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Good Times, TOUGH ISSUES and... CHARGEBACKS

Good Times, TOUGH ISSUES and... CHARGEBACKS

Sultry describes the weather, much of the content, and many of those who attended the Cybernet Expo 2000, held here at the Riverside Hilton May 31-June 3. A ragtag band of protesters claiming affiliation with the American Family Association greeted cheerful show goers as they entered the hotel, but were easily overlooked and clearly ineffective.

More than 50 exhibitors representing a wide variety of industry services took booth space in the upstairs exhibition hall. Specialties included hosting services, content providers, credit card processors and product fulfillment companies.

In addition to the usual stacks of informational brochures, business cards and flyers, many companies also distributed promotional products such as pens, lighters, CD-ROMs and mouse pads. Live DJs played music from the Insite Investments' booth, where people huddled around a bank of computers Insite provided for attendees to check their e-mail. Another company's promotional lobster wandered the walkways, and nearly everyone was warm and congenial.

Though attendance at the three-day event was lighter than anticipated, exhibitors and attendees alike said they profited from the resulting opportunities for extended conversation and repeat business.

Class Is In Session

Workshops ran each day from early morning until late afternoon, and covered a number of topics. Probably the most animated discussions occurred during the June 2 child-pornography conference. Opinion was clearly divided on how to deal with child porn discovered on host sites. At the core of the debate was the question of whether hosts are doing enough by merely deleting the offending sites (which, some said, often reappear days or even hours later on a different host) or whether it's wiser to cooperate with the Customs Department to assist in closing down the sites "for good" - which typically results in the offending sites remaining online until Customs can determine their source and build a case. Consensus could not be reached.

Other, generally less controversial workshops focused on topics such as pay site management, tips on running niche sites and free sites, legal advice, e-commerce/credit card processing issues, and a full day's worth of sessions specifically directed toward sites providing adult content for the growing number of female consumers who are going online.

All Work and No Play Wouldn't Be an Expo Experience

When not attending workshops or doing business in the exhibitor's hall, industry professionals enjoyed the local scenery and entertainment. The Expo was in easy walking distance of the French Quarter and its many eateries, voodoo and souvenir shops, chain stores, Aquarium of the Americas, and nightclubs. The summer heat and humidity encouraged many to indulge the area's policy of allowing alcohol to be consumed on the streets. One corner store in the Quarter offered a large assortment of flavored daiquiris, all ready to drink while touring the district on foot. A difficult temptation to resist in a city seemingly dedicated to supplying a plethora of temptations.

Although the corporate-sponsored parties didn't begin until the evening of June 1, on the first night of the Expo the National Net (www.national-net.com) suite provided the perfect place to gather for complimentary drinks, snacks and conversation, as well as providing a spectacular view of the Mississippi River. It was also an ideal rendezvous point for those seeking companions in a brilliant new business scheme, Big Easy club hopping adventure, sight seeing tour, or other intimate encounters.

The evening of Friday June 2 saw a party hosted by Epoch Transaction Services (www.epochsystems.com) at the sleek and modern Rick's Cabaret, while on Saturday, Expo attendees took over the elegant and historic Temptations; both upscale gentlemen's clubs are located on the French Quarter's famous Bourbon Street. Complimentary buffets, a multitude of dancers and great socializing were the order of the night at both.

Preparing to Meet the Charge

Amidst all of the socializing, networking, educating and exploring, one topic seemed to rise to nearly everyone's lips more often than any other: the "chargeback situation."

In recent months, both Visa (www.visa.com) and MasterCard (www.mastercard.com) have taken a tough stance against online chargebacks. Visa has implemented a "high-risk" category for online companies, which, among other things, requires that businesses have fewer than 50 chargebacks per month. MasterCard recently dropped its allowable chargeback percentage from a 2.5\\\\% to a 1\\\\% ratio of chargeback transactions to total sales volume per month for two consecutive calendar months. After that, it has sole discretion about whether or not a merchant warrants disciplinary action.

The near impossibility of the new percentage rates coupled with the uncertainty of application makes the chargeback situation a major concern for all online merchants. Since American Express (www.americanexpress.com) recently dropped adult Internet merchant accounts entirely, some fear that the situation will only become worse; but currently, it would seem, calmer heads are prevailing.

Taking a Deep Breath

Clay Andrews of Epoch Systems says his company is not panicking. "We're concerned with the steps that Visa and MasterCard have taken. They're permitting new fine programs that could potentially cause merchants, specifically adult Internet merchants, problems. As far as being a crisis situation, we're not really viewing it as a crisis. But we're concerned about what's going on and we're taking steps in order to ensure that we stay in compliance with the new regulations. As long as we can do that, we're not too concerned about being terminated or Visa/MasterCard taking the same steps American Express did and terminating their accounts."

Some are seeing this as an opportunity to not only toe the line, but also think creatively. "There will always be alternative methods for anyone to process and get the job done," according to Dokk, webmaster, Web DJ and owner of TV-X.com (www.tv-x.com). "The industry is going to continue on. So you lose one charge card. I mean, how many people are using American Express, anyway? It's kind of like somebody taking away your Nickelodeon Channel. Unless you've got a kid who's watching Nickelodeon, who gives a damn? You've still got 200 other channels of cable."

