Risky Business: When to Say When on Casino Credit Lines

Many moons ago, when I worked in banking, I was taught very early about the four C’s of credit: Character, Capital, Credit History and Commitment. Now, I don’t think that the banking industry still practices the philosophy of these four C’s, but I do—and they can help a credit manager determine whether granting someone a line of credit is worth the risk to the casino. But how do we decide on an appropriate amount of credit, balancing the need to balance risk with marketing’s need to retain customers?

We’re all familiar with this scenario: The casino host or a table games representative tells the credit manager that Mr. Jones is a really good customer whose lifetime losses exceed $200,000 … and that Mr. Jones would like to have a $50,000 line of credit.

Now, there is no doubt that Mr. Jones is a good casino player, but does that mean he should be granted casino credit automatically, let alone a $50,000 line? From a casino marketing point of view, the answer is of course! Marketing would argue—and rightly so—that we need to retain Mr. Jones as a customer for future trips to the property. But, from a casino credit point of view, the answer is not so obvious. Any customer needs to qualify for credit just like the rest. That means that the customer’s value to the casino, or theoretical win/loss, needs to be carefully considered in relation to any potential line of credit.

That’s right, there is a correlation between theoretical win and casino credit. Let me explain. We all have the casino credit customer who has a $50,000 line of credit but whose play is $75 average bet and whose high action is $2,500. I call this type of credit line an “ego line,” which entails a property running too large a credit risk for the sake of a customer’s personal ego. Consider the play of two players, Player A and Player B:

Player A’s Play
Hours Played 4,069
Hands/Hour 67
Average Bet $707
Total Wagered $192,744,461
Hold % 18%
House Win $34,694,003

Player B’s Play
Hours Played 589
Hands/Hour 67
Average Bet $625
Total Wagered $24,664,375
Hold % 18%
House Win $4,439,588

[Note: Hands played per hour estimate is based on 400 total hands dealt per hour at a fully occupied six-seat table at which Players A and B were playing one seat each.]

Now consider the lines of credit calculated for Player A and Player B, based on the standard Factor of 20 and Factor of 25 formulas:

Player A – Line of Credit Calculation
Factor of 20 Factor of 25
Average Bet $707 Average Bet $707
X X X X
Factor 20 Factor 25
= $14,140 line of credit = $17,675 line of credit

Player B – Line of Credit Calculation
Factor of 20 Factor of 25
Average Bet $625 Average Bet $625
X X X X
Factor 20 Factor 25
= $12,500 line of credit = $15,625 line of credit

As you can see, although the formula would grant just a few thousand dollars more in credit to Player A, Player A’s theoretical house win is $34,694,003, while Player B’s is $4,439,588.

Player B, with his ego line, is a perfect example of the relation between the theoretical win and the property’s credit risk. This type of credit customer exposes the property with little to no gain. But we should grant the line to Player A, right?

Maybe.

Another question we need to consider is when does the credit risk start? At the time the line was approved or when the customer takes his first marker? I know it sounds a lot like which came first, the chicken or the egg? But as far as national consumer credit standards are all concerned, credit risk starts at the time the line of credit is approved.

Many of my colleagues agree with me that we have never issued bad credit ever, although it just so happens that credit tends to go bad no matter how sound the initial credit-granting decision was. Here is a very profound statement that a friend of mine once told me: “We always have to assume that every casino credit customer will eventually go bad on us. The key is to make sure that the customer’s lifetime losses exceed the final write off.”

Player A has a high theoretical win, but that does not necessarily mean that you must extend him casino credit. He still has to qualify for credit, and here’s where those four C’s of credit come in. This too is not a simple task; perhaps this customer has plenty of capital and a good bank rating but his consumer credit history is derogatory—then what? Do we want to expose the property to a possible bad debt?

I was chatting with a VP of casino marketing recently, and we both agreed that there is a strong relation between a player’s theoretical win and actual play and casino credit. We both also agreed that just because there is a correlation, actual play and theoretical win should not be the only basis on which to extend credit. Even though sometimes we get caught up with our emotions and don’t want to lose a customer, the bottom line is we need to look at the whole picture—the theoretical win, actual play and those classic four C’s.

Unfortunately, it’s quite a bit like being a Monday-morning quarterback—it is a lot easier to make a decision after the game is played!

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