The State of Online Billing

Stephen Yagielowicz
Online adult transaction processing is one of the most complicated and vital areas of concern for experienced merchants and an area of frequent misunderstanding for e-commerce neophytes.

To help get a grip on the current state of affairs in online billing, XBiz sought the help of two industry leaders in developing a snapshot of the billing market.

The first, Holly Moss of HMoss Consulting, is a consultant for alternative billing companies such as Electracash and 2000 Charge, as well as XBiz.

Powerhouse processor also supplied its viewpoint through the expertise of Communications Director Rand Pate.

Here's what they had to say:

XBIZ: What do you see as the future of online billing?

HOLLY MOSS: Webmasters will increasingly look into alternative billing methods, such as online checks and 900-number billing. Larger-traffic websites will add stored-value cards that will build customer loyalty while isolating themselves from the rules that Visa and MasterCard have set on adult merchants. A good example is the AdamEve card, where a large online adult merchant has added a CNWB private-label credit card as a preferred payment option.

As credit card processing for adult merchants gets harder, you will see fewer players in the industry. Many merchants will be forced to process offshore, where Visa has a 2 percent chargeback rate, double that of its domestic chargeback threshold.

RAND PATE: There are no indications that current billing models, specifically recurring memberships, are going away. However, as competition becomes fiercer and programs look for new ways to attract business, there is an opportunity for billing models to evolve and to better suit the marketplace and deliver what surfers want.

Credit cards will most likely remain the preferred currency of the online world with very few alternatives, which are attractive enough to both merchants and surfers. So if the billing mechanism is unlikely to change, then what we will most likely see is a transition of the billing model. It is easy to see how sites offering digital content will move to a more a-la carte type model offering the surfer more billing options. Especially in the area of pay-per-view and/or nonrecurring entrance fees with upgrades.

This will have effects on the affiliate models and the payment structures currently used by so many programs, so it may take a while for this shift to happen.

XBIZ: What types of anti-fraud measures are being taken to protect consumers and affiliates?

HM: 2000 Charge offers an innovative phone verification system known as PhoneQ that calls the customer and requests confirmation of the order. It's an automated process that works internationally. Electracash can also offer age verification by requiring the last four digits of a user's Social Security Number, from which their age may be determined.

RP: There are a host of actions taken to help ensure that sponsored merchants remain within good business practices and that consumers have the information they need to make an informed buying decision. Beginning with a comprehensive compliance check, each site we process for is evaluated to ensure that the language on the site represents the site contents, discloses the billing terms, offers links for support and adheres to all card association rules and IPSP policies.

These sites are randomly checked on an ongoing basis. Problems arising from changes to a site are often addressed quickly when customer complaints begin to appear in the billing support call center. Of course the specifics regarding what any financial company does to protect itself against fraud are never discussed in public forums.

However Epoch, which has been processing transactions since 1997, has developed an extensive high-risk fraud database and expanded its Risk Management department significantly. By processing such a large share of the market, potential problems can be identified quickly by cross-referencing patterns of abuse.

XBIZ: What trends do you see occurring with your clients?

HM: Many clients are refining their current alternative billing solutions and adding more countries that they are able to process transactions for. Offering as many payment options as possible is the key to ongoing transaction processing.

RP: The trends appearing in today's marketplace are of consolidation, optimization, cost effectiveness and re-organization.

Many smaller programs find it hard to compete with larger sponsors, so they sell out or close shop. Many of them probably entered with inflated ideas of profitability or could not solidify the necessary business relationships required in this tight-knit community.

Larger programs have streamlined their operations to conserve costs and improve revenue necessary to continue to build their operations. These programs have been in the game for a while; many have had success beyond what was imagined when they started, and since the business continues to grow and evolve, the owners have recognized that online entertainment is a real business and needs to be managed and operated as such. This trend began about three years ago and continues to this day.

XBIZ: What are your feelings on subscription-based sites versus tangible product sales?

HM: Recurring subscription-based sites are more risky but profit margins are good if you have good content that keeps surfers longer. Tangible product sales can offer merchants better pricing and lower chargeback rates.

RP: These are two totally different types of billing models with different kinds of rules and merchant category codes. Of course, the higher-risk model is that of subscription-based websites where there is no physical delivery of goods. An IPSP pays a higher discount rate to process these types of transactions as do sites that process to their own merchant account with MCC-5967 transactions. Additionally, the rules for processing audio text transactions are stricter with higher penalties and increased scrutiny.

That being said, there are larger profit margins in this area if the sites are managed by a company committed to their business.

While this discussion has only scratched the surface of the complicated nature of online adult transaction processing, it provides a good glimpse into where the industry is and where it is heading.