From today's NY Times. Since registration is required, full text and link is posted below.
http://www.nytimes.com/2002/11/18/technology/18PORN.html?ex=1038643485&ei=1&en=34f2af393b7d7015
Credit Cards Seek New Fees on Web's Demimonde
November 18, 2002
By MATT RICHTEL and JOHN SCHWARTZ
New financial industry rules could threaten the growth of
one of the most vibrant drivers of the Internet's early
success: naughtiness.
In the wake of rules from credit card companies and banks
that have strangled many online gambling sites, Visa and
MasterCard are now looping the noose for adult sites that
may have spotty credit-card records. Many of the online
companies say that the new rules, which the card companies
call antifraud measures, will clean up an industry rife
with unethical billing practices. But some operators say
that, in fact, the credit card companies have taken it upon
themselves to step in as de facto regulators of their
industries.
"It gives Visa a level of control over the way business is
done," said Tom Hymes, the editor of AVN Online, a magazine
that covers the online adult industry. "The smoke signals
are worrisome."
Others say that the costs, while modest, could also drive
out some of the smaller sites that have very small profit
margins.
The financial companies say the rules merely extend to a
new group of businesses policies that have long been in
place for combating fraud. "These are wild-eyed, crazy
theories," said Martin Elliott, director of corporate risk
at Visa, of the idea that this is the beginning of a larger
crackdown on adult fare. "We're just trying to protect our
payment system and cardholders."
At issue are rules and fees that went into effect on Friday
- measures that apply to sites and companies that the
credit-card issuers call "high risk." Visa will charge its
member banks a $500 registration fee and an annual renewal
fee of $250 for each high-risk company they pay a
credit-card charge to. Those fees will be passed on, with a
markup, to the sites themselves. MasterCard is expected to
roll out similar fees, industry analysts say.
The sums are insignificant to larger sites, but could well
drive smaller sites into the red; tens of thousands of
adult sites are home-grown entities, industry experts say.
To Mr. Hymes, the magazine editor, it all looks like an
attempt to put a broader squeeze on the industry. He said
he was especially worried by a Visa statement on the fees
that has been posted to his company's Web site: "These
steps will also help keep illegal activity from entering
the Visa network." That, he says, could mark the beginning
of decisions by credit card companies based on the content
of sites. "The implications of that statement are really
chilling," he said.
Many of the entrepreneurs who run such sites agree. "I'm
concerned that Visa or MasterCard could use their position
to regulate content on adult sites," said Brooks Talley,
who runs a site devoted to bondage and sadomasochism
through his company, the FRNK Technology Group.
The new fee structure comes at a time when banks that issue
MasterCard and Visa cards have already made a significant
impact on online gambling. Numerous banks, including some
of the nation's largest, now entirely prohibit the use of
their cards for online gambling. The banks say that they
are not sure that Internet gambling is legal, and that they
do not know if they will be repaid for extending credit
when some courts have ruled gambling debts are
unenforceable.
PayPal, the big online payments company, which acts as an
intermediary for consumers to buy from Internet merchants
using their bank accounts or credit cards, has also said it
would no longer accept payments from gambling sites. Some
of the 2,000 sites devoted to gambling have said the added
fees from Visa and MasterCard alone have caused their
revenues to drop by as much as 70 percent.
The credit-card companies say that the new charges for
adult sites are necessary because those sites cost them
more money in fraud and a practice known as "chargebacks."
In a chargeback, a credit card holder denies having made a
purchase and demands that the company take the charge off
the bill. This practice, which gives new depth to the term
"buyer's remorse," often occurs, for example, when a
husband incurs a charge and his wife discovers it, said
Chris Mallick, the chief executive of Paycom Billing
Services, another financial intermediary company.
David Robertson, publisher of the Nilson Report, which
follows the credit card industry, calls many chargebacks
"friendly fraud," and says they are rampant on both
pornography and gambling sites. "The dirty little secret
that occurs in the card business is this kind of fraud," he
said. Banks, which generally have to absorb the loss, do
not want to challenge the cardholder, "who's making valid
and profitable transactions at other merchants," Mr.
Robertson added.
Chargebacks are a headache for site owners as well, said
Mr. Talley, the owner of the bondage site. He has some
8,000 subscribers who each pay $16.95 a month, but he loses
about $100 each month to chargebacks, he said. Often, the
denials come from people who have been subscribers for
several months - in one case in Newport Beach, Calif., 18
months. Generally, thieves will use stolen credit cards in
different locales, but in this case the company's user logs
show that the subscribers are dialing in from the same town
as the credit-card billing address, he said.
Sometimes, the subscribers make the call themselves, Mr.
Talley said, and he hears a tone in their voices that
suggests the callers are claiming, for the benefit of their
wives, that they have never visited a site like his.
