Beware of the Non-negotiable Chip Program

By Bill Zender

Here’s a scenario that could happen or has happen at your casino. An executive is contacted by an Asian marketer with a proposal to bring a large number of Asian customers to the casino. If the casino executive agrees with the marketer’s program, the marketer guarantees that he can bring the casino $1 million in additional play in the first month and will increase this number to $2 million and as high as $3 million within the next three months. The marketer also informs the casino executive that although a majority of the customer’s gambling money will be cash, he needs to be able to establish lines of credit for some of his better customers. He then explains that most Asian gamblers deal only in cash, and when they lose all their money they don’t have checking accounts and debt cards to fall back on. How does the Asian marketer plan on attracting these customers to the casino? Through a value added “non-negotiable” chip program establish by the casino and available only to his best players. Sounds like a good deal so far, doesn’t it?

The Asian marketer’s next step is to convince the casino executive that a non-negotiable or “dead chip” program will be worthwhile to the casino. To make this program work the promotion needs to be supported with a “value added” incentive that will allow the marketer to attract valuable cash gamblers, and here in lies the problem. But, before we can broach this subject we need to examine the basics of a non-negotiable chip program first.

Understanding Non-negotiable Chips and a Non-negotiable Chip Programs

To the best of my knowledge non-negotiable chip programs started oversea in the Far East-Australia region of the world. The program was used originally to track higher limit Asian play in the casinos. If you’re familiar with Asian gamblers you know they’re very difficult to track during table play. Asian players have a knack for bouncing from table to table and are know to hand chips off to other players, making it almost impossible to track the number of hands played and their average wage. In an attempt to maintain better theoretical win figures overseas casino executive required higher limit players buy-in with cash, either at the cage or gaming table, for non-negotiable chips. Non-negotiable chips are special chips that have an expressed monetary value that can not be cashed out by a cashier and have to be played across the casino table games. Because non-negotiable chips have to be played or “washed” first before chips of “live” value can be obtained, the casino could instantly calculate the player’s theoretical win and that player’s theoretical value to the casino.

Here’s how non-negotiable chip’s actual value is calculated. Since the chip can’t be cashed out it has to be wager on the gaming table. Let’s say the chip’s face value is $25. If the wager loses the chip is taken by the dealer; if the wager wins the non-negotiable chip is paid with standard casino chip(s) and the non-negotiable is retain by the customer to bet again. This situation forces the customer to “wash” or play through all the non-negotiable chips he or she has in their possession, pocketing all casino chips they have won. Once the customer has finished losing all the non-negotiable he or she will cash out the casino value chips at the cage. Since the non-negotiable chips are played until they lose, the theoretical win on this type of play is very close to the casino’s calculated house advantage (H/A). In baccarat for instance, the game most commonly used for non-negotiable play, has an approximate H/A of 1.1%, or a theoretical win of $1.10 for every $100 wagered. Taking this example into consideration the theoretical win for a player who has non-negotiable buy-ins of $100,000 would be worth $1,100 to the casino.

For practical purposes a casino using this program would use the non-negotiable chip theoretical win number as a factor when determining the amount of complementary services the casino could provide to the player. However, many Asian players aren’t interested in receiving meal or room comps; they want to be compensated in cash. This concept posed a slight problem for the casino operators since they could not be sure the players won’t take the cash back money and run. To mitigate this concern the casino executives decided to provide the players with additional non-negotiable chips upon purchase of the original non-negotiable buy-in. By using this procedure the executive knew the customer was forced to play his or her reward across the tables at least one time. This is where the program starts getting out of hand. Casinos in this region understood the power of attracting higher limit cash gamblers and started a bidding war to see who could give the best additional non-negotiable chip “incentives” to draw the best play. In the end many of the gambling operations promoted the program to such an extent that they priced themselves beyond the theoretical win limits; rendering the program a losers. Remember, volume never overcomes a negative situation.

Over the last dozen years or so a number of casinos throughout North America have been subject to a negative player promotion with non-negotiable chip programs as the basis for what can be best described as a premeditated scam against the casino. The scam is anchored through misdirected percentage numbers and is fueled through greed on the part of the casino. A one time proven maxim wisely states; “If it’s too good to be true, it probably is”.

