Adult site operators are smarting under stricter rules from MasterCard International and Visa International that require merchants to keep their charge-back rates to a minimum or face stiff fines. A charge-back is created when a cardholder refuses to accept a purchase on a monthly statement.
Under the new rules from MasterCard, announced March 1, merchants falling into certain high-risk categories must keep their charge-backs to less than 1 percent of total monthly transactions, or 2.5 percent of total dollar volume. Visa has tightened its rules to 2.5 percent of dollar transactions or less than 50 charge-backs per month, starting April 1.
"It is impossible not to be above 1 percent," said Aaron Karacas, chief executive of Wicked Interactive, based in Studio City, Calif. "The small guys won't have a place in the adult industry."
At its discretionVisa will charge noncompliant merchant accounts a $5,000 "review fee" in the first month of violation, escalating to $25,000 in the sixth month, plus a $100 per-charge-back handling fee. MasterCard is even more aggressive: After two months above the threshold, a merchant must pay a $25,000 fine per month. At six months, that fee jumps to $50,000. At 10 months or more, the fine is $100,000 per month.
As a group, adult sites have traditionally generated high charge-back rates due to card fraud and poor customer service.
But not all sites are in that camp, and some adult site owners said the industry is being painted with too broad a brush by card issuers.
"It's really putting a pinch on the adult community," said Danni Ashe, chief proprietor of Danni's Hard Drive. "I keep my charge-backs to one-half of 1 percent, and we work really hard at keeping it down. We're being horribly penalized for others in the industry."
Despite Ashe's low charge-back rates, she's finding her business has been categorized as a "video-text merchant" by banks and is now in a higher-risk category. She is facing higher transaction rates and is being asked to put $300,000 up front to open a new merchant account.
Vinny DeLuca, vice president of fraud control at MasterCard, said there is no mistake about the industry he's targeting. "We believe that [adult sites] are the major driver for charge-backs in the system. We had the same problem with the audio-text [900 number] merchants," he said.
While fines have yet to be levied against any porn site operators, the new rules are also sending shockwaves through the network of third-party payment processors that cater to the industry. Some are now shunning or dropping adult site merchants altogether.
"If new people call me and say they want to do substantial volume, I say, 'No way,' " said Steven Peisner, who handles about 20 adult merchants. "It's a tough industry right now."
Andrew Edmond, founder of Flying Crocodile in Seattle, which operates the site SexTracker, is miffed about the new rules because, he said, many adult sites have effectively reduced their charge-back rates and are still being penalized.
"We're doing a heck of a lot better than other industries," said Edmond, who added that he works hard to keep his charge-back rate to 1 percent to 2 percent per month.
Industry insiders said the new rules will likely force a consolidation in the online porn industry and prompt the remaining adult sites to clean up their business practices.
"The ones that have been less than ethical deserve to get squeezed," said Craig Tant, a vice president at ccBill, a card payment processor in Phoenix.
