Germany’s gambling market: Understanding the present challenges and pent-up potential

Good intentions do not necessarily always hit their intended mark. Think of the cobra effect or incentives that unintentionally reward undesirable behaviors. In fact, an overbearing regulatory framework could often backfire even if the original motivation behind it has been to aid consumers and bring order to industries, and this is what this article sets out to explore.

To best try and explain the way German gambling regulation works today, we ought to think in allegory. Imagine that you had a pub, but suddenly, you would need certification for every beer you served.

This is pretty standard, but it also isn’t - as this is not a license you get to open the venue, but rather you are asked to have an individual certification process for every brew you wish to serve (or at least this was the case until February 2024) and may be allowed to sell no more than two beers per customer. Plus, no other types of alcohol but beer are allowed.

At a quick read, this model would disrupt your business, make it harder to cater to customer needs, and may even force you to shut down what is an otherwise well-thought-out venture. This is precisely what is happening in the German iGaming industry, a year after it was regulated under a new regime that is increasingly coming under criticism from observers and industry insiders.

Can things change, however, and what are the specific challenges that stakeholders face today, and how is this clash of views impacting the people that the regulated market sets out to serve – the players?

A Brief History of Germany’s Gambling Market

In the 2010s not much was happening in the regulated gambling market in Germany. In 2012, the European Court of Justice deemed the country’s gambling laws regarding sports betting licenses unconstitutional and sent legislators on an odyssey to try and bring home a working framework and regulation.

At the time, a piece of legislation called the First Amendment to the State Treaty on Gambling was proposed but failed to garner sufficient support and was never ratified, leaving the industry in a state of regulatory limbo.

Germans persevered, however, and even though it took them eight more years, the Third State Treaty on Gambling Amendments (GlüÄndStV) came into effect. This was then replaced by a new State Treaty for Gambling which took effect on July 1, 2021 and sought to significantly expand the industry’s clout and allow gambling on products of chance such as slot, table, and poker games, among others.

The piece of legislation passed and enforced in 2021 is also referred to as the Interstate Treaty for Gambling (GlüStV) or the Fourth State Treaty for Gambling (GlüNeuRStv) and is backed by all 16 German federal states, essentially opening the door to operators interested in providing gambling products legally to the local market.

However, this has not gone entirely as expected, as the chief issue at the beginning of 2024 remains – operators have misgivings about the language used in the regulation, cite rules that they find onerous or counter-productive, and sound the alarm over lack of clarity on certain matters, or frameworks that are altogether not really allowing legitimate businesses to compete with offshore ones.

Of course, a cynical way to look at this would be to argue that a vilified industry is just complaining about regulators doing their job. Yet, on this occasion, there seems to be merit in the industry’s complaints, and some hard facts to back the claim that consumers are showing a proclivity for unregulated gambling products which is, let’s face it, wide of the stated mark of protecting consumers under a controlled market.

The beginning of 2023, in the meantime, marked another seminal achievement, with Germany introducing its unifying regulatory body that supersedes state regulation and has unified the rules and regulations for gambling operators in the country.

The Gemeinsamen Glücksspielbehörde der Länder (GGL) has played a prominent role in helping monitor the market and enforce rules, as well as issuing licenses. The GGL has been around since July 1, 2022, but only supplanted the previous two gambling supervisory authorities on January 1, 2023.

It is the sole enforcement and regulatory authority in Germany as a result, in a bid to streamline the process and ensure that it has the means to tackle offshore gambling through means such as IP blocking, prohibition orders, and blocking of payment service providers.

The regulator also publishes a so-called whitelist of operators that have been authorized to operate in the gambling market, including both brands that focus on games of chance and those that cover sports betting.

It all looks good on paper, but operators are having qualms about what may land them in trouble with authorities, and what is okay. There are also operational challenges that are diminishing their ability to engage with customers, and even worse – losing customers to the black market.

What Challenges Do Operators Face?