How the Non-negotiable Scam is Sold to the Unwary Casino Executive

Going back to the Asian marketer’s meeting with the casino executive we find the marketer explaining the value of the program to the casino executive. “If you want me to bring big cash playing customers into your casino I will need to provide them with an added value incentive”, the marketer comments. “You need to establish a non-negotiable program that allows my players to buy-in for $10,000 cash for which they will receive $11,000 in non-negotiable chips”. The casino executive chews on this for a second and says, “How can we afford to give the players $1,000 extra in non-negotiable chips?” “What is your hold percentage right now on your baccarat games, 15% to 16%?”, asks the marketer, “If your casino is hold percentage is 15% at baccarat then you expect to win $1,500 for every $10,000 in action”. “If you give my players back $1,000 as an incentive to come here and play,” the marketer states, “then your casino is theoretically winning $500 for each person buying in.” The marketer then reasons with the executive that he can bring in several million dollars in business each month; business that is new to the casino. He explains that if the casino executive wants this type of higher limit business he will have to pay for it, and with a return of $500 per player buy-in its well worth it. Now ask yourself as you read this short narrative, does it sound logical? In many situations it sounds extremely logical, especially to the casino executive that needs to drive new business into the casino. After mulling the information over in his mind, the casino executive decides to “give it a shot” and see what return the program will bring to the casino. In reality all he accomplished by agreeing to this promotion was to cost his casino approximately $800 in promotional expenses (the actual cost of the additional non-negotiable) for every $10,000 cash purchase.

In this example the marketer focused the casino executive on the game’s “hold percentage” and not on the game’s mathematical “house advantage”. The games hold percentage is based on the relationship between money used to buy chips at the table and the amount of money won by the casino after a number of wagers that are made or “churned” over and over again. While the hold percentage may actually be 15%, the game’s house advantage of 1.1% is more closely related to the actual multiplier required to estimate the break even point of issuing additional “value added” non-negotiable chips. In the past I have used house advantage as a multiplier when figure non-negotiable worth; however winning non-negotiable chips may be played several times over and a truer breakeven number should be approximately 2% (baccarat). In their book, Casino Math, 2nd Edition, Cabot and Hannum state that the breakeven number in baccarat is closer to 2.4% to 2.7% depending on whether the player is wagering on the banker hand or the player hand. Regardless of which number you may use, non-negotiable chip value is much less then 10% returned to the non-negotiable player requested by the Asian marketer. In the this example the non-negotiable chip player receives $1,000 in value added non-negotiable chips when the casino should have issue no more than $200 in addition chips.

To add insult to injury other costly casino problems stem from this fraudulent program. In many situation the non-negotiable customer are receiving full credit for their playing time, receiving complementary rooms and food in addition to the value added bonus. Another problem that occurs is the issuance of uncollectible credit. Many of the credit decisions are based on the marketer’s recommendations about specific players since the players have very little credit history. Also, the marketer, while not having the ability to issue credit, may be given the right to issue credit line extensions or “TTO” (which means “this time only”, or temporary extension this player trip). In many cases the marketer will sign for or request the authorizing casino executive to go well over the previously establish customer limit. The combination of “shaky” original line of credit decisions and risky TTO extensions are a cause for uncollectible markers in the future, usually exceeding 50%.

Note: If the non-negotiable chips are purchased at the cage and all non-negotiable chips lost by the players at the table are credited back to the cage at face value, the hold percentage for that table game will be overly inflated. Purchasing chips at the cage reduces the drop and forces the game hold percentages upward indicating a false game performance. In many cases executives are reluctant to cancel this fraudulent program because they originally perceive the program as being positive based on the higher hold percentage. Attention needs to be focused on the cost of the promotion in the expense created by the value added, since the monetary damage is not usually apparent when reviewing gaming revenue figures.

In addition, in almost every example of non-negotiable chip program fraud the Asian marketer receives a “kickback” from the customers he or she brings into the promotion, usually in the neighborhood of 50% of the value added estimated value. Recently I was question by an inquisitive casino executive as to the scope of his casino’s non-negotiable chip program’s problem. After outlining the problem program and the created percentage misdirection, the executive looked at me and asked if it was “really that bad of a deal”. My comment; if you decide to keep this program in place please call me and let me known. I’ll have you introduce me to your Asian marketer and after I split the proceeds fifty-fifty, I can still make about $400 a day.

I’m not saying all non-negotiable programs are bad, just the programs that return a much high value added then percentages dictate. If you have a non-negotiable program it will behoove you to investigate its true cost and marketing potential for your organizations. Many larger casino operations have lost money to this same scam, but because discover of this predicament leads to embarrassment, usually by higher level casino executives, the problem is corrected and the facts swept under the carpet. Because facts about this scam aren’t freely passed to other casinos, details about this type of casino scam are not reveal, and this situation renders other casinos unknowingly vulnerable to the “too good to be true” deception.