Adult Processing

Adult entertainment or adult service business (pornography industry) is considered as the most marginal business. Forbes in the article "How big is Porn" tried to determine the dimensions of the business, in general, and to disclose the fact numbers that would speak for themselves. Some skeptics say that "pornography is an industry where they exaggerate the size of everything". In accordance to New York Times Magazine (based on Forrester Research) the annual sales of the porno-industry is approximately US $10-14 billion dollars. However, closer approach would reveal not such a fascinating picture: in reference to Adams Media Research and other sources the annual sales of porno industry would bring in total no more than $5-7 billion dollars, including all types of distributions channels. At the same time nobody would take an initiative and claim the rightness of the numbers as the industry itself reflects the social marginality of consumption, the evanescence of many enterprises and the lack of market transparency. It is obvious that the success and the constant growth of profitability of the industry is explained by the consistently high demand for the adult -related material provided by the great number of relevant bodies and enterprises. In fact, the industry includes enterprises directly involved into production and further distribution of adult content but it also encompasses the companies that provide with hosting and payment processing services, as well as vendors/operators of contents filtering systems.

This market segment is regarded as the most saturated and highly competitive due to the constant demand and ability to start up the business with low capital investment. For example, a rudimentary site with pictures and ad banners would go as low as $3,499; add a thousand more and you would be able to add a video feed; for about $35,000 you might be able to get an e-commerce subscription service (numbers may vary). Thousand and thousands of domains are the best proves of the market saturation. As to number of major operator- some analysts suggest that there are around 200-400 major operators with the revenue derived from the subscription, advertising and providing the content to smaller operators.

Industry revenue embraces three different types of activities:
- retailing of tangible products, such as DVD, videotapes and etc;
- sales to end-users of access to information as erotic stories, still images and similar (typically paying by credit card to subscribe to a site, with subscription on annual or monthly basis, priced at between US$15 to $150);
- advertising (paying a flat fee for the displaying the content; pay on a click by click basis or share subscription from "conversions through the site).

There are certain criteria and regulations applied to this specific sphere of business. Miller test is the test that evaluates web if entirety of the web lacks artistic, literary, scientific/cultural merit. Failure to comply with these criteria would cause the forced shut-down of the web. Law enforcement agencies have knuckled down on protecting younger Internet users from the exposure of content deemed immoral. One of the most famous  American acts protecting young generation and making illegal for the web owners to post child pornography is the Child protection Act of 1998 (effective in the USA).  There are some more restrictions applied, such as hosting limitations - as most web hosts have a contingency against adult related sites and sometimes the inability to provide the web operators with high bandwidth and disk space to cover the site's high traffic, high volume streaming and media-rich content. 

 The risk-proneness has resulted in labeling the adult merchant services as a "high risk" business and the relevant accounts as a "high risk adult merchant account".  Opening a high risk merchant account might cause considerable problems due to absolute reluctance of domestic banks and other merchant account providers. This aversion of the account providers to facilitate high risk credit card processing could be attributed to the high sales volume, numerous chargebacks, unpredictability of the web environment, and potential hull of data base from the vendors of such services make e-commerce ventures, especially in adult entertainment segment, and, at least, but not last, nature of online usage adds certain risk as the credit card is not physically presented to vendor. The combination of these risk elements is resulting in higher transaction fees for high risk credit card processing. In comparison to regular rates offered to low-risk accounts, processing fees for high risk merchant account may vary from 9% to 20% (although some offshore companies offer their processing services for as low as 4-5%) and approximately 11% for the third party adult processing. So far the merchant has to either increase the price either low down the quality. Compromising on quality or raising the price will definitely cause the loss of consumers.

While searching a processing provider you would notice that the majority of adult processing providers offer similar services:

-no upfont fees (start up costs taken same day from processing);
-hassle free set up (start processing as soon as you received approval);
-password member management;
-multicurrency processing;
-affiliate tracking;
-anti-fraud -protection;
- timely and reliable settlements;
- one time or recurring payments.