Although the biggest issue has been sorted, and operators can now indeed apply for virtual slot games and even poker licenses, there are certain fears about how to carry on, as the current regulatory framework has been punctuated by one fresh criticism after the next. Some issues continue to persist, such as the lack of a regulatory regime for table games, and German players are unable to play blackjack, roulette, baccarat, and other forms of table games. This is not likely to change in the foreseeable future.

Yet, there have already been numerous companies that have taken advantage of the existing legislation as is and, according to GGL’s website, which publishes a whitelist of all licensed and authorized gambling companies, there are more than 39 operators at the moment of writing, which run 120 licensed websites, with the GGL’s list updated at least once a month.

So, if that many operators have already navigated what are arguably opaque rule sets, what is holding others back? There are several main points to touch on here. The challenges that are most commonly outlined by operators include both the process of regulation as well as the enforcement of regulation.

Companies are grappling with how to protect consumers and comply with strict deposit limits as well as ensure safe and responsible play. There are technical considerations that are arguably difficult to implement, and there is also the issue with taxation, because the GlüNeuRStv taxes stakes, not gross gaming revenue, bogging down operators and sapping their competitiveness in the process.

Presently, the law obligates operators to pay 5.3% tax on stakes rather than turnover in iGaming and 8% on sports betting. The tax has forced operators to also reduce the return-to-player rate (RTP) on virtual slot games, which in turn has sent players looking for alternatives offshore. The German Sports Betting Association (DSWV) has already warned that this has led to a drop in the overall stakes placed between 2021 and 2022, with the numbers dropping from €9.4m to €8.2m, suppressing tax gains to €433m from €470 a year before.

Outlining these issues in broad strokes, we ought to mention that the Interstate Treaty for Gambling may also not be compatible with European law, although an outright challenge has not been launched just yet. GGL’s powers to issue IP blocks are another puzzler that hounds courts.

Taking a closer look, there are also issues with advertising laws, the way gaming products are actually licensed and what sports bets are allowed during what time – remember that uncouth beer analogy? This is it.

Makeup and KYC?

German operators have had qualms about privacy, their own obligation to the market, and the processes that they need to implement in order to remain compliant with a law that they find increasingly difficult to follow.

The challenge, though, is not too much unlike what the United Kingdom and other markets have recently requested from their operators with regards to Anti-Money Laundering (AML) and Know Your Customer (KYC) verifications.

German operators have 72 hours to verify the identity of a player to ensure that an individual who has registered and is playing is not an underage individual or a self-excluded person. However, this poses another challenge as privacy-conscious Germans usually baulk at the idea of having their identify verified to access entertainment.

Yet, the beer parallel fails here, as a pub will ask you for an ID if they suspect you are not old enough to drink. So why should it be different here? Allowing everyone to register without running checks though is not wise either, but once again the status quo and the industry are at loggerheads, while offshore operators benefit.

Offshore companies hardly ever bother with identity verification checks which makes it easier for players to onboard, although they usually ask registered players to submit personal information especially when withdrawing large amounts. Regardless, players seem keener to register and play right away, and worry about withdrawals later on.

All the while, companies registered in the German market have to comply with LUGAS, the Interstate Gambling Evaluation System, which processes input from operators to determine if they have complied with the market rules. The system has been lambasted over lack of transparency, with critics pointing out that operators do not have full access to it as well.

Streamlining the B2B Licensing Regime

Another Herculean task at hand that operators face on a day-to-day basis and need to be particularly careful about is how the licensing of online casino games works in Germany.

Although it’s a fairly common practice for only certain games by suppliers to be licensed in certain markets, the fact that German operators have to have each of their casino games certified even if the games have been certified elsewhere in the country is definitely adding to the sluggishness of the process and generating a fair degree of red tape. There is a lack of licensing schemes for B2B suppliers and game developers.

The main carp here is that in the absence of sufficiently competitive offers that feature enough online casino games, consumers will be prompted to seek games elsewhere. Even then, this is seen as a temporary problem by regulators, as with time, more games will be certified, but it begs a fair point whether this is the best way to ensure a competitive market, and whether GGL’s resources could not be used more efficiently.

