Getting Paid? Part 1

Stephen Yagielowicz

There’s an ongoing battle between surfers, adult Webmasters, the companies who provide credit card processing services, and the credit card companies themselves. The issues are complex, the stakes are high – and the outcome will affect everyone in this industry. The latest battle features Epoch and MasterCard, and the war is underway:

MasterCard (along with VISA) enjoys a virtual monopoly over the issuance of credit cards – a monopoly so severe that it effectively prevents any serious competition from entering the current market. Being ‘the only game in town’ allows MasterCard to alter their terms and fees without fear of losing a substantial portion of its customer base, and it is this practical reality that allows them to do as they wish, regardless of the impact that their actions have on merchants and IPSPs (Internet Payment Service Providers) – a situation that at least one IPSP is attempting to redress through litigation.

On May 12th, 2003, Paycom / Epoch filed suit against MasterCard over a wide-ranging variety of issues, some of which will be discussed in this article. Adult Webmasters in particular should be following these events closely, for in my opinion, the vagaries of payment processing and the long-term viability of being able to accept credit cards for recurring adult site membership fees is now the single greatest threat to our industry – and a threat that cannot be so easily overcome.

These issues transcend the current dispute between Epoch and MasterCard, and whether directly (as in the case of IPSPs and their clients), or indirectly (as in the case of ‘free site’ and other Webmasters who send traffic to affiliate programs, and the Web hosts, designers, coders and other Net ‘infrastructure’ providers who rely upon income generated from the clients of IPSPs), affect nearly everyone in our industry.

Issue 1: Merchants Bear the Risk of Fraud
Credit Card fraud is a serious and growing concern for all merchants, but for many e-commerce merchants (whether their products are ‘adult’ in nature or not) it may very well be a ‘life or death’ issue. I suspect one reason online fraud is higher than in more traditional settings is the relative ‘anonymity’ customers perceive. This allows them to feel more secure about using stolen credit cards online where their threat of capture is almost nil – or (more commonly in the adult industry) of later denying a legitimate purchase authorization (so-called “friendly fraud”) when the consequences of their membership to an adult Web site become all too clear (which is usually on the same day that the wife opens their latest MasterCard bill).

While there is no practical way to stop a lying spouse, pre-approval ‘scrubbing’ of transactions against a ‘negative database’ of known fraudulent users can mitigate some of the losses from what$is essentially a willful (and criminal) “theft of service.” This common approach, along with address verification protocols and other proprietary techniques that are employed by IPSPs all help to reduce the occurrences of fraud, however, one other major issue of fraud remains: MasterCard will not provide a timely list of known stolen credit card numbers to IPSPs for inclusion in their negative databases!

While it might be easy to say “if MasterCard doesn’t want to share what it knows about which cards are stolen, then that’s their problem!” the real problem is that they actually penalize the IPSP for processing a transaction on one of these accounts – something which could easily be avoided by them simply saying “Hey, don’t run that card – it’s been reported stolen!”

These penalties are not insignificant, either: In addition to having to develop in-house fraud reduction measures, as well as shoulder the cost of a customer service staff, and the infrastructure necessary to support it, IPSPs (and indeed, most other merchants with in-house customer service staff) must refund all charges to customers who call and then complain about their charges, asserting that they never authorized the same. This so-called “friendly fraud” is the credit card industry’s “dirty little secret.” Beyond this expense, IPSPs must refund the costs of chargebacks to the Issuing Banks, pay MasterCard the ‘Discount Rate’ of the transaction (their fee for accepting the purchase charge, just as if the declined charge had been successfully transacted), and on top of all this pay per-chargeback fees and other penalties!

With no practical method for merchants to dispute the voracity of a consumer-induced “friendly fraud” and the credit card companies and merchant banks refusal to implement technological solutions to this problem, and even worse, advertising the fact that consumers are not liable for “mystery charges” appearing on their statements (encouraging their deceitful theft of service), it is no wonder that so many in our industry are feeling an untenable – and seemingly irresolvable – negative economic impact.

The issue of online credit card fraud will continue to plague both merchants and processors until a secure means of positively verifying a cardholder’s purchase authorization can be developed and implemented. Stay tuned for the next installment in this series, where we’ll look at more of the factors that could lead to the end of our industry as we know it. ~ Stephen