rails. This also enables reliable withdrawals, giving your customers confidence in your payment processing ability.

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Key Features of Prediction Market Payment Providers

Not all prediction market payment providers are equal. The hallmarks of a good provider include:

• ‍Cross-platform compatibility to function wherever you are based‍
• Fast withdrawals to boost customer confidence and satisfaction‍
• Flexible payment options, including multi-currency foreign exchange
• ‍Security measures to protect against fraud and data theft
• ‍Speed and efficiency, with access to established banking rails

Best Practice in Prediction Market Payment Providers

The best prediction market payment platforms offer:

• Ability to create custom approval rules‍
• Access to multiple IBANs in key jurisdictions
• Full client control over multi-currency accounts
• Liquidity control and in-depth treasury tracking‍
• Real-time payment rails for rapid turnaround

Security is paramount in payment processing. That's why setting up approval rules on your own terms is important e.g. to determine whether cross-border payments and foreign exchange transactions are allowed to proceed.

How to Choose the Right Payment Method for Prediction Markets

We've covered some of the best practice principles for prediction market payment processors. Here are three factors to consider when choosing the best payment methods for your platform:

1. Security and Compliance

It's important to take into account the different security regulations that apply around the world. A good multinational payment processor will be able to offer you local IBANs that make it easier to comply with the financial and regulatory regimes of specific jurisdictions.

2. Speed of Transactions

Payment processing platforms for prediction markets should be able to evidence the speed of their transactions, as well as to offer access to rapid international banking rails, so you can have full confidence that a transaction will complete within the required time.

3. Transaction Costs

While transaction costs are a fact of life, different processors demand different transaction fees. Keep this in mind when partnering with a payment platform, as it can have a direct impact on your bottom line.

Why Traditional Banking Fails Prediction Market Operators

The traditional banking sector has consistently failed to deliver on the demanding needs of prediction market operators. Outdated payment processing procedures and risk-averse attitudes mean that in many cases, long-established banks are not able to support clients in the sector.

Resistance to Risk

Banks are generally unwilling to provide services they deem to be high-risk. In the case of prediction markets, this can be due to the high-volume, incredibly fast-moving nature of the sector, leaving operators looking for alternative payment service providers.

Payment Fraud Rates

A particular concern is the relatively high rate of payment fraud in this industry. Customers using chargebacks to recover lost stakes represent a real threat to platforms' profitability. This is why specialist payment processors for prediction markets have such rigorous security measures in place - including the ability to create custom rules to approve or reject transactions, foreign exchanges and cross-border payments.

Payments and Risks in Prediction Markets

Risk is inherent in payment processing in prediction markets, spanning deposits, withdrawals and foreign exchange transactions.

Here are five threats a prediction market bank should be careful to counter, through a combination of rigorous security policies, vigilant monitoring of transactions and real-time reporting to our clients:

1. Chargeback Costs

As mentioned above, chargebacks represent one of the single biggest risks of financial loss. This type of financial fraud is common and rates continue to increase. Vigilance is essential and we monitor chargeback rates on an ongoing basis.

2. High-stakes Payment Reliability

Excellent reliability records ensure that transaction volumes, including time-sensitive in-play markets, do not suffer from soft declines or payment processing failures during peak periods.

3. Regulatory Complexity

The provision of IBANs in major economies helps you to simplify your regulatory exposure. But we go beyond that, to ensure that our services keep pace and continue to comply with regulation changes around the world.

4. Transaction Fees

Transaction fees should be fair and transparent, allowing you to know at all times exactly what it costs to use our platform. Access to multiple banking rails with local IBANs is key to ensuring your exposure to transaction costs is optimised - and to keep as much of your money in your account as possible.

5.  Unpredictable Payment Service Providers

Traditional PSPs are notoriously unpredictable in the prediction markets space. You should ensure that your business does not suffer due to risk-averse policies or unexplained account termination by conventional financial institutions.

Prediction Markets Payment FAQs

What is a prediction market payment solution?

Payment solutions for prediction markets range from actual payment service providers (PSPs), to payment gateways, and payment settlement systems. They are digital services that allow for prediction market services to securely and quickly process payments made by credit, debit cards, e-wallets, e.t.c.1

How can predition market payments be processed?

Prediction markets should allow for a range of payment options for customers. Whether that is via traditional debit cards, ACH transfers or via SEPA. Prediction markets fall under the definition of gambling in certain jurisdictions, such as the UK. So credit card payments are prohibited as a form of payment, and identity verification is essential.

What to expect from a prediction market payment provider?

Security is paramount, especially when you are building a trusted prediction market brand. So too is the speed of payment transactions, and the reliability of these services. Price and offerings are key of course too, such as API integrations and compliance.

More Power for Your Prediction Markets Platform

Payment processing sits at the very core of prediction markets platforms. Xace's carefully crafted payment services for the iGaming sector ensure that you do not suffer adverse impacts due to customer fraud, forex risks or unpredictable PSPs.

Open an account today to put this power at the heart of your prediction markets platform, so that you can operate your P2P betting business with total confidence.

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