Another Turn of the Screw: Part 1
According to an announcement released last week by three of the adult Internet’s larger third-party aggregators - Epoch/Paycom, iBill, and CCBill - VISA and MasterCard (V/MC) have established several new regulations that have the potential to profoundly change the relationship between aggregators and adult Webmasters who do not have their own merchant accounts. Immediately after the announcement, the boards were awash with comments, complaints, questions and prognostications, dire and otherwise, about what exactly the intended and inadvertent affects of the new regulations might be.
Typically, when V/MC sneeze, the adult Internet gets a cold, and sometimes a touch of influenza. With these new regulations, however, few Webmasters know whether they should see a doctor, travel agent, or mortician. And though it may be a while before the answer is crystal clear, AVN Online's preliminary discussions with a variety of adult Internet individuals revealed reactions that ranged from sanguine to fatalistic, and opinions as to V/MC's motives running the gamut from those who believe that the companies are trying to do what's best for both themselves and the industry to those who are convinced that these new rules are the beginning of the end for the domestic adult Internet as we know it.
Perhaps the most palpable changes are the new labels: Aggregators will now be called Internet Payment Service Providers (IPSPs), and merchants that use IPSP services will now be referred to as Sponsored Merchants. According to the announcement, "An IPSP is a company that provides a broad array of services and has financial responsibility and liability for merchant accounts whereby you, our clients (Sponsored Merchants) are allowed to process and settle Internet transactions."
The name changes, according to one respected Internet attorney, are significant: IPSPs are now linguistically associated with Internet Service Providers (ISPs), with which they have traditionally shared similar rights and responsibilities, and Sponsored Merchants are now an acknowledged subset of the IPSPs, linked in liability by being "sponsored:" an ingenious way of marking the IPSPs publicly as being manifestly responsible for their clients' actions.
On their face, the new regulations - the majority of which are being implemented by VISA - are couched in language that is aimed at giving the credit card companies greater control over an industry that knows no geographical boundaries and historically has been susceptible to high chargebacks and fraud. They include:
• New registration fees: initial ($750) and annual ($375).
• The required filing by Sponsored Merchants with VISA of new registration forms that must then be approved by VISA.
• The compulsory funneling to VISA by the IPSPs of monthly sales and chargeback data for every URL.
• A new policy that states that IPSPs can register Sponsored Merchants only in the country where the Sponsored Merchant has a presence.
• MasterCard will be instituting several new rules of its own in the near future, but for the time being the company has decreed that the MasterCard logo may not be displayed on clients’ sites, something that VISA has yet to stipulate.
Other less controversial emendations have to do with changes to the descriptors on the cardholders' credit card statement, the displaying of IPSP Terms and Conditions on join forms, and other labeling requirements.
Regarding the timetable of these changes, the announcement says, "October is the month to implement these changes," and includes a timetable for Webmasters to follow to have everything completed by Nov. 1. The rapidity with which these changes are being ordered is also of some concern in certain quarters, as it leaves precious little time for Webmasters to review their options and decide whether they want V/MC to have direct access to all the information the companies are asking for.
We asked the three companies that issued the announcement for some clarifying comments. All responded except iBill.
Rand Pate of Epoch Systems generously took the time out from an inevitable avalanche of Webmaster queries to respond to some questions. Keep in mind that these answers were provided immediately after the announcement was released, and some of the questions have since been fully answered.
What regulations are new?
"The enforcement of reporting down to URL levels all credit and chargeback activity to VISA [is new]. Epoch has been doing this for over a year, so although nothing is new to us, it is now being "enforced" by VISA."
Are all these fees new?
Why is this happening now?
"All I can really say is what we've heard over and over again.... If adult Webmasters don't learn to police themselves, someone will do it for them. Guess it's happened."
How long ago were you informed that this was going to happen?
"We've known about much of the regulations for several weeks, and some for several months. The regulations were not released from acquiring banks, however, until now."
Is there any significance to you now being called an IPSP?
"It's VISA's designation for online third party processors. By defining us and being familiar with our business, they can understand how IPSPs help fight fraud and manage a section of business for them they would not otherwise want to deal with."
Are you aware of any other new regulations that are not included here?
"Not that I'm aware of. The new MasterCard regs have not yet been released, however."
"IPSPs can only register Sponsored Merchants in the country where the Sponsored Merchant has a presence." Do you know what this means? Does it mean where their servers are, their headquarters, their P.O. box?
"I'm waiting for clarification of this myself. It does appear that if you process in the U.S., you must have a presence there; same for the U.K., Canada, or wherever." (We have since been told that VISA has clarified its "presence" requirement to mean that all companies must actually have staff in the United States, though VISA has not yet confirmed this to us, or explained what exactly constitutes a "staff.") The new rules, as Fisher understands them, apply to all IPSPs, not just those who deal with certain kinds of clients.
