X-Rated Perils

  How does one describe the business of handling payments for Web purveyors of digital pornographic images? Profitable, generally, but also perilous because of moral and chargeback risks. Gasping husband to outraged wife: "It wasn't me who charged those pictures to my card, no ma'am!"
  That's the conventional wisdom, at least. But the chief executive of one payment provider insists that the industry's reputation is undeserved.
  No question, however, that the recent dust-up over porno payment processor Media Billing Co. and its subsidiary Internet Billing Co., collectively known as iBill, has as many twists and turns as a Roman orgy.
  In recent months, iBill made headlines by suing two First Data Corp. subsidiaries, by being sold and then unsold, and by plans to be resold to the firm that unsold it. And that's after it was sold in March by troubled processor InterCept Inc.
  First Data submitted into the bank card system transactions from the buyers of digital content from iBill's merchant clients. First Data's contract with iBill ended Sept. 15, but a pact with a new acquirer, reportedly Utah-based Merrick Bank, wasn't to take effect until November, according to a lawsuit iBill filed in Queens County, N.Y. A processing gap like that could be fatal for an online merchant.
  Spokespersons and lawyers for Deerfield Beach, Fla.-based iBill, which had revenues of $43 million in 2003, did not return repeated CCM calls for comment.
  To Chris Mallick, chief executive of iBill competitor Paycom.net, which does business as Epoch Transaction Services, iBill's misfortunes say nothing about the real business of processing for X-rated Web sites.
  "I view their issue as one of their own doing," he says. "I don't believe they planned for what they knew was the end of their deal with First Data."
  Mallick says Marina Del Ray, Calif.-based Paycom.net's chargeback rate is only about 0.5% of transaction volume.
  "I don't agree with the term 'high-risk,'" says Mallick. "That implies there are more chargebacks or credits in the adult online space. In fact, chargebacks or credits in our client space are lower." Mallick says Paycom.net processes for thousands of Web merchants but would not give an exact number.
  About two years ago, Visa and MasterCard cracked down on so-called Internet Service Payment Providers, or IPSPs, like iBill that aggregate transactions from small Web merchants. IPSPs send the transactions on to an acquirer for settlement. The card associations demanded acquirers working with IPSPs take steps to verify the IPSPs' merchants and protect themselves from financial risk ("More Costs for Adult Web Sites," Card Watch, December 2002).
  While some adult-entertainment processors have taken control of chargebacks in a business notorious for customers denying they've made purchases, iBill still seems to be struggling. IBill owner Penthouse International Inc. said in May that iBill had been released from Visa USA's Risk Identification Service (RIS) program and would not be assessed a "fee" of $100,000 per month because of its chargeback levels, but a month later put out a press release backing off from that claim. Penthouse said iBill planned to be in compliance with RIS guidelines by the third quarter, but a source tells CCM that iBill currently is not taking Visa transactions.
  'Core Values'
  Nor is First Data handling its volume. In a statement, a spokesperson said, "We have determined that processing payments of the adult-entertainment marketplace is inconsistent with our core values" and that First Data had given iBill multiple warnings the contract would not be extended. A judge refused iBill's request for an injunction to force First Data to continue processing until the new acquirer took over.
  A Merrick spokesperson in late September said the bank did not have a signed agreement with iBill and was not processing for it. But an iBill spokesperson told AVN.com, a Los Angeles-based publication covering the adult-entertainment industry, that iBill had secured an undisclosed acquirer and was taking transactions.
  News of the First Data flap came just after media and marketing services company Care Concepts I Inc. rescinded the closing of its acquisition of iBill from Penthouse. Pompano Beach, Fla.-based Care Concepts, however, insists it will go through with the iBill deal later. Care Concepts announced Aug. 31 that it had completed the acquisition, though it mentioned an escape clause.
  In rescinding the transaction, Care Concepts cited several questions about the $55 million stock deal raised by the American Stock Exchange, which had notified Care Concepts of its intention to delist its shares and briefly halted their trading.
  If Care Concepts doesn't resolve the Amex's concerns by Jan. 21, Care Concepts says it will close on the sale anyway, withdraw from the Amex and find a new exchange for its shares. Penthouse will get securities convertible into 49.9% of Care Concepts' common shares under the plan.
  Care Concepts wants to use iBill's processing platform to expand its Internet auction service.
  Meanwhile, New York City-based Penthouse's chief subsidiary, Media General, is attempting to emerge from bankruptcy.
  Media General publishes the men's magazine Penthouse, whose circulation has fallen steadily in recent years. Many of its readers have switched to adult Web sites.