The third-party billing model is one aspect of the online Adult entertainment business that has gone though a heap of changes over the past five years. The Adult Web site billing industry has grown up fast, and this maturing process has brought changes both helpful and unfortunate. The Adult site billing industry has been increasingly effective in its ongoing efforts to reduce fraudulent charges and customer chargebacks. Webmasters have been forced to consider important concepts like responsive customer service and the need to put out a quality product; that may sound like I'm being facetious, but happy subscribers mean fewer chargebacks. Yet Webmasters wanting to accept Visa these days are saddled with new annual fees that previously did not exist. American Express is out of the Adult site game altogether. And of course the billing power structure has changed too – more power for the credit card companies, and less power for webmasters.
The online Adult business has its fair share of stable players – companies that have been in business for many years. Still, the industry also has a high degree of turnover; industry veterans often call it quits, and there has never been a shortage of new faces looking to make a mint off of Adult entertainment. It occurred to me recently that many Adult webmasters started publishing their adult sites well after the most significant changes had already been made to the third-party billing model. As such, I thought it might be interesting to recap – to take just a look at a few of the most important changes that have occurred in the past five years. An understanding of these changes fosters an understanding of the third-party billing industry and its importance to the online Adult entertainment business.
The Death of DMR
When I published my first Adult Web site with the infamous recurring billing scheme (meaning subscribers would be billed anew each month until they opted out by canceling their memberships), I chose a company by the name of DMR (also known as Web800) to handle the site's credit card billing needs. I didn't have a merchant account of my own, and I wasn't interested in setting up a customer service department to handle subscriber billing issues; a third party billing service was the perfect solution. Frankly, my small and humble Web site did quite well with DMR. Subscribers would stay subscribers for a long time (on average six to eight months), and my conversion ratios (hits to new sales) were solid. Life was good, right?
The problem, and I wasn't aware of it at the time, was that DMR was on its way out of business. Visa took note of the high number of chargebacks and consumer complaints resulting from charges made by DMR. By the year 2000, DMR was no longer processing Visa for its clients with a recurring membership base; you can imagine how devastating that was for sites with tens of thousands of recurring members. DMR eventually would lose its Visa merchant account entirely, and webmasters both big and small were left scrambling for an alternative. Most of the old DMR customers caught on with Epoch, iBill, and CCBill, although other third-party billing companies were in the mix.
So what was going on with DMR that resulted in the eventual loss of its merchant account? What was causing the high chargebacks? Like all complicated matters, a variety of factors sunk DMR, including dishonest consumers ("Gee honey, I'm not sure why there's a charge on our credit card bill for a porn site; it must be a mistake!), fraudulent charges made by scam artists with stolen credit cards, and of course a lack of sufficient action on the part of DMR to address these problems and others. The third-party billing companies that were left standing knew Visa was serious when it demanded that the industry reduce chargebacks or else.
The Importance of Scrubbing
It's not that "scrubbing" was a brand new concept prior to DMR's exit from the business world, but the fate of DMR meant the importance of scrubbing would take on a new urgency. What is scrubbing? Essentially it's the process by which third-party billing companies attempt to weed out high risk and potentially fraudulent consumer billing attempts before actually submitting charges to the bank for processing. For example, the scrubbing process can check to see if a credit card number has been associated with chargebacks in the past. This is done in order to stop consumers from repeatedly signing up for a Web site membership, downloading a bunch of pictures or videos, charging back the membership fee, and then repeating the process with a new site. Of course, there's more to the scrubbing process than just that one example, but you get the general idea. The goal here is to stop chargebacks before they happen by declining those charge attempts that are likely to result in a chargeback.
The downside of scrubbing is that less subscription attempts are approved, meaning fewer paid subscribers. Scrubbing isn't a perfect process, and through the effort to reduce fraud, sometimes legitimate new subscription attempts are denied by the billing companies. My own Web site experienced a significant drop in sales when I was forced to find a replacement for DMR. My new billing company used intensive scrubbing algorithms to weed out potential chargebacks, but that company is still in business today and has never missed a scheduled payment; frankly, there's something significant to be said about stability and reliability. Scrubbing sure hurt in the short term but the end result was reliable sales, and most of us are in this business for the long haul.
