Oct 7, 2004 1:30 PM PDT    Text size: 

“It appears indeed that iBill was relying on future sales to pay previous obligations, such as webmaster payouts, while current webmaster revenue was used for operating costs,” said Grant L. Hutchison, chief security officer for Militis Intelligence Corp., in an exclusive post made on the XBiz Boards.

The beleaguered third-party payment processor has been out of commission since mid-September when First Data stopped processing its credit card payments. Scattered postings on Internet forums now suggest that iBill may finally be making payments to European Union-based clients, but United States payouts have not been made.

If Hutchison is correct, it essentially means that iBill was living “paycheck-to-paycheck,” instead of holding funds in reserve for webmasters as it has previously stated.

“[This is] a practice any risk assessment team would have found inappropriate at best, with reasonable grounds,” said Hutchison. “It led to iBill defaulting on webmaster payments as early as mid-September.”

IBill did not return phone inquiries about its financial practices.

Management issues aside, Hutchison also said that his group felt the trend for credit card processors and financial institutions to distance themselves from the online adult community would only grow.

“The trend is indeed for banks and large corporations to withdraw from the adult services business,” said Hutchison. “Not for moral reasons, as corporate empires do not experience moral judgment when it comes to money, but simply because there is a high risk of financial loss.”

Hutchison pointed to the “substantially higher levels” of chargebacks for adult websites as one of the major reasons for the new trend.

“The chargeback concept, originally designed to promote e-commerce at the expense of merchants, quickly backfired and banks found themselves drowned in chargebacks and faced with the ever growing cost of processing,” said Hutchison.

The implications of dealing with unknown clients through a third party probably also scares away financial institutions, according to Hutchison's analysis.

“What would happen if a bank was to find itself associated with a site selling child pornography, bestiality content, or even violating copyrights?” said Hutchison. “From a public relations point of view, it would be potentially devastating. It would not be much better under a liability perspective."

Given the looming problems for financial institutions, Hutchison said that the Militis Intelligence Corp. regularly advises its major banking clients to stay away from businesses associated with the adult entertainment industry.

“It’s reasonable to expect that, on the long term, credit card processing for adult sites will no longer be viable,” said Hutchison, adding that some researchers believe credit card e-commerce might become extinct in the future.

“It is indeed one thing to get a chargeback for a membership on a website and another for a $2,000 jacket,” Hutchison said.

Instead, Hutchison lays the long-term future of online adult payment services on pre-paid card systems and online checks.

“Dialers will most likely not remain sustainable as most webmasters will not remain satisfied with a payout of about $.03 a minute, when third-party companies are keeping up to $2 a minute,” said Hutchison.