VISA wants to see all monthly statements, chargebacks, etc., down to the URL, and reserves the right to terminate specific URLs. Is this new? Is it significant? Are they trying to exert more centralized control?
"They are trying to ensure that programs causing damage to their product and unacceptable customer issues are not able to hide in third-party portfolios or by spreading their business out among multiple processors."
Tom Fisher of CCBill spoke with AVN Online’s Technology Editor, Kathee Brewer, who reported his follow-up comments as follows:
The new rules, as Fisher understands them, apply to all IPSPs, not just those who deal with certain kinds of clients. He said the introduction of the acronym "IPSP" is to facilitate referential "shorthand" for VISA.
Regarding the requirement that "IPSPs are required to provide VISA with monthly sales, chargeback and credit data," Fisher said, "That information has always been available to them [VISA], but what they're doing is putting the burden for reporting it on the processor. It means a little more work for us."
There's still quite a bit of confusion on the part of the IPSPs about what is meant by "IPSPs can only register Sponsored Merchants in the country where the Sponsored Merchant has a presence." Epoch, CCBill, and iBill are attempting to clarify that through their acquiring banks, because VISA doesn't seem to want to talk to the IPSPs directly about it, but basically, that particular point breaks down for Fisher thusly:
VISA is a consortium of banks that are broken into six regions scattered around the globe. The U.S. composes one region. Others encompass Europe, Asia, Australia, etc. Each region has a governing board composed of representatives from the acquiring banks (the ones that process the charges) and the issuing banks (the ones that issue credit cards - some banks do both). Each of the regions also has representatives on the board of VISA International, which is the main governing body. Each region is free to set its own rules for its member banks, and sometimes VISA International upholds those rules for everyone, but sometimes it doesn't. Fisher said he thinks this new set of rules comes down from VISA International.
Each VISA member bank has a contract with VISA under which both entities operate. In turn, merchants who accept VISA as a form of payment have a contract with an acquiring bank (the one that processes charges), not with VISA itself. When VISA makes a rule, it tells the acquiring bank with which it has a contract, "If you don't do this, then we'll fine you or yank your ability to process VISA payments." The bank, in turn, says to its affiliated merchants, "If you don't do this, VISA has threatened to fine us or yank our processing capability, so although we appreciate all the money you bring in, we don't want to lose all the money we make from our other clients. Violate this rule and we'll pull your ability to process VISA, plus we'll probably fine you."
Under VISA's definitions, IPSPs function as giant merchants. Their contracts are with their banks, not with VISA itself.
One of the problems in the Internet age is that acquiring banks were getting upset with each other because - since most e-commerce still takes place in the U.S. and the U.S. is home to all the big IPSPs - the banks in the U.S. region were getting the lion's share of the acquisition fees (which compose quite a chunk of their income). To address that, several years ago VISA International instituted a rule disallowing cross-border acquiring - meaning the bank and the merchant with which it had a contract for merchant services had to be located in the same geographic region (basically, in the same country). Until now, that rule hasn't been enforced very diligently (if at all). The new rule about registering sponsored merchants only in the same country is an attempt to get tough about that rule.
What the IPSPs are trying to clarify is what constitutes "same country" residence. Is it any branch office? Headquarters only? The country where the charge capturer and merchant pay taxes? "Web server and ISP location have nothing to do with it," Fisher said.
Fisher's entirely hypothetical example was Wal-Mart. (Wal-Mart, ironically, is suing VISA for alleged anti-trust violations.) Say Wal-Mart has a store in England through which it processes VISA charges. To minimize its expense and accounting red tape, Wal-Mart would like to run all those charges through one merchant account assigned to its corporate headquarters in Bentonville, Ark. British banks, understandably, probably would cry "foul!" because they'd be losing the acquisition fees to a U.S. bank, even though the purchases were made in England. VISA International steps in, and because it's already established a prohibition against cross-border acquiring, it says to Wal-Mart, "Look, we understand what you're trying to do here, but the money really needs to stay in the U.K. You're going to have to set up another merchant account for all your stores in England and process all the VISA charges through a British bank, or we'll fine you and/or yank your merchant account privileges worldwide. You'll never do VISA business in this town again."
PSW Billling is a Rhode Island-based aggregator that did not participate in the issued statement, but did release a press release on Oct. 4 that dealt with the new regulations. The timeliness of the release, and the new services offered in response, indicate that these new services were on the drawing board long before the announcement last week. It reads, in part:
"In an ongoing commitment to keeping options open for clients and other industry merchants, PSW unveiled the following service updates and additions:
"ePaymentPro, a complete online billing solution, will allow clients to accept Online Checks, VISA, VISA Debit, MasterCard, MasterCard Debit, and JCB. The registration fees will be required for continued service provisions.