To open the high risk merchant account you would need to submit to your provider certain obligatory papers, including the application form (general information about the company), incorporation documents and proper identification of the board members (some times including the pictures). Some adult billing services may go as far as to ask you to submit business credit report or statements form the current processor. Usually, once you have submitted the required papers, you should expect the preliminary approval within next 24 hours. The final decision -making can take up to two business days depending on our processing history.  Once your company gets an approval you should be able to integrate the adult merchant service provider's payment gateway to the shopping cart system (if you have one) and you would receive the URL of the secure gateway payments. As soon as this step is completed you should be able to start server-to-server processing of live transactions. But of course, the most important step in the whole procedure of processing is the Payout. With consistent and regular transaction processing your company would be able to get consistent and regular payouts. Some merchant account providers have a threshold before they release your first check; others, process payments either on monthly (specific date of month, usually 15^th or 30^th) or on weekly basis. In difference to low-risk account card processing for the high-risk accounts it is a common practice for the merchant account provider to deduct from each billing statement 10% adding them to rolling reserve fund. One of the purposes is to provide the acquirer and payment processor with protection against potential credit risks. After certain time (some providers state 180 days) and basing on the history of business relationship, when the risk is ceased, the amount is to be repaid. Once merchant gets hold of  high risk card processing facilities, he would not be bothered by any bank or another processor. In ddition to effectively managing the high volume sales that once prohibited by locl bank vendor from acquiring the high risk card processing facility for himself, his business site can accept and process commonly used credit/debit card in multiple currencies.

There is also a certain procedure to obtain the high risk merchant account processing facilities through a third -party processor. First of all, the high risk vendor should apply for the merchant credit card account. Secondly, processing agency would exam the submitted papers and determine the compliance of the vendor to the criteria of eligibility and set regulations. Thirdly, if the processing agency isn't satisfied with the eligibility of merchant, it approves the use of its own services by the applicant as a third -party processor. In that case, the payment gateway is made variable and subsequent sales are processed though the third-party processor's system.

We also should mention about TMF (Termination Merchant File). Both Visa and Mastercard maintain an association-wide list of previously terminated business or individuals. If you ever have previously encountered the problem with processing credit card transaction or if you ever had a merchant account terminated for the fraudulent transaction processing or failure to deliver the services paid by the cardholders you would be definitely listed there. In other words, be prepared to face serious problems while opening the new merchant account. In addition, if you have a criminal record or your credit report shows previous bankruptcy for business owned by you or yourself individually, your application for the merchant account would be more likely denied. In this case you may address to specific processing provider that lists the availability of processing services for the previously closed accounts (you should expect astronomical charges). Once your account is terminated the processor is required to list the names of the principals and business  in TFM Match File.

In addition to hereabove, porno payment CCBill, iBill and Epoch/Paycom have issued a set of strict credit card-order handling regulations for adult webmasters using their services, which they say have been handed down to them from VISA International. Processors would be responsible for good deal by monitoring and record-keeping related to their clients, known as "sponsored processors". Therefore, the processors are implicitly accountable for the massive amounts of fraud and chargebacks which the on-line adult entertainment industry contributed to consumer. Among the innovations is a prohibition against taking business from overseas Web operation, to ensure that "sponsored merchants" are having their transaction handled though financial institutions in their own countries, caused by numerous complaints from banks getting shorted by overseas transactions. So VISA required webmasters to prove the billing service providers that they have the presence in the country where credit card processing to take place. The credit card processors received the new name too - Internet Payment Service Providers (IPSP) and it would be their responsibility to ensure compliance of the merchants with VISA International rules. Adult sites would be required to register not only with IPSP but also with VISA, they will be subject to greater individual scrutiny. IPSP has to provide VISA with monthly sales, chargeback and credit data for VISA review by each sponsored merchant and down to the URL of each sponsored merchant site. Sponsored merchants who are out of compliance on chargeback and or credit ratios may be terminated at VISA discretion. Credit statements, from now on, must show the ISPS name and the sponsored merchant's company code, most likely to reduce number of chargebacks.

In conclusion, porno-industry, despite the fact of high potential fraud risk, is a subject of fascination by the shown dynamics of sales volume, increasing number of web sites and domains related to this category and is reasonably called highly profitable business. And as Frank Rich said: Porn is "no longer a sideshow to the mainstream... it is mainstream" and, therefore, it is logical to expect enormous growth of sales in adult web sites and augmenting flow of adult card processing though Internet at high risk merchant accounts.

Natalia, Reporter of Ecommerce Journal