"It would be the moral high ground to fight these, but in
the end it's just not worth it," he said. "It just creates
bad feelings."
But a Visa executive said that friendly fraud was not the
kind that worried his company. Charges made on adult sites
have "significantly higher" rates of disputes than other
businesses, said Mr. Elliott, the director of corporate
risk at Visa, which is based in San Francisco. He blamed
these disputes on the Web companies, which he said commonly
employed unscrupulous billing tactics like charging for
membership after a subscription lapses.
Mr. Elliott added that Visa had required other types of
high-risk businesses to pay such fees for some time. The
new rules, however, are focused on an emerging class of
financial intermediary companies, technically known as
Internet service payment providers, he said. Those
companies process billing and provide innocuous names for
adult sites. The intermediary companies, Mr. Elliott said,
have given the adult industry an end-run around the earlier
rules by masking the identity of pornography merchants.
Mike Smith, senior vice president of corporate risk at
Visa, said the rules applied to the broad class of
companies that sold images or video online and that worked
with the intermediary companies - and were not anti-porn
measures. "We're not singling them out," he said, "but they
are, de facto, the predominant merchants" in the category.
Mr. Mallick of Paycom Billing Services said the credit
card giants' rules made sense, and that his company happily
submitted to new rounds of security and background checks
that were also part of the process. "They're making us more
part of the solution to handle these sorts of
transactions," he said.
But he also called the system "a great revenue generator
for Visa," as thousands of sites pay the fees. His tone is
less grudging than admiring: "This is America - you're
supposed to make money," he said.
But Mr. Robertson of the Nilson Report says that Visa's
fees are not designed to shake money out of the lucrative
vice industries. "Visa doesn't make money on this type of
thing," he said. "They're trying to weed out anyone who is
a quick-shot artist. Anyone who doesn't have the money to
pony up doesn't belong in the game."
The operator of one of the best-known adult sites on the
Internet agreed. The notion that credit card companies
might be trying to shut down the pornography industry is
"complete and utter nonsense," said Gerard Van der Leun,
who retired earlier this month as the vice president in
charge of Internet activities for General Media
International, the publisher of Penthouse magazine and the
magazine's Web site.
Mr. Van der Leun said the rules were an intelligent
response to an unruly industry whose members often "depend
on, how should we say, a fast and loose relation with their
customers' credit cards."
"It basically says you have to be an honest, upright,
ethical business person," he said. "If not, you're going to
suffer."
http://www.nytimes.com/2002/11/18/technology/18PORN.html?ex=1038643485&ei=1&en=34f2af393b7d7015
Credit Cards Seek New Fees on Web's Demimonde
November 18, 2002
By MATT RICHTEL and JOHN SCHWARTZ
New financial industry rules could threaten the growth of
one of the most vibrant drivers of the Internet's early
success: naughtiness.
In the wake of rules from credit card companies and banks
that have strangled many online gambling sites, Visa and
MasterCard are now looping the noose for adult sites that
may have spotty credit-card records. Many of the online
companies say that the new rules, which the card companies
call antifraud measures, will clean up an industry rife
with unethical billing practices. But some operators say
that, in fact, the credit card companies have taken it upon
themselves to step in as de facto regulators of their
industries.
"It gives Visa a level of control over the way business is
done," said Tom Hymes, the editor of AVN Online, a magazine
that covers the online adult industry. "The smoke signals
are worrisome."
Others say that the costs, while modest, could also drive
out some of the smaller sites that have very small profit
margins.
The financial companies say the rules merely extend to a
new group of businesses policies that have long been in
place for combating fraud. "These are wild-eyed, crazy
theories," said Martin Elliott, director of corporate risk
at Visa, of the idea that this is the beginning of a larger
crackdown on adult fare. "We're just trying to protect our
payment system and cardholders."
At issue are rules and fees that went into effect on Friday
- measures that apply to sites and companies that the
credit-card issuers call "high risk." Visa will charge its
member banks a $500 registration fee and an annual renewal
fee of $250 for each high-risk company they pay a
credit-card charge to. Those fees will be passed on, with a
markup, to the sites themselves. MasterCard is expected to
roll out similar fees, industry analysts say.
The sums are insignificant to larger sites, but could well
drive smaller sites into the red; tens of thousands of
adult sites are home-grown entities, industry experts say.
To Mr. Hymes, the magazine editor, it all looks like an
attempt to put a broader squeeze on the industry. He said
he was especially worried by a Visa statement on the fees
that has been posted to his company's Web site: "These
steps will also help keep illegal activity from entering
the Visa network." That, he says, could mark the beginning
of decisions by credit card companies based on the content
of sites. "The implications of that statement are really
chilling," he said.
