How Does Betfair Make Money?

Betfair is a massive and revolutionary force in the betting industry that rakes in billions of pounds in revenue. In this post we will look at how it makes money. The business model is complete genius and, as a former shareholder, I have had the pleasure of riding its wave of growth prior to its takeover by Paddy Power.

Charging a Net Commission on Winnings

The fundamental way that the Betfair exchange makes money is by charging a fee on winning bets. This varies between 5% to as low as 2%. All users start at 5% but as you bet you get a discount based on the volumes of bets you put through. To get to the 2% level you need to turnover millions of pounds.

A small and unexceptional race on a Monday traded over £350,000

If we consider a betting market where a gambler makes a net profit of £10 (say they win £15 betting on a team to win and lose £5 betting on the score) Betfair will pay them £9.50 and withhold a 50p commission charge. When you consider that many markets can trade millions of pounds the commissions really ad up.

It is important to understand that Betfair does not take 2-5% of all bets but only charges on winning bets. The fees are only charged on a customers net win. Those who sell a bet on a losing horse are charged on their net winnings. Likewise those who backed the winner are charged. But those that laid the winner or bet on the loser are not charged. The exact amount that Befair wins is based on which horse wins. However the great news for Betfair is that - as the bets are between punters - the house can never lose.

Taxing The Winners

Headline in the Guardian newspaper about Betfair's premium charge

Bookies hate winners. The bread and butter of a bookie is the customer who wins a little then bets his/her winnings again and again until he/she loses the lot. That's the core of the old model. Get them hooked on betting and then get them on the machines until they lose their house. In the long run the bookie always wins and the customers are really all just mug punters.

Betfair, they said, was different. They claimed that winners were welcome. Betfair doesn't care if you win as they don't pay you anything - in fact you pay them a commission on your winnings. However as time went on some people began to win and win big. A breed of super Betfair traders developed and some of them did exceptionally well. One such trader has used the exchange to place around a quarter of a billion dollars of bets every year!

There are many complex Betfair trading strategies. The most basic and easiest to understand is betting on both sides of a bet at different odds. For example you could bet £10 on a horse to win at 2.0 and then lay £12 at 1.8 say. That way you win £10 is the horse wins and pay out £9.60 making a profit of £0.40 then pay Betfair 5% of that. If the horse loses you would lose your £10 bet but pocket £12 for the bet you sold making £2 before commission. This however is easier said than done and the odds can more in the opposite direction.

Very skilled traders (many of whom used to work in finance and have advanced degree in engineering or mathematics) can earn a very good return on the exchange. Betfair has decided it wants in on the game so has introduced a premium charge. They now get a sizeable cut of the profits of this breed of super trader.

Betfair Casino, Betfair Sportsbook and Betfair Everything Else 

Betfair is much more than an exchange

The clever people who run Betfair eventually figured out that there is more money in running a casino and bookmaker than simply running a betting exchange. The only people that are interested in using exchanges are those clever enough to figure out how they work. These people tend to be more sophisticated bettors. Thus Betfair now rakes in money offering casino betting and regular sports betting which draws in the usual punters thus expanding their profitability.

Betfair is also active in race broadcasting and publishing as it owns Timeform which it bought for £15M in 2006.