However, as matters stand, the market, and specifically online casinos, feel a little underwhelming and not competitive enough, which could be harming channelization and stoking a thriving black market as recent reports seem to suggest.

Tight Control over Players’ Spending Decisions

Another equally unattractive matter is the manner in which the Interstate Treaty for Gambling and the GGL want to protect consumers and the specificity of depositing limits. As matters stand, GlüNeuRStv imposes blanket restrictions that do not look for specific financial red flags, such as a customer’s income, aberrations in gambling behavior, or reckless spending.

Instead, everyone is subject to the same blanket regulatory lever, which means €1,000 in maximum deposit limit a month across all operators, and a restriction on slot limits that is capped at €1 per bet, including a cool-down period in-between spins that purposefully slows down the game giving players time to think.

"The restrictions on €1 max stake and 5-sec rules are destroying the user experience," says Mike de Graaff, Director of BetComply. "They need to go. From a consumer point of view, can you imagine if you want to deposit €200 and do 100 x €2 spins to find out that a) you can’t. and b) you must wait 5-10 seconds between each spin?

At the same time, you can gamble elsewhere where those restrictions don’t apply. The shared limit of €1,000 should be easily upgraded following SOI/SOW checks. Finally, the tax plan needs fixing.

The 5.3% on stakes is negatively affecting the players which they will notice very easily when playing on a legal vs illegal website," De Graaff explains.

All of this combined makes the regulated market less appealing to players who would much rather play at regulated casinos but may be tempted to try alternatives and engage with rogue operators if they offer them a better overall value. There has been some evidence to suggest that the black market has been compounded as an issue under GlüÄndStV, although more data would be needed to verify this claim.

Supporters of the State Treaty for Gambling duly remind us that the regulated industry is still in its early days. For example, the GGL will not publish a review of the results achieved by the reregulation of the market and expansion into online gambling any time soon. This won’t be coming for another couple of years and is due in 2026 or 2027.

Back to depositing limits, other markets too have tinkered with the idea of imposing such blanket bans, including the United Kingdom and Sweden, but it is Germany that actually does it. Tighter financial control over players have had a negative impact on the tax income generated from online slots, for example.

German Online Casino Association’s president (DOCV), Dr. Dirk Quermann said last year that tax revenue had declined from €40m per month in 2022 to just €20m per month in 2023, once again reiterating a stance that the regulated market has borne the brunt of the bet cap, while rogue operators have thrived.

DOCV is not the only body in Germany that has been urging action on the part of regulators and reuniting the industry in having their voices heard. The DSWV has been similarly vocal about the challenges operators face and the increasing role of the black market.

Although everyone argues from a slightly different angle, the consensus remains unchanged. Lack of attractiveness means that legislative efforts have come short of their initial goal and may have contributed to player harm. Let’s look at the numbers.

Players Gravitated Towards Offshore Gambling in Germany

Industry stakeholders, analysts, and observers have all mostly agreed that the way Germany regulates its gambling industry under GlüNeuRStv is far from ideal and in seeking to do good it inadvertently causes harm.

Claiming that the current regulatory framework causes more harm than it does good is an argument that we are not willing to make, but if a recent study by The University of Leipzig commissioned by the German Online Casino Association and the DSWV can be trusted, 50% of Germans who gamble online still prefer to play on unlicensed platforms, with 28.9% playing at unlicensed websites based in Europe and 19.9% of players seeking other alternatives.

Officially, though, GGL argues that there are only around 800 to 900 offshore gambling websites in Germany with a volume that hits anything between €300m and €500m and accounts for 2-4% of the market. This number is contested not only by the study but also by other industry observers, including Yield Sec, an AI and tech firm, who said that the offshore gambling market accounts for around 47% of the total market and is projected to continue growing by 11%.

The company has also found that there are in fact 1,380 offshore gambling sites, and out of all affiliates in the country, 45% are offshore or promote activities alongside regulated ones, hoping to go unnoticed. Although the numbers are at odds, they largely suggest a dire picture, especially when independent observers agree that the state data is not dependable.

