Regulation Breeds Innovation in High Risk Processing

Stewart Tongue

The high-risk processing space is one of the most tightly regulated and rapidly changing parts of the adult industry online and one of the more complicated components of any successful adult venture.

That’s why billing experts have emerged and become trusted strategic partners, capable of smoothing out all the new wrinkles regulators create while allowing their clients to focus on their own core competencies instead. With regard to new regulatory trends, here are a few you will want to keep in mind, according to the insiders who know best.

As long as banks fear prosecution from the feds for providing services to an industry still considered illegal on a federal level, obtaining banking services including credit card processing remains illusive to merchants in the marijuana industry. —Lane Farinacci, Processing Partners Inc.

“Two main issues come to mind,” Aaron Slominski, senior vice president of sales for Signature Card Services, told XBIZ. “First, all merchants, including Level 4 merchants, will have to comply with the newest version of PCI-DSS (3.0) by the end of 2015. For smaller merchants that means a longer and much more technical self-assessment questionnaire that may require contracting an IT specialist.

“Secondly, it is anticipated that online fraud will rise alarmingly in the next three years due to the increase in overall traffic and the EMV implementation in the U.S. Online merchants will have to address it with stricter, more sophisticated authentication procedures.”

Europe is also facing some significant changes in the way business needs to be done.

“In December of 2014, the European Banking Authority published updated guidelines on Internet payment security,” Cathy Beardsley, CEO of SegPay, told XBIZ. “The guidelines cover best security practices. One of the recommendations or requirements is that by August 2015 all Internet payments will need to be strongly authenticated which is greater than just 3D secure.

“Potentially credit card transactions will need to be authenticated by a PIN or some other greater form of consumer interaction to confirm the transaction. This requirement will take time and money for the financial system to implement and will increase infrastructure cost to processors. It will also have a huge impact on throughput.

“Visa Europe has instituted a new regulation which goes into effect in April that requires a payment processor to notify consumers on rebills from free trials as well as any rebill in which more than six months have elapsed since the last billing period. The regulation does not address penalties for not complying. It will most likely be used when a merchant is abusing the system.”

When it comes to being compliant, “it boils down to trusting your merchant account provider to inform you in timely manner about any regulations or market trends that could affect your business,” according to Slominski.

“Most of the billing companies in the adult space are very knowledgeable and well-informed. Allow them to educate you, lean on them for informational support to guide you through the complicated payments landscape.”

As an example of the kinds of innovations adult processors are rolling out, Slominski proudly unveiled some new biometric security measures that may become industry standard practices in the near future.

“We have developed a family of voice biometric-based authentication products to significantly improve the quality and dependability of authentication processes with the purpose of achieving greater security,” he said.

“The uniqueness of voice biometrics, or voiceprints, has proven effective for identity authentication by businesses and governments around the globe for a myriad of purposes ranging from password verification to debt collection. In the payments industry, voice biometrics-based authentication could reduce credit card fraud and increase online security by providing an ironclad payer identity verification protocol. In the adult industry, it could also successfully police account sharing and significantly reduce declined transactions. Check out the site, from Signature Card, if you are intrigued.”

Compliance with existing regulations remains the primary focal point.

“Another big undertaking for us this year is the migration to the TSYS processing platform, as we continue to deploy the best payment solutions to support our clients’ processing needs,” Slominski said. “TSYS is a global, publicly traded company with operations in more than 80 countries. TSYS provides electronic payment services to financial institutions and companies around the globe, and they provide a broad range of issuing and acquiring payment technologies, including consumer, credit, debit, healthcare, loyalty, prepaid, chip and mobile payments.

“Our merchants achieve greater flexibility on TSYS and will benefit from features like: the ability to accept PayPal; online, easy-to-understand statements with 13 months of history; faster deposits; and the ability to deposit funds into multiple checking accounts to name a few.”

However, that doesn’t leave out the possibility of opening new verticals and expanding the global reach of merchants seeking to grow new revenue streams.

One of the fastest-growing adult industries currently is the legal marijuana business being done in a small number of states across the country. Banking remains a huge obstacle but hope may be on the not too distant horizon.

“As long as banks fear prosecution from the feds for providing services to an industry still considered illegal on a federal level, obtaining banking services including credit card processing remains illusive to merchants in the marijuana industry,” Lane Farinacci, chief risk officer of Processing Partners Inc., told XBIZ. “However, very recently a landmark piece of legislation was introduced as a comprehensive bill brought forth within the senate and now referred to as the CARERS Act.

“If passed, the CARERS Act could radically change the future of the medical marijuana industry and may eventually pave the way toward processing possibilities for the legal recreational cannabis store vertical as well,” Farinacci said. “Essentially it would amend federal law to allow states to set their own medical marijuana policies and most importantly prevent federal law enforcement agencies from prosecuting in those states.

“It also calls for the specific changes in the law that would be necessary for banks to accept transactions and may subsequently allow banks and credit unions to provide financial services to marijuana-related businesses that operate in accordance with state law while protecting them from federal prosecution or investigation. That being said, we have a number of acquiring banks and aggregates within our portfolio that, when passed, are willing to amend guidelines and finally open their gates to boarding these merchants.”

The enthusiasm is palpable, thanks to the massive numbers being generated. In Colorado alone consumers purchased more than 140,000 pounds of legal marijuana in the first year the state made it available. However, that’s just a small start.

“It’s great that marijuana has become legal in a few states but for now that is all it is — a few states,” Jordan Stewart, vice president of OrbitalPay, told XBIZ. “That being said, it is and will continue to be a booming business so billing companies like ours have to be prepared and ahead of the curve. Having had the same established banking relationship for over a decade, at OrbitalPay we are in a position to have accounts of this nature approved if and when the time should come.”

Navigating existing regulatory changes, maximizing efficiency and helping to usher entire new industries into existence are just a few of the paths the world’s best billers seek to help their clients proceed with as markets continue to change and areas of opportunity shift from one region or business model to any other.