September 26, 2003 -- (WEB HOST INDUSTRY REVIEW) -- Adult, gaming and other controversial or "high-risk" Web sites are finding it increasingly difficult to process payments for their products and services over the Internet. American Express exited the adult industry three years ago, citing the financial risks associated with the high incidence of fraud and disputes over transactions. Similar issues pushed popular third party online payment processor PayPal (paypal.com) to join AMEX on the sidelines in May, and have led Visa and Mastercard to institute progressively stiffer regulations that have made it increasingly difficult for "high-risk" Web sites to process online payments.
The growing reluctance of major vendors to process payments in risqué business segments is the function of various legal, fraud, financial, security and corporate governance issues.
Gaming, one of the most highly regulated industries in the United States, is a perfect example of a risqué segment that straddles the limits of the law. And because of the growing attention being paid to corporate governance, companies are increasingly fearful of the ramifications of any legal and regulatory impropriety, especially those that are publicly traded. As a result, many Visa and Mastercard issuing banks, mindful of legal entanglements, have joined PayPal and terminated their association with online gaming sites.
The high incidence of fraud in the adult industry is the impetus behind stricter credit card regulations and a central reason why AMEX and PayPal got out entirely. Quite simply, there are still far too many ways in which consumers can fraudulently purchase digital products like adult content subscriptions or gaming funds, and the frequency of chargebacks or "returns" is still too high. Compounding the situation is the high incidence of disputed transactions, some legitimate and many completely phony. Disputed transactions are rarely denied because credit card companies have been anxious to ensure consumers that e-commerce is safe. Either way, once a charge is "returned," the merchant is required to pay a fee and adjust payments, creating significant overhead for both sides.
The chargeback problem in particular has made credit card companies increasingly impatient. As a result, Visa announced in July that it was making chargeback regulations even stricter. Starting October 1, 2003, Visa will drop the acceptable rate of chargebacks for online merchants from 2.5 percent to 1.0 percent in the U.S. Merchants over the threshold will run the risk of having their payment services terminated.
PayPal's exit from the adult and gaming industries was particularly disconcerting for many "high-risk" online businesses, as PayPal had become the de facto standard for online payments. The shrinking list of payment vendors willing to work with risqué businesses has left businesses scrambling to find alternative billing solutions. As a result, many sites are turning to Internet Payment Service Providers (IPSPs), an ideal solution for online businesses that operate in these controversial segments.
IPSPs are basically third party resellers for merchants who wish to sell online but who do not have their own merchant accounts, explains Cyndalie Fanshaw, vice-president of marketing with PSW Billing Solutions (pswbilling.com). The IPSP resells the online merchant's products and services through its own merchant account, serving as an "umbrella" under which businesses process money under. This does not mean that just anybody can sign up and hide behind the IPSP. Companies like PSW Billing have strict terms and acceptable use policies that dictate what kind of businesses are acceptable, weeding out those that cross the line between risqué and outright illegal.
IPSPs provide a number of advantages. For the consumer, an IPSP provides added security, notes Fanshaw. The payment processor "acts as a conduit between the customer and the merchant client, providing customer service, password management and security," without ever having to pass information on to the site operator.
For online merchants, working through a single provider saves them valuable resources. Using an IPSP helps online merchants stay within chargeback ratios and gives businesses access to several types of payment methods. The merchant also saves on the extremely prohibitive cost of setting up a merchant account. According to Fanshaw, "the third party billing model is an important stepping stone for new businesses online, as well as for high-risk businesses." This is because "acquiring your own merchant account can be extremely difficult and expensive," she says.
With the tougher chargeback regulations pending, IPSPs can help their merchants get under the allowable limit. To this end, myVirtualCard (myvirtualcard.com), an IPSP based in Montreal, has deployed a unique phone verification system that is designed to reduce fraud and keep chargebacks to a minimum. When a customer makes a purchase through myVirtualCard, the customer's information is confirmed through an automated phone verification system. The call comes within 30 seconds, during which time the customer is required to verify the financial information and enter a security pin number created during the sign-up. "We have everything to prove that it was actually you that verified the transaction," says Norton Burah, president of myVirtualCard. "Adult is a high-risk business." What the phone verification system does is provide added security in the form of a "safeguard," explains Burah.
IPSPs are also easy to set up, Fanshaw says. On the client and Web host sides, "there are no software programs to implement and just about every type of site/server is easily setup by PSW's technical staff for free."
When integration is not so straightforward, Web hosts should make it as easy as possible to integrate a billing solution with a merchant's Web site. For this purpose, Joshua Beil, an analyst with Tier 1 Research (tier1research.com), recommends that site operators make sure that back-end hosting automation and provisioning platforms are equipped with open APIs to ensure compatibility of systems and software. PSW Billing uses XML technology, a new standard for the open exchange of information, to simplify the integration process between applications and the host. Aaron, a programmer at Truecash.com, an adult webmaster referral program, explains that "PSW's use of XML made integration with our Truestats product, the easiest of all the seven biller modules I've written to date."
Finally, open channels of communication between the IPSP, Web host and webmaster are crucial to the successful deployment of an IPSP solution. "PSW Billing will work directly with a client's Web hosting company to be sure password management and security is properly setup," explains Fanshaw. And customer support from a Web host is also important. Alan Meadows of PROTGP, an adult Web host, notes that while IPSPs often do a "full service job for the customer, once in a while we need to step in and offer the customer additional support that these companies can't or wont' provide."
With the options becoming more limited to risqué site operators, IPSPs represent a viable billing solution alternative. As Tier 1's Beil says, "it's a good idea to diversify."
