Just as the promise of fatter pipes for every Web surfer has been dangled in front of our fervent faces for, well it seems like years now, so has the taunt of a new revolutionary billionaire-making fraud-proof age-verifiable easy-to-use method of billing for the Internet. Something, anything (please!) to release us from the monopolistically tyrannical grasp of the credit card companies and the sucking black hole of chargebacks. We're still waiting, we're sick and tired of waiting, but the reasons for the delays are no mystery.
The obstacles to creating and propagating such a complex mechanism are, to say the least, daunting, and since we're talking about money, probably should be. That doesn't mean, however, that promises haven't been made and new methods attempted. They have, but while a few secure though limited alternative methods have become widely adopted, like online checks and charging through phone bills, on the whole the Promised Land of safe business-to-customer billing remains just over the horizon. Watch out, though, because when the next wave finally breaks it'll be a formidable tsunami of profit and potential, and everyone basking on the beach under the Internet sun will be swept along.
The adult Internet industry in particular is in dire need of an improved billing method, if for no other reason than to dispel an understandable public perception that all it does is charge people for services they never ordered or received. This perception has been fueled of late by some very widely publicized cases of fraud with combined takes of upwards of $200 million. The Federal Trade Commission (FTC, www.ftc.gov) was the prime mover in bringing these big-time con artists to justice, and has for some time been keeping a watchful eye on an industry that seems to incur its fair share of publicized woes. Indeed, the sex industry is one that people love to hate, and hate themselves for loving.
But the inexhaustible entrepreneurial spirit that sexual pioneers have so successfully brought to bear - on the publishing and video industries in the past, and the Internet at present - is hard at work fueling new research into solutions to this latest obstacle to e-commerce nirvana. And adult entities are not the only ones in search of a billing method custom-designed for the Internet. The Online Cemetery is littered with startups that have tried to create new online currencies, only to realize, just like the broadband content startups, that they were fatally ahead of their time.
But progress is made on the bones of the failed, and each one of these doomed attempts has shed light on the unique needs of the Web. These include secure encryption (which translates into peace of mind), embedded respect for privacy, age- and identity-verification, and proof of purchase. Obviously, the anonymity of the Net makes these requirements more difficult to ensure than brick and mortar or ATM processing, but then that's what makes the hunt for the seamless method of currency exchange on the Internet so damned exciting.
A Cavalcade of Methods
The great breakthrough we have been referring to is probably going to happen sooner rather than later, and by that we mean within the year. It's all about technology and insight; in other words, seeing the big picture, imagining a solution, and hiring the right people to make it happen. Oh, and money. Lots of it. And balls, because despite being scrutinized by the FTC for monopolistic practices, the one-two punch of Visa and MasterCard will not relinquish their territorial hegemony without a fight.
In the interim, there has been no dearth of stopgap remedies with usually very specific benefits for surfers and/or merchants. These are often offered by processors as a lesser-used alternative to credit cards, though we have been told by one of the larger third-party processors that online checks, for instance, have been taking up a greater percentage of their transactions than in the past.
In previous articles, we have written about some of these methods. Specifically, phone billing (where the Internet and audiotext truly meet), which involves downloading software that allows users to access sites and then be billed on a pay-per-minute basis through their phone bills. The advantage for consumers is complete anonymity, universal access and no recurring charges; for merchants, no chargebacks, certain payment and also more global potential. The downside is that it tends to be much more expensive for users. In fact, the operator of one of these methods told AVN Online that charges of upwards of $10,000 a month for one person are not unknown. In some countries, Japan for one, anonymity is apparently worth the cost. An issue not addressed by this method is age verification, since anyone can use a phone and download software, but many of these lesser alternative operators admit that they aren't concerned with that problem, leaving it up to the individual sites. Evidently, there's far too much money to be made to worry about minors.
The aforementioned online checks are another method that leaves age verification up to the websites. With this system, a customer makes a purchase and provides his/her checking account number and MICRline, which appear on the bottom of the check. The funds are transferred to the client's account through the Federal Reserve Automated Clearing House System. No check is ever printed and the online check system can be used for one time or recurring memberships.
One of the more unwieldy of the alternative billing methods is the prepaid debit card, for the simple reason that they often have to be purchased in a store with a choice of usually five locations, and then are good for only a handful of sites at best. Then when you've used them up, you have to go back to where you got them and either put more money on them or buy another one. It's not the most universal of concepts, though the concept of prepaid for adult is certainly rational and attractive. There are companies out there that are developing prepaid anonymous debit cards that can be purchased over the Internet, making them available to consumers who do not have credit cards.