Of course, both cases could be argued, but both GGL and independent researchers have data sets that they can use. GGL for its part rebuffed suggestions that its data collection methodology was flawed and welcomed "scientific discourse on survey methods."

This does not bode well for an industry that seeks to protect and shield players from the often pernicious influences of gambling companies that have no accountability under national laws and operate outside of the law and often despite the law.

The report provided by the university argues that the revenue spent offshore amounts to three-quarters of the total online gambling revenue, resulting in missed economic opportunity, and is itself a staggering number. If true this is a shocking amount. Although the university is hardly to be accused of submitting red herrings, the number cited by the study ought to be taken with a grain of salt.

For starters, there is no way to actually know how much German consumers spend at unregulated gambling websites across the world. Those websites would not be particularly incentivized to report their numbers, especially when the information could be used to inform regulation and pass laws that are arguably prohibitive and restrictive of their product offers.

Gunther Schnabl, the economist who led the study, though, is confident that the numbers are accurate and reliable. If so, further lingering on the matter not only undermines the gambling industry in aggregate – it’s also harming consumers.

Without the rein to respond to rogue operators who recognize no authorities, and are bogged down in a clutter of restrictive regulation, licensed operators have very little chance to actually be competitive with the operators that are harming the average German consumer.

What Must Happen in German Regulated Gambling Next

Going back to the example with the disparity in numbers regarding the exact size of offshore gambling, there clearly is a gap in the analysis and exact figure and this seems a serious enough anomaly to raise a simple yet important question – is there a lack of communication between GGL, confident as it is, and the industry?

There are several angles to look at this. What arguments may be made about a regulator that holds the reins on the regulated gambling market firmly are somewhat lessened by the fact that a better line of communication between all parties involved in gambling in Germany could benefit consumers, which is the stated end goal of the Fourth State Treaty for Gambling.

In other words, GGL may be content to maintain an absolute truth, as it has already testily stated that "no challenge is too big (sic) for us [the regulator]," but taking a sterner look at the mismatched data could be a good direction in that direction. Even if we accept that there are only 800 to 900 offshore gambling sites in Germany, that is still a fair degree more than the 70 or so regulated ones in the country.

De Graaff makes a good point in explaining that both independent as well as regulatory data are most likely "educated guesses at best," as the true size of the offshore market remains an elusive and moving target all the time. He does note that different methodologies and covered periods may also have a contributing role in the disparity.

It certainly is more beneficial for GGL and the regulated market, and especially consumers, to heed the call of analysts who suggest that the numbers are grossly underestimated. Even if they were not, efforts to fight off offshore operators, whether through the issuance of IP blocks – which are a bit of a legal chestnut with courts still debating their legality under German law – or in another way take a lot of hard work.

Kansspelautoriteit, the Dutch Gambling Authority, which is not easily appeased by supplications from the companies it considered to be operating without authorization, has time and again battered the offshore gambling sector, slapping hefty penalties and designating culprits in a public, finger-pointing fashion.

The Australian Media Communication and Authority has spent the years since 2017 blocking some 840-odd websites, and it took it arguably six years to achieve that and a considerable resource tied up to that exact end. In Australia, IP blocks are not contested as possibly offshore, too, which means that the regulator would not have to grapple with reversed decisions later on.

So, the question for the future is, is there a way to tackle the offshore gambling market, boost channelization into regulated operators, and attain the end goal, which is protecting consumers? Right now, this is still a moving and elusive target, and hitting a bull’s eye may require GGL to sit and listen to input from gambling.

This invites its own challenges, naturally. Hawks would say that the regulator has grown complacent with the pleas of industry stakeholders who are clearly in the business of making money.

Even if we took the cynical view here, it still doesn’t spell well for the country’s gamblers if they are allowed to play freely in unregulated gambling operators while regulated ones are growing weary of finding a way and making the market work.

Another matter to consider is broader cooperation with other operators. For example, the study conducted by the University of Leipzig names Curacao-based operators as the main culprits.