"ePaymentLite, an economical online billing solution, will allow clients to accept Online Checks, MasterCard, MasterCard Debit, and JCB. There will be no registration fee, no setup costs, and no periodic maintenance fees." [Notice, of course, the absence of VISA from this option.]
California-based Jettis is another aggregator that was not party to the joint announcement, but followed with an Oct. 4 press release, which includes, in part:
"In response to these concerns, Jettis has decided to share the financial burden with all existing and new clients by absorbing this fee on their behalf. Jettis clients will need to pay the fee during the registration process, but will be credited back the registration fee against their normal Jettis processing fees.
"We will offer a rebate to all clients processing with Jettis within this calendar year (2002) in the full amount of the required processing fee. We hope that this will help in some way to alleviate some concern and to keep you focused on the execution of your respective business plans.
"In addition, for those who wish to explore the possibility of setting up your own merchant account, Jettis would be happy to help you through this process. Jettis has a large base of clients who have their own merchant accounts and we are adequately prepared to help you obtain and manage a merchant account.
"In closing, while change is never easy, we think it is important that we not forget to recognize the positive. Many have been concerned over the years that VISA would pull out of this space completely, thereby eliminating our ability to accept a credit card that is widely held and used. These new regulations, while in some cases difficult to accept, demonstrate that VISA has accepted IPSPs as a viable business model."
Adult Verification Services (AVSes) are not IPSPs per se, but do share many of the same characteristics, such as a similar level of liability regarding affiliate member sites, and the responsibilities that come with supplying the billing services for those sites. AC Pay is Adult Check’s billing/processing program. Immediately after the announcement, Adult Check Vice President for Business Development Brad Estes offered the following observations to AVN Online:
"Everyone has known about this for a couple of months and we are still analyzing it, but as of yet, we don't think it affects us, and we have no plans to implement any fees or change the way we do things.
"I think that people have a bit of a sticker shock to the $750, but in the grand scheme of things, it's not a ton of money if they're making a good income with their pay sites. Sure, there are going to be people who fall off, but those people will be able to get right back up again in terms of income by rolling it over to a sponsor. The way our industry always works is that you have a problem and then somebody comes up with an innovative solution that people continue using.
"The way our industry always works is that you have a problem and then somebody comes up with an innovative solution that people continue using. I hope that smaller people don't go out of business, because a lot of them are really good Webmasters, but I also hope that they [the new regulations] clean up the act of some of the people out there who bounce around between billing companies and try to burn up accounts and take the money off the table.
"If the analysis dictates that we need to make a change, then we'll work out a way with our Webmasters to make it as painless as possible."
In a subsequent Oct. 8 press release regarding their AC Pay program, Adult Check explained why the company believes it is not affected by the regulations:
"First, due to our worldwide processing arrangements and seven years of experience at processing high volumes of transactions, AC Pay does not anticipate that the registration fees required by VISA USA will apply to our Webmaster Clients. In addition, our non-U.S. webmasters will not have to set up a corporate presence in the U.S. as some of our competitors are requiring.
"AC Pay has a presence in other regions of the world and processes its VISA transactions through VISA International, which has not adopted the new regulations made by VISA USA. There is a chance that VISA International may adopt these regulations in the future, however VISA International has traditionally had a much better track record of cooperation between itself and its acquiring banks and merchants.
"Our redundant banking relationships spanning the globe combined with the structure of our business mean that AC Pay is much more stable than other processors in the industry. AC Pay not only screens fraudulent transactions more accurately via our Profile Check scoring system, we also get more transactions processed due to our ability to attempt transactions through multiple banking channels in a fraction of a second.
"Second, AC Pay has strong and healthy relationships with VISA and MasterCard due to our professionalism and track record over these seven years in business. These relationships made us aware of the recently announced regulations over six months ago and allowed us to enter the pay-site billing marketplace with a quality product and a distinct advantage.
"Third, AC Pay values its clients, both large and small. We will keep you apprised of any future regulations that may impact the way we do business together. Further, we will always leverage our weight in the processing industry to make your voices heard and keep unnecessary costs down. We appreciate the fact that any fee impacts your bottom line and would never hide an announcement regarding fees until the last minute in an attempt to back you into a corner."
A PayPal spokesperson told AVN Online via email that the new regulations apply equally to all IPSPs, and therefore they apply to PayPal as well. The spokesperson noted that while other billers are dropping processing for non-U.S. businesses, PayPal will continue to process for merchants in the U.S. and worldwide.
Return tomorrow for Part 2 and see what some top attorneys have to say about the implications of these developments...
Erick Black and Tripp Daniels also contributed to this report.