Penny Breakage: Regulators Should Take a Stand

The recently created Thoroughbred Idea Foundation (TIF) broke its maiden at first asking with its white paper released on September 7, 2018. It is titled Penny Breakage: Returning rightful winnings to horseplayers and stimulating North America’s tote pools. The executive summary and the full report are must reads.

TIF is a non-profit organization designed to improve the prospects of the Thoroughbred industry and its stakeholders. In other words, it’s a “think tank.” The penny breakage white paper is its first.

The idea of penny breakage is not new, but it’s a topic that has been largely ignored for years.

As explained in the report,

Breakage is the difference between what horseplayers should receive on a winning bet and what they actually receive. The concept has been ever-present in racing since the pari-mutuel tote system was implemented – with bet-takers (in the early 20th century) claiming breakage was necessary to keep the flow of customers moving, helping betting churn, saving tellers from having to pay odd amounts ($2.98), instead relying on a rounded figure ($2.80).

I believe that breakage reform will now become a front burner issue of industry leaders due to the elegance of the argument put forth by TIF.

The argument is based on principle, historical context, facts, and figures. Add how technology has made moot the logic of current breakage calculations and the takeaway is an unassailable call for reform.

The first reaction from every regulator and track operator should be – “Sign me up!”

Historical context

The current approach to breakage is a remnant of a bygone era. Here is the reports description,

The regulations about breakage were designed prior to the internet era, and even before racetracks employed self-service machines. They have remained the same, essentially, for as long as a pari-mutuel tote system has been employed in North America. Handle continues to shift away from traditional cash channels and more to online ADWs. Breakage no longer reaches its originally intended sources to the degree it once did.

Retaining breakage in its current form is an opaque practice at a time when pricing transparency is essential to customers. It is also an antiquated concept in an age where the modern customer experience has little to do with standing in line to collect cash. Switching to penny breakage is an obvious, but much needed change. 

Breakage is a big number

Can pennies really make a difference? Well it depends on how many. Again, here is the view reported by TIF:

The Thoroughbred Idea Foundation (TIF) estimates annual breakage in America is worth roughly $50 million – or 0.45% of the $10.9 billion wagered in 2017. If breakage was returned to horseplayers and churned through the tote pools, even at a blended takeout rate of 20%, TIF believes this could yield an extra $200 million handle, or an approximate 2% increase in handle at current levels. That equates to the largest single year percentage increase in handle over the last 15 years.

The win pool from the Triple Crown races previously cited generated $1 million in breakage alone. 

Pennies can make a difference, if there are 5 billion of them.

What should regulators do?

Speaking with me after the report’s release, Mr. Patrick Cummings, TIF’s executive director, said, “I’m optimistic. My optimism is based on two weeks of conversations. My phone is ringing off the hook.”

Mr. Cummings know his way around the racing industry. Prior to joining TIF in June of this year he had led the Hong Kong Jockey Club’s racing division’s public affairs team. Prior to that, he spent four years as director of racing information for Trakus, based outside Boston.

Mr. Cummings said that he has discussed penny breakage with track operators, officials from horsemen’s organizations, and regulators. The potential supporters have different perspectives. Some track operators may support penny breakage because they take a bath on minus pools that would be eliminated in the reform. Horsemen may get on board because they see it as a way to increase purses.

Regulators should help lead this movement for the most basic of reasons – it’s the right thing to do.

Singing in unison is always more effective that hearing a few stray voices in the wilderness. That is where the Association of Racing Commissioners International (RCI) comes in. As the only entity representing U.S. regulators on a national level, the RCI’s model rules are looked upon by many as the de facto standard for racing regulations.

If the RCI passed a model rule on penny breakage consistent with the TIF report the racing industry would gain a very effective marketing tool. Every commission, track operator, and horsemen’s group in every state could go to their respective state legislatures and point to the RCI model rule and say: “This is what we should do. This is the industry standard.”

RCI, please move forward. It’s the right thing to do.

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