Therefore, a broader cooperation between GGL and the Curacao eGaming Authority, especially at a time of tightening regulatory regime in the Caribbean country, could be welcomed, but again this fits more in the category of trying to run rings around a sprawling offshore gambling market rather than making the available offer at home more competitive.

The Other Pain Points of Germany’s Gambling

The gambling industry is facing other challenges as well. Advertising is a popular gripe among companies that are finding it hard to get players’ attention who, for the most part, are not even aware the regulated sites existed, nor what they have to offer.

Online advertising isn’t allowed in Germany which means that any gambling popping up on netizen’s screens in the country are probably the work of a rogue operator, with advertisements mostly conducted by offshore operators who share their promotional materials on YouTube.

Although restrictive, the strict advertisement regime is somewhat comparable to the tight advertising rules in the Netherlands, which also prohibit gambling companies from teaming up with famous personalities and thus to appeal to vulnerable consumers. The difference between Germany and the Netherlands is in the timing, explains De Graaff:

"The Netherlands became increasingly restricted after the opening of the market (market opened October 21st, 2021. Ban on the use of role models came within 1 year (effective July 1, 2022) and the ban on untargeted forms of advertising came into effect July 1, 2023). Channelization is super tough to measure, no one has accurate data. It’s educated guesses.

In Germany, the most notable rules that operators must follow include a blackout on online and TV advertising between 9 pm and 6 am, restrictions on displaying sports clips in advertising and a ban on working with sports personalities and other influencers. That is not much different than it is in the Netherlands. Differences will be more on a detail level."

A complete ban would be more akin to Italy’s Dignity Decree which brought gambling advertisements to a grinding halt, threatening harsh penalties against wrongdoers, including technological whales such as Google or Meta.

Sports betting is also not enjoying the best conditions with certain sports in the market available to bet on but only under certain conditions and events.

Electronic sports is completely off the table, for example, which once again points to an overbearing way of managing what is an already complex market that does not do well when micromanaged on every level, impairing its natural flaw and functionality.

Can We Expect Big Changes in 2024?

There are more or less two scenarios for the gambling industry in 2024. The first it that the status quo would persevere, unperturbed by independent analyses and numbers that seem to be a little too far from GGL’s own estimates for comfort's sake. This is a worst-case scenario in which the industry will continue to huff and puff under the onerous burden of GlüNeuRStv with no respite in sight.

This may not be entirely a bad thing either, as it would achieve one of two things – it would either prove or disprove the concerns raised by the industry, but at the expense of consumers if true.

Moving forward, efforts should probably focus on galvanizing political action and drawing attention to a sector that has historically been unpopular. This would mean for lawmakers to better understand the current market realities, and for GGL to start entertaining the idea – if even in theory - that the market may be failing the consumers it has sworn to serve under GlüNeuRStv.

With a report due several years from now, immediate change does not seem very plausible, but even then – fatalists need not be heeded as the German market is, ironically, too big to fail, and where there is potential, gambling companies would persevere, no matter what the cost.

Players, though, may choose to explore some of the unlicensed foreign operators that seem to be more than happy to take them on.

The Bottom Line: Taking Stock of German Regulation

After all of this, there are still questions that we feel merit closer examination. Among those are reasonable concerns about the future of problem gambling in Germany. Is the current course of regulation actually contributing to helping tackle the issue or is it, conversely, worsening it as an unintended consequence of a ham-fisted approach to the industry?

Are operators in the current markets able to retain market share and drive channelization and especially when they are already at a disadvantage, facing tough rules on advertisement and even taller orders trying to convince players to play at games that post lower-than-usual return-to-player rates? Not least, shouldn’t regulation make it so that legal and regulated companies are more competitive against offshore operators?

What will happen if the current regulatory push fails and backfires to the point where more customers become exposed to harmful or offshore gambling and if that would indeed turn out to be the case, would the government and regulator consider an alternative course of action?

The simple fact remains that German players will do with their money as they please and pain them as it might, they may choose to spend their money elsewhere if local state-controlled supply proves a mismatch with their expectations. Every day these questions remain unanswered, and Germany’s gambling industry and players seem to be suffering.

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