Crackdown on Free Trials
The use of tougher scrubbing algorithms wasn't the only attempt that billing companies made to reduce chargebacks after DMR's departure. One theory concerning the industry's high chargeback ratios was its regular use of "free trials" as a means to generate more paid monthly subscribers. The concept was simple and honest enough: Offer surfers a free one-week (or shorter) trial membership to a Web site with the condition that, if not cancelled, the trial membership will convert to a regular paid membership after the free period is up. The "free trial" approach provides consumers with the opportunity to "try out" a Web site before being charged full price. Problems arise, however, when surfers don't read very far past the word "free" and thus fail to understand that they will be charged once the trial period has expired. Surfers who feel cheated when the free offer converts to a paid subscription are a high risk of a chargeback. Many billing companies felt that stopping the free trials and requiring Web sites to charge a few dollars for short-term trial subscriptions would lower overall chargebacks.
Free trials never really went away completely. Some of the billing companies eventually returned to allowing their clients to offer free trials, while other companies allow well-established customers with proven track records to offer free trials. It's safe to say, however, that free trials are no longer standard operating procedure for subscription-based adult Web sites.
Exit AmEx
Have you ever wondered why Adult Web sites don't accept American Express? Shortly after the death of DMR was official – we're talking around the middle of 2000 – American Express dropped out of the online Adult entertainment business entirely.
According to American Express, the time and energy it spent in resolving cardholder disputes concerning Adult Web site subscription charges wasn't worth whatever financial gains the company made through legitimate, uncontested Adult site purchases. American Express didn't exactly account for a significant percentage of Adult Web site subscription charges, but losing payment flexibility is never a good thing for an online business. Simply stated, more billing choices mean more sales.
Four years later, American Express has not lifted its ban on online Adult entertainment despite the industry's significant strides in reducing fraudulent charges. Don't expect the status to change any time soon.
Visa's New Regs
Probably the biggest effect of the American Express pullout was the fear factor. After all, if American Express could exit the online Adult entertainment business, couldn't Visa or MasterCard decide to take the same action? Rather than taking such a drastic step, however, Visa and MasterCard instead chose to force additional change by issuing new regulations and placing constant pressure on billing companies. Yet it wasn't until the last few months of 2002 that the billing industry would face changes as significant as those felt immediately following the DMR debacle.
In late 2002, Visa USA announced new regulations that would forever alter Adult site billing practices in America. First, Adult Web sites using third-party billing companies are now required to pay an activation fee, currently around $750, in order to allow their customers to pay with a Visa credit or debit card. In addition, a recurring annual fee of around $375 is assessed, with the first annual fee coming due one year after the initial activation fee is paid.
Perhaps more significant, however, are the new reporting requirements. Webmasters who use third-party billing companies are now required to register with Visa the URL of each and every Web site that accepts Visa as a means of payment. This nifty little development allows Visa to collect private information about an Adult Web site's profits. The new reporting requirements also make it possible for Visa to cut off an individual webmaster for whatever reason; anger the Visa gods and you just might lose your ability to stay in business. Before the new reporting requirements, webmasters enjoyed a certain degree of privacy through the third-party billing companies. Today, Visa knows a lot more than it did just a few years ago, and there's no telling with whom Visa might be sharing its information.
If you're an optimist, the 2002 Visa regulations reduce the amount of competition in the Adult Web site field by keeping out of the game those smalltime players who don't want to pay the initial and annual fees. In addition, optimists would point out that the new reporting requirements help keep webmasters honest; if a webmaster loses his or her Visa privileges due to fraudulent activities then a new account with a different billing company isn't an option. Remember, Visa knows. On the other hand, pessimists might point out that more of their hard earned dollars are now going to Visa, and the new reporting policies make it possible for Visa to greatly determine the nature of Adult content on the Internet. What happens if Visa decides to cut off all webmasters who use the word "teen" on their Web sites? What happens if Visa gets uncomfortable with BDSM sites that mix sex with violence? So far, the doomsday scenarios have not reared their ugly heads into reality.
The old saying goes: That which does not kill us makes us stronger. In the case of Adult Web site billing, that old saying might be especially apt.
I was talking with industry veteran Steve Sweet about his recent court victory in Canada. His company was raided two years ago by Canadian authorities, and he was charged with 20 counts of producing and distributing obscene videos. Prior to being acquitted on all charges – after a costly legal battle – Steve had several opportunities to settle his case and take a quick and easy out. He told me that he resisted the "quick fix" approach to his problems because the industry had been good to him and therefore he was in the business for the long haul; without properly addressing the charges and winning in court, he reasoned, his company would not enjoy the security and peace of mind that he was seeking.
The billing changes that have taken place over the past five years have at times been costly, but for those companies in this business to stay, stability is a high priority. Who can deny that, with few exceptions, the Adult site billing solutions offered today are more stable now than they were back in 1999? That stability is the result of a process that has been ongoing, and will likely will continue into the future.
Connor Young is the editor-in-chief of The ADULTWEBMASTER Magazine (www.theadultwebmaster.com).
