But whether they are the result of friendly fraud or stolen credit card numbers, too many chargebacks can be devastating to adult websites — and Mallick asserted that adult membership/content sites that do their own billing instead of using third-party processors are taking a huge risk. Experienced IPSPs, he explained, have fine-tuned their methods of identifying and combating CNP fraud and keeping chargebacks to a bare minimum. In fact, Mallick said that CNP fraud would have been the downfall of adult content/membership sites were it not for IPSPs.
"I can tell you as an absolute fact that without third-party processors, adult content sold online would have been shut off by the card associations," Mallick asserted. "The card associations would not have allowed adult webmasters to bill for adult content. They would have simply gotten out of the space the same way they have done with gaming in the U.S. And I think that most people understand that. It's the people who have gotten into the business only in the last five years or so who don't know about the battle that went on and how close adult webmasters were to extinction with respect to credit cards."
Fraud is Rampant
DHD Media's Jenkins pointed out that while CNP fraud is a major problem for mainstream sites, it is even more problematic for adult sites. "The way that the card associations, Visa and MasterCard, profile online adult entertainment companies is very different from [the way they profile] mainstream companies," Jenkins explained. "Because of the adult nature of the content, banks are both more willing to accept the chargebacks from the consumer and are quicker to impose penalties on the website as a result of too-high chargebacks."
Pate said that because operating adult sites is demanding in so many ways, webmasters save themselves considerable time by hiring third-party processors to handle their billing.
"With an IPSP," Pate said, "both the site owner's interests and the interests of the billing company are completely aligned. Each is concerned with risk vs. reward, and the goal is to process as many transactions as possible while maintaining established thresholds. This isn't the case when working with your own merchant account; your bank does not share the same concerns, nor does it have the same commitment as your IPSP."
One complaint that some adult webmasters have had about IPSPs is that they think their customer service representatives can be too quick to give refunds — even if a refund is not really deserved and the rep thinks that friendly fraud may be occurring. But Mallick and Skarlen both emphasized that if IPSPs' customer service departments took a more hardline approach, the result would be more chargebacks.
"If we are doing refunds," Skarlen explained, "we will have clients calling us up and saying, 'Hey, why do you do so many refunds?' and we will tell them, 'Well, it's to prevent the chargebacks and keep your account alive.' They will say, 'Isn't this a little bit too much?' And we will say, 'We don't think it is too much because we know from our experience that if we keep it like this, you will stay alive and keep your account.'"
"If someone calls a call center and demands a refund, you can tell them no and explain why if you have enough data," Mallick noted. "But generally speaking, if you say no, that customer is going to hang up the phone, end the call to your call center and call their bank — and in 30 seconds, there is going to be a chargeback. The card associations have made it very easy for consumers to deny transactions. Understanding how to bill is a huge, huge undertaking for any company, and webmasters needs to understand that third-party processors are there because it is such a difficult industry and such a difficult business model."
PrideBucks' Yaffe stressed that because Visa and MasterCard's rules on chargebacks are so unforgiving, adult sites must "keep their standards as high as possible" when it comes to sales — and if they have any doubts about a transaction, it is always best to "err on the side of caution." But unfortunately, Yaffe said, some adult sites are so anxious to make a sale that they do not scrub adequately and therefore put themselves in jeopardy.
"Getting an extra sale or two may help your stats look better for one day, but if it ultimately bites you in the posterior and eliminates your ability to make a living every day, then it certainly is not worth it," Yaffe stressed. "By lowering the standards to a minimum, you might get the most transactions, but you are also carrying the most risk. PrideBucks is much more interested in being around for the long haul. We absolutely err on the side of caution; if a sale isn't bona fide, it's not doing me any good. We would rather ensure ourselves and our affiliates that we are going to be around in another three years than go for the extra sale now."
Mallick explained that when it comes to credit card fraud, the adult Internet is battling an abundance of criminals who are as cunning as they are technologically sophisticated. But while it is impossible to eliminate CNP fraud altogether, Mallick said, adult webmasters can take comfort in knowing there are many experienced, savvy people in the adult Internet field — third-party processors and others — who remain committed to fraud reduction.
"The reality is that credit card fraud rises in direct relationship to the speed with which technology grows," Mallick explained. "When you plug one hole, another hole seems to open up somewhere else. There are a number of people with really bright minds who sit around thinking of new ways to be dishonest; those people are always going to be around, and as they evolve, sites will have to evolve. We will never be able to get rid of credit card fraud completely, but good minds can make it more difficult for the crooks."