Visa U.S.A.'s new Internet merchant rules introduce a new level of transparency for high-risk transactions, by requiring the merchants to register a good deal of information about themselves with both their merchant bank and their payment processors and to pay registration fees that other merchants do not pay.
The rules, which Visa put into effect last week, are meant to reduce fraud and chargebacks. Web merchants must supply their incorporated name, domain name, city location, street address, and merchant identification number. They must also name their principal owners.
Visa says that the rules, targeted specifically at adult-content Web sites, are not a form of censorship, but merely a way to make sure that all transactions on Visa cards are legal and traceable. Visa will continue to permit transactions involving Web-based pornography sites, as long as the sites are legal - for example, they do not involve child pornography, and the customers are adults.
Visa and MasterCard International also permit their cards to be used for online gambling, but they have created a distinct code to identify such purchases, and most U.S. banks refuse to accept transactions with that code.
"The only thing we're going to control are illegal transactions," said Martin Elliott, Visa U.S.A.'s director of corporate risk. "Member banks may not admit illegal transactions into the Visa payment system."
The new rules apply specifically to any site that sells a videotext or audiotext over an open network for a fee.
"I think the rules are great - they force all of us to play by the same rules, know who these clients are, and know where they're located," said Garrett Bender, the chief executive officer of the Deerfield, Fla., Internet payment service provider iBill LLC.
Visa charges the acquiring banks a one-time registration fee of $500 per merchant, plus an annual fee of $250 per merchant, both of which are presumed to be passed along to the merchant itself. The bank also charges the Internet service payment processor a one-time $250 fee and a $125 annual fee, both of which the processors presumably pass along to the merchant.
Web merchants usually have to sign up with at least two payment processors in case one goes down, so each merchant probably winds up paying the fee twice, Mr. Bender said.
Mr. Elliott said that, before the new rules were implemented, Visa and its merchant banks would know the identity of the Internet service payment processor but not the identities of the merchants for which they process transactions.
"They could hide under the IPSPs in the old days," he said. "They can't do that anymore. The primary purpose is to ensure we have low disputes in a high-risk payment area. There are some people in this industry that have not exerted self-control, and give the business a black eye."
Since the large, mainstream transaction processors are loath to accept high-risk Internet merchants as customers, the processors that accept such clients are highly specialized and are considered high-risk themselves.
One of Visa's other new rules requires financial institutions that work with such Internet payment processors to have at least $100 million in Tier 1 capital. Another rule prohibits the processors from accepting transactions on behalf of other processors. This is to ensure that all transactions can be tracked properly.
Mr. Elliott said that the chargebacks that take place at pornographic Web sites can largely be divided into two categories - "friendly fraud," or the denial of the transaction by an embarrassed customer; and deliberate incompetence, fraud, or deception on behalf of the Web site operator.
For example, some sites sign customers up for a free trial period, then try to obscure the fact that customers must cancel the service if they do not want to get billed for continued service, he said. Sometimes customers will call to cancel, but the Web site will not process the cancellation.
"In some cases there's fraud, in other cases it's sloppy business practices," Mr. Elliott said. "Any time you offer something for free, you'll get a lot of folks accepting it, and now you have an awful lot of cancellations to process, and unless you have the proper manpower, you can get behind."
Pay-as-you-go adult Web sites tend to have low dispute rates, he said.
Mr. Bender said that his company will continue to process transactions from adult sites as long as the card associations permit it. iBill reviews its customers' Web sites thoroughly before doing business with them, to make sure their disclosures are clear, he said.
MasterCard has also devised new rules for adult Web merchants. MasterCard said recently that it does not charge fees to merchants. It charge its acquirers certain fees associated with adult videotext Web sites, which the acquirers may, in their discretion, pass along to their merchants, MasterCard said.
American Express Co. said that it has not processed any gambling transactions - online or offline - for more than a decade because of the high risks associated with them. It also says it stopped processing for adult Web sites in 2000 for business reasons.
"We weren't making a moral judgment about Internet pornography," said Joanne Fisher, an Amex spokeswoman. "There's a cost involved [in settling disputes], and when you have a high number, as we did in this industry, it no longer made sense."
Paul Jamieson, the president of FiSite Research in Evergreen, Colo., said that neither Visa nor MasterCard was looking to be an Internet censor.
"Their actions in terms of what they're doing online is protecting their franchises, the general consumers, and their association members, rather than taking any moral stand regarding pornography or gambling," he said.