Dokk's statements are supported by Ray Maroki of Net Billing (www.netbilling.com). "Our major billing services clients really don't care too much about American Express. So it hasn't really hit them yet because they're not accepting American Express as a payment method."

Perhaps Dokk is correct then when he says, "As soon as there's a problem, there will be a solution because any time there is money to be made, there will be people there to make it."

Brainstorming For a More Secure E-World

Joe Elkind, CEO of Cyber Entertainment Network (www.cencash.com) plans on avoiding the situation by introducing alternate methods of payment. "We have an ATM program coming out in which we have the exclusive rights for the adult and there will be no chargebacks. In a new business, the billing always becomes a problem because big business comes in and they want more money from you. So it forces you to find new ways to bill. And that's what CEN has done."

Does everyone need to explore alternative billing forms, though? Are there ways that the industry can become more efficient with the tools at hand?

According to some, more careful research is often the difference between a sale and a chargeback. Bill Hooven, Managing Director for Web Fulfillment Company (www.web-fc.com) points out that businesses that carry physical merchandise have a much lower chargeback rate. "We've actually been very fortunate in this arena because, in the last six months we've only had one chargeback - and that actually came through last week." The way Hooven's company keeps the chargeback rates low is by careful research. "We do address verification and we monitor orders that come in. Occasionally we'll get an order for 100 dildos that somebody wants to ship to Romania. We'll follow up on that, make a couple phone calls and make sure they're a legitimate person."

Hooven suggests that sometimes cutting corners in order to save time, such as not verifying addresses, can cost more in the long run.

"If I had to completely guess, I would say that we're all trying to maximize our profits, and sometimes when you do that you tend to not take advantage of all the precautionary measures that are available because they might cost you a few extra dollars."

This has been the situation for Brian Berrett of XXXPress Toys (www.xxxpresstoys.com), as well. "Our systems are tied through a credit card clearing house that verifies their authenticity, their address and so forth before we even receive the order. Then we do the shipping. So far, we've had hardly any chargebacks whatsoever. People who are ordering toys really do want them. And it's a tangible item." Because toy customers genuinely want to receive merchandise and its shipping is able to be traced, according to Berrett, fraud is not much of a concern for online businesses selling material products. "We can prove that they've received the item through their signature, so they tend to be not chargeback issues."

Noah Bogan of Internet Fulfillment, LLC (www.imfc.com) feels much the same way. "We are a fulfillment company and therefore we deal with tangible products, so we're not really being affected by that in the sense of our transactions and ability to conduct business." However, as Bogan explains further, that doesn't mean that providing tangible goods is a guarantee of fiscal security. "It is impacting us because we are an affiliate program. We are a transparent company that's behind the scenes. We don't really have a store. It's everybody else who has stores. So, if our membership sites are being impacted by the fact that they can no longer easily sign up people and get them to be members on their sites and generate their revenue and generate their marketing programs, then that ends up impacting us because they're the ones who are branding and marketing the store."

In other words, although some segments of the industry may not be directly affected by the new chargeback policies, the potential percussion wave when the policies are implemented is likely to affect nearly everyone to some extent, including those the credit card companies would like to believe are the most at risk: customers. As Bogan points out, "More than 65\\\\% of our customers are women. We give them the ability to shop these kinds of products relatively easily and make it more accessible." Bogan says that chargeback penalties will ultimately affect some of the most vulnerable members of the adult Internet community, consumers hoping to shop for intimate items in the privacy and relative safety of virtual storefronts.

Making It Happen

Harsh as the situation could be, should it be catching the industry by surprise? Not according to Internet Billing Company's (www.ibill.com) Bob Cox. "I guess my stance on it is that I understand why American Express did what they did. I also think that what we need to do in this industry is ensure that there aren't misconceptions to the end user, meaning to the customer. We need to make sure that there is no fraud. I think that the industry basically needs to police itself. I don't want to use the term 'grow up' but I think it's time we took responsibility for our actions and quite misleading the consumers."

Strong words for a still young industry to ponder.

Although there have been and continue to be sites that don't take the business of doing business as seriously as the industry as a whole might hope, there are plenty of competent and creative thinkers working on solutions and thinking positively. Aly Drummond, Marketing Manager for Python Communications (www.pythonvideo.com) is one of them "My hope is that everything will be all right in the end and that the industry can still work with credit card processing companies," Drummond says. "However, I think it's important for companies to keep in mind that they shouldn't, especially at this point in time, have all their eggs in one basket and to look at the other options that are available. And there are other options available that are quite attractive to us and that we're taking full advantage of. And I also think it's really necessary for the billing companies that are involved in the industry to be smarter about what they do."

With venues like Cybernet Expo and the upcoming ia2000 - where adult Internet professionals can socialize, explore common ground and share solutions - hopefully everyone will come out smarter.

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