Another area that many businesses are looking into is the development of a new form of currency, digital cash, or the virtual equivalent of cash. One such company, called eCash (www.digicash.com) is making inroads in Europe and has its eye on the States. It's a global electronic currency that allows financial institutions, online merchants and consumers to make and receive cash payments for goods and services on the Internet, allowing micro-payments, person-to-person payments, business-to-person payments, and online purchases with merchants who accept eCash. As with other methods, it's a good idea but its ultimate success will depend upon the number of merchants who end up using it. Without them, its days are numbered, as happened with CyberCash and DigiCash.
e-gold (www.e-gold.com) is "the first electronic currency that unleashes the potential of worldwide e-commerce by enabling secure payments over the Internet," according to one of its flyers. It's issued by e-gold Ltd., a Nevis corporation, and is 100% backed by gold bullion in allocated storage. They also issue e-silver, e-platinum and e-palladium. Both consumers and merchants open e-gold accounts, for consumers to spend, and merchants to spend or accept. The specifics of how it works are available on the e-gold site, and according to the literature, as of May of this year there were in excess of 36,000 e-gold accounts. But while it may be a safe method of currency exchange, avoiding identity concerns and allowing miniscule or large online transactions in seconds, age verification is not possible with this method either.
A New Kind of Card
As innovative and clever as the new methods are, the industry's money, so to speak, is on debit cards. The prevailing belief is that they will provide everything the adult industry needs to handle ever-growing traffic while avoiding chargebacks. Indeed, in the last hours before the deadline for this article, AVN Online received an e-mail from Joe E, CEO of Cyber Entertainment Network (www.cencash.com), directing our attention to a site called atmbilling.com (www.atmbilling.com), which purports to provide, well, ATM billing. The site was up, but apparently had no clients, or at least none that were represented on the site. In the e-mail, Joe E states, "ATM will change the industry." He is probably right, and no doubt by the time this issue is out, CEN's billing method will be up and running, and in the running.
CyberNet World Business (CNWB; www.cnwb.com) is also offering a new card, and they really mean a new card, "The Internet's first user and age-verifying credit card."
Randy Duke, Director of Marketing for CNWB, explained to us what they are up to. "CNWB has purchased the same software that Visa/MasterCard uses to build and connect their network, and we're in the progress of creating a Visa/MasterCard/Discover equivalent. We're building the exact same back end processing capabilities so that we can plug into those networks, as well as private labels. It's not only our own credit card, but we also have others issue their own credit cards and issue their cards and use them through our back end processor.
"Upwards of 90% of all transactions on the Internet are done via the credit card. The card that far and away handles that volume is Visa, followed at a distant second by MasterCard, and virtual non-players are American Express and Discover. But they constitute the bulk of how you can move money on the Net. The systems that they put in place years ago were built on a set of business model assumptions. For example, when you come in and imprint, not swipe, your credit card, I can look you in the eye and get a second piece of identification. I can look at your signature on the back and I tie in electronically to my version of an interface that then connects together with a large network that got built over time, that was intended for face to face credit card transaction processing.
"Wave number two was the ATM. ATM said, I'm going to figure out a way through the electronic funds transfer system (EFTS), which is a parallel system that at various points in time butts into Visa and MasterCard. These backbones act as conduits through which information flows. This EFTS now doesn't go to a credit card account with Visa or whoever the issuing bank was, but goes directly into my checking account. Because it can do that I'm now adding a new level of security to it - at least when I'm at an ATM - and that is to force me to use a PIN, because you can't see me anymore, so you can't confirm that I'm the right guy and you're not handing me the cash out of the drawer.
"Both of those systems were built using non-Internet technology, and were really a patchwork quilt of complimentary systems that were designed to integrate with one another as best they could. Then along comes the Internet. The only way you can really move money across that backbone is using credit cards and the guys who put themselves in the middle. Those guys are the online credit card processors, and they say, 'We'll move the money from the Net, and we'll interface into these existing systems, and we're going to charge a premium for having done that.' That system by its very structural nature is unable to redesign itself. My background is 20 years of working with Fortune 500 companies doing reengineering and redesign. What we're doing here is we're saying, okay, if you didn't have that 20 years of experience and the hodgepodge systems and certain sets of assumptions about how you connect business, but you could start from scratch and you could do it with an Internet business model assumption, how would you do it? And that's what we're doing. We're gutting everything that's not needed in the process, with all these middlemen. So the backend processing is set up to streamline and therefore reduce the cost to the merchant of having somebody move their money to and from them.
"That's one piece. The second piece is what happens with the customer - how is the card designed and what capabilities does it have. The card that we're building, for example - we have someone who will label our card for the adult industry. Which means that if you have a Visa or MasterCard, and you go out and your bill is due, let's say 50 bucks, there is a period of time, typically seven to 14 days, when you can continue to make charges, having not paid your bill on time, that will not alert the system and allow you to continue to run up debt. Our system is designed so that if we don't get your payment within 48 hours, your credit gets turned off. We're charging zero interest on the credit card, because where we're going to make our money is in reduced processing fees. So we're taking our money from the back end of the merchant, but the merchant will still pay less than he does right now.
"As it relates to the adult industry, because we're a financial services institution and we are issuing and extending credit or providing debit card capability, we also have the ability to do something that's big on people's minds right now. That is that even though Visa may not accept the charge and may initiate a chargeback, our position is, hey, then you [the consumer] owe us the money, and if you don't pay us then we'll report you to the credit bureau.
"We're calling it the ClearCard, powered by CNWB."
Well, we don't know if it's going to succeed, but we appreciated his clear explication of how things work, and we wish CNWB and all the others good luck.
And may the best card win.