Some adult Web businesses returned from Internext this week to find a wrinkle in their payment processing systems as yet another large bank dropped adult merchants from its merchant account client list.
E-commerce transaction processor Online Data Corp. of Westchester, Ill., notified Badpuppy Enterprises Inc. on Tuesday afternoon that the company’s back-end bank, HSBC Global, no longer would support transactions for adult entertainment and said another banking relationship would have to be established, according to Badpuppy Chief Financial Officer Max Zechinato.
“They couldn’t give me any sense at that time as to how soon [HSBC would close our account], but that it was happening, and they were looking to move us to another back-end processor [on Tuesday],” Zechinato said. “The gentleman I spoke with told me that [HSBC does its] business through JP Morgan Chase, and that JP Morgan Chase, in a blanket statement, has said that they will no longer support the adult industry. It’s my understanding that [this will only affect] persons who have their own merchant account.”
By Wednesday afternoon, the news seemed worse: The accounts of all Online Data clients who process adult transactions through HSBC Global would be shut down on Friday, Aug. 20. However, the situation did not prove as dire as initially feared.
“We found out that this is not a Visa/MC situation, but it does involve anyone who goes through HSBC Global,” said Badpuppy’s Lisa Turner. “That does cover a great deal of merchant accounts and markets, but it certainly is not the whole industry, which has us greatly relieved.”
Relieved, perhaps, but still scrambling, according to Zechinato. “We’re hustling to find a new bank,” he said, noting that Online Data’s representative indicated to him that no U.S. banks are accepting clients in the adult entertainment realm. Online Data suggested Badpuppy initiate a relationship with U.K.-based VolPay International, but Zechinato said that option is unappealing because of VolPay’s high fees, which include a $4,000 application fee, processing fees of 8 percent plus 50 cents per transaction, a gateway fee of $59 per month, and wire transfer fees of $35 per transfer. In addition, VolPay requires adult clients to maintain a 10 percent rolling reserve for 180 days, and the company holds all funds for 14 days before disbursing them. That seems excessive, Zechinato said, for a merchant that has had its own account since 1996 and maintains a chargeback ratio of less than .5 percent – well below the Visa-mandated maximum of 1 percent.
Johnny V., president and CEO of Porn Posse, agreed. Fresh from presenting an overview of billing options during the Internext roundtables, Johnny V. said he was uncertain why Online Data would insist on moving Badpuppy’s business offshore, but that was certainly one option.
“There are domestic banks for adult,” Johnny V. said. “They don’t want to put out a banner and say ‘Welcome adult merchants,’ but domestic solutions exist. You have to be discrete.”
He also noted that despite Visa’s regulations against cross-border transaction acquisitions, offshore processing is a viable alternative if it’s handled correctly. “There are international solutions for solving cross-border issues effectively and legally,” he said, and not all of them demand exorbitant fees.
Of paramount importance for companies affected by the banking shuffle is to bear in mind that banks periodically adjust their portfolios, and it’s not all that uncommon for adult clients to find themselves in danger of being cast adrift temporarily.
“First and foremost, don’t panic,” Johnny V. said. “This is part of the entire long-term process of billing in this space. There are ways to deal with it inexpensively and thoughtfully.”
Badpuppy was still investigating its options on Wednesday afternoon, but expected no interruption in its customer service as a result of HSBC’s short-notice bombshell. “We have alternatives,” Zechinato said. “We have long-standing relationships with a number of third-party processors – “CCBill, iBill, Verotel, EU-Debit – and all of our new subscriptions are being run through them.” It’s the rebills that concern him more, he said: Badpuppy retains at least 60 percent of its subscribers from month to month, and the majority of those charges have been run through Badpuppy’s own merchant account.
Still, the situation isn’t as bad as Badpuppy initially thought it might be. At least Visa and MasterCard aren’t abandoning adult entirely. Experts in the payment processing industry don’t see that happening, ever.
“There isn’t any controlling authority that could cause all banks everywhere to close all [adult] merchant accounts,” said CCBill vice president Tom Fisher. “Frankly, I’m not sure how that could happen. Visa and MasterCard would be in deep sneakers if they made that decision.”
And representatives of two of the adult industry's largest third-party processors assured their customers that their accounts would be unaffected.
"HSBC Global and First Data are just the most recent examples of financial institutions unwilling to support the online adult entertainment business," said Paycom director of corporate communications Rand Pate. "Considering the dynamics of high-risk online processing and the number of financial institutions closing their doors to adult, as well as the number of IPSPs which have failed in the last several months, it is becoming increasingly important to insure that your online transactions are being handled by a company you trust with a long term view of their business.
"Today's announcement does not affect Paycom or its' clients in any way," Pate added.
"Netbilling is sorry for any merchants who may be affected by HSBCs decision to no longer process adult transactions," commented Netbilling president Mitch Farber. "This does not affect any Netbilling merchants and we are pleased to be able to provide adult merchants with at least two domestic banking solutions to setup their high risk merchant accounts for processing through Netbilling's payment gateway."
Online Data Corp., HSBC Global, and VolPay did not return phone calls seeking comment.