Online businesses can’t sell products or services to anyone who has cash in their pocket; they can only sell to people with sufficient bank funding. Processing those charges also requires the merchant to have a bank willing to accept those funds.
An entire industry of subcontracted processors, third-party billers and banks willing to handle high-risk industries has blossomed in the last decade seeking to earn a percentage of the sales from markets including adult content, health supplements and other products with a higher than average risk. That high-risk banking sector is imploding and most webmasters aren’t even aware of the impact these tremors are already having on the adult industry. Even more unsettling is the uniform silence among the small group of business owners who actually understand what it going on these days.
As originally published on Haaretz.com, the website of the oldest daily newspaper in the country of Israel, Israel Discount Bank (IDB) is in the process of removing its Chairman Shlomo Zohar and handling the aftermath of a 9 million euro fine from Visa against its subsidiary Israel Credit Cards-Cal Ltd. (ICC-Cal). Rumors have circulated that Visa Europe intends to withdraw the permit for international clearing that it had issued to ICC-Cal and may take other action against IDB if it does not take immediate action to change the way its subsidiary high risk departments were handling transactions in sectors that include internet gambling, nutritional supplements, online pharmaceuticals and porn.
Globes’ report (www. tradingmarkets.com/.site/news/StockNews/2654143/), suggests that ICC-Cal was on the verge of a share issue that had a value of two to three billion and that the heat brought by the VISA fines for excessive chargebacks on nutritional supplements and possible further disciplinary action would make any share issue far less lucrative than was originally projected.
While the ICC-Cal fines stemmed from the activities of several clearing companies, Globes reported “a substantial part of the clearing problems for which the fine was imposed was related to transactions connected with Internet clearing companies owned by Nathan Jacobson, who owns PayGea.”
If you are a webmaster wondering why any of this is important, there are two important aspects of the equation that are already affecting you more than you may realize: money potentially being withheld by ICC-Cal and less banks willing to accept adult business in the future.
The immediate impact is that companies who did business through ICC-Cal signed standard contracts permitting the bank to force businesses to be responsible for sanctions based on their transactions. That means any company that was doing business through ICC-Cal may have had a large amount of its money withheld during an internal investigation or seized outright if its actions were deemed to be causing any of the ongoing problems the bank is now facing.
That may possibly explain a rash of affiliate programs suddenly failing to make regularly scheduled payouts, and if processors were deemed accountable, it becomes possible that funds of their clients may be held in aggregate so a company that did nothing wrong directly may find itself lumped in with bad actors and subject to fines or financial holds as an unintended result.
In doing research for XBIZ articles over the last few years, I have compiled a long list of knowledgeable contacts in many sectors of the online adult economy including trusted people with an undeniable understanding of the industry and varied backgrounds. Not one single source was willing to comment on the record about this ICC-Cal situation.
In the past, whether writing about obscenity or legal matters, business trends or financial incidents, many were willing to lend their point of view to nearly any article. In this instance not only were people unwilling to comment on the record, most were unwilling to discuss the matter off the record as well, even companies which clearly were not being directly affected by the situation.
Long term, the biggest impact of the ICC-Cal debacle is the decreasing number of banks willing to process payments for high-risk markets. Put simply, if there are no banks willing to process payments, it does not matter how well anything else is working — nobody can pay for anything or get paid as a result.
Furthermore, as the remaining banks see the damage done by a small number of scammers and notice the shrinking number of competitor banks in the high-risk sector, they are each likely to raise new regulations, be stricter with enforcement and raise their rates — all cutting deeper into the profit margins of each transaction.
For an issue this significant to have gone unnoticed by most of the adult online industry says a lot about the state of the industry right now. Message boards are cluttered with ‘would you hit it’ threads and Obama banter posts while topics that actually affect every dollar or euro a webmaster might ever earn go quietly without much discussion. When the announcement about ICC-Cal was made, a single thread on JustBlowMe.com appeared with a flurry of VIPs hashing out the likely significance of the matter, but it ended quickly and as abruptly as it began.
In that JBM thread, Ron Cadwell, founder of CCBill said: “It just amazes me that more people don’t realize how huge this is. You have the largest high-risk bank in the WORLD. Saying goodbye to 500+ million per month in processing. THIS IS HUGE!!!! You also have every other high-risk bank in the world on NOTICE to not accept or be very careful who they take in as a new/existing client. Make no mistake ICC did not just wake up and decide they would stop making a TON of Money in high risk processing. They WERE FORCED to stop… will merchants get their last week+ of transactions wired to them? Will the bank hold them and their reserves for years to protect against losses? Will ISO just pocket the money and never pay the merchants? Time will tell but I think we will start hearing stories shortly just like the iBill days just a lot more and larger.”
Then after only 45 posts in the thread, the discussion stopped; or more likely it went out of public view leaving many very important questions unanswered. Finding out which companies will be affected and to what degree is impossible, with so many companies intertwined, working with each other or sending traffic and cross sales to one another — the cascade of unpaid bills may ripple through a very large swatch of the online economy.
Knowing what actions other banks will take or what direction VISA may move in is equally impossible to determine and the eerie silence from anyone even remotely aware of what is going on makes the matter that much more ominous.
Those brick-and-mortar cash-only days of XXX entertainment may seem quaint in the modern digital age where a single website can be visited in one hour by more potential customers than a strip club sees in an entire year. However, nobody had to worry that cash would stop being printed by the Treasury, so the means to get paid was never in question.
Now, with the financial meltdown and ongoing credit crunch affecting all consumers being compounded by high-risk banks like ICC-Cal feeling the pinch from card associations — the question of how to sell porn may soon become secondary to the emerging quandary of how to get paid for it.