Many of the entrepreneurs who run such sites agree. "I'm
concerned that Visa or MasterCard could use their position
to regulate content on adult sites," said Brooks Talley,
who runs a site devoted to bondage and sadomasochism
through his company, the FRNK Technology Group.
The new fee structure comes at a time when banks that issue
MasterCard and Visa cards have already made a significant
impact on online gambling. Numerous banks, including some
of the nation's largest, now entirely prohibit the use of
their cards for online gambling. The banks say that they
are not sure that Internet gambling is legal, and that they
do not know if they will be repaid for extending credit
when some courts have ruled gambling debts are
unenforceable.
PayPal, the big online payments company, which acts as an
intermediary for consumers to buy from Internet merchants
using their bank accounts or credit cards, has also said it
would no longer accept payments from gambling sites. Some
of the 2,000 sites devoted to gambling have said the added
fees from Visa and MasterCard alone have caused their
revenues to drop by as much as 70 percent.
The credit-card companies say that the new charges for
adult sites are necessary because those sites cost them
more money in fraud and a practice known as "chargebacks."
In a chargeback, a credit card holder denies having made a
purchase and demands that the company take the charge off
the bill. This practice, which gives new depth to the term
"buyer's remorse," often occurs, for example, when a
husband incurs a charge and his wife discovers it, said
Chris Mallick, the chief executive of Paycom Billing
Services, another financial intermediary company.
David Robertson, publisher of the Nilson Report, which
follows the credit card industry, calls many chargebacks
"friendly fraud," and says they are rampant on both
pornography and gambling sites. "The dirty little secret
that occurs in the card business is this kind of fraud," he
said. Banks, which generally have to absorb the loss, do
not want to challenge the cardholder, "who's making valid
and profitable transactions at other merchants," Mr.
Robertson added.
Chargebacks are a headache for site owners as well, said
Mr. Talley, the owner of the bondage site. He has some
8,000 subscribers who each pay $16.95 a month, but he loses
about $100 each month to chargebacks, he said. Often, the
denials come from people who have been subscribers for
several months - in one case in Newport Beach, Calif., 18
months. Generally, thieves will use stolen credit cards in
different locales, but in this case the company's user logs
show that the subscribers are dialing in from the same town
as the credit-card billing address, he said.
Sometimes, the subscribers make the call themselves, Mr.
Talley said, and he hears a tone in their voices that
suggests the callers are claiming, for the benefit of their
wives, that they have never visited a site like his.
"It would be the moral high ground to fight these, but in
the end it's just not worth it," he said. "It just creates
bad feelings."
But a Visa executive said that friendly fraud was not the
kind that worried his company. Charges made on adult sites
have "significantly higher" rates of disputes than other
businesses, said Mr. Elliott, the director of corporate
risk at Visa, which is based in San Francisco. He blamed
these disputes on the Web companies, which he said commonly
employed unscrupulous billing tactics like charging for
membership after a subscription lapses.
Mr. Elliott added that Visa had required other types of
high-risk businesses to pay such fees for some time. The
new rules, however, are focused on an emerging class of
financial intermediary companies, technically known as
Internet service payment providers, he said. Those
companies process billing and provide innocuous names for
adult sites. The intermediary companies, Mr. Elliott said,
have given the adult industry an end-run around the earlier
rules by masking the identity of pornography merchants.
Mike Smith, senior vice president of corporate risk at
Visa, said the rules applied to the broad class of
companies that sold images or video online and that worked
with the intermediary companies - and were not anti-porn
measures. "We're not singling them out," he said, "but they
are, de facto, the predominant merchants" in the category.
Mr. Mallick of Paycom Billing Services said the credit
card giants' rules made sense, and that his company happily
submitted to new rounds of security and background checks
that were also part of the process. "They're making us more
part of the solution to handle these sorts of
transactions," he said.
But he also called the system "a great revenue generator
for Visa," as thousands of sites pay the fees. His tone is
less grudging than admiring: "This is America - you're
supposed to make money," he said.
But Mr. Robertson of the Nilson Report says that Visa's
fees are not designed to shake money out of the lucrative
vice industries. "Visa doesn't make money on this type of
thing," he said. "They're trying to weed out anyone who is
a quick-shot artist. Anyone who doesn't have the money to
pony up doesn't belong in the game."
The operator of one of the best-known adult sites on the
Internet agreed. The notion that credit card companies
might be trying to shut down the pornography industry is
"complete and utter nonsense," said Gerard Van der Leun,
who retired earlier this month as the vice president in
charge of Internet activities for General Media
International, the publisher of Penthouse magazine and the
magazine's Web site.
Mr. Van der Leun said the rules were an intelligent
response to an unruly industry whose members often "depend
on, how should we say, a fast and loose relation with their
customers' credit cards."
"It basically says you have to be an honest, upright,
ethical business person," he said. "If not, you're going to
suffer."
