Information on IPSP’s, Merchant Accounts and the State of Internet Billing
E-PROCESSING
About six months ago anyone that was listening may have seen the first warnings of trouble ahead for e-merchants when merchant providers changed their underwriting guidelines to make it impossible for anyone to open an account to handle “aggregator” business.E-PROCESSING
About six months ago anyone that was listening may have seen the first warnings of trouble ahead for e-merchants when merchant providers changed their underwriting guidelines to make it impossible for anyone to open an account to handle “aggregator” business. This type of business model is when a “third party” acts as the middleman between the Webmaster, who is selling services, and the merchant bank or merchant provider with which the third party solution has secured a personal account. The Aggregator, or Third Party Billing Solution (TPBS) would hold a secure on-line sign-up form and take the necessary information to be able to process the credit card via multiple gateways and processors. The TPBS would then have the funds settled into their personal account and pay out their customers and referrers minus percentages, rates, fees, lost income on charge backs and/or refunds. The TPBS would have to secure their own personal merchant accounts by way of personal assets, business assets, personal credit history, payment of an up-front reserve and a rolling reserve (which is held by the bank to protect against charge backs.) Based on the strength or weakness with the billing solution per se, they would be provided with specific lines of credit with multiple banks, which are connected to multiple gateways and pipelines. (This is to provide high credit lines and to protect if a processor should “go down” thus stopping Webmaster signups.)
In addition, based on how well the company actually ran their business, they typically would not float any charge backs to the Webmaster. (Most charge back fines are roughly $25.00 per charge back. A $2.95 trial results in a charge back – the Webmaster loses those funds, but the TPBS is charged $25.00 plus the transaction fees they paid to initially run it through the system, usually 18 to 25 cents – and have that sit against their charge back ratio).
The most important item to note is that even though VISA/MC are accepted via the TPBS signup page, there is no direct relationship between a Third Party Billing Solution and VISA/MC. Billing solutions have no direct contact with VISA or MC. They are not recognized, and they are mandated to work directly with their own banks to get information. Therefore, all VISA/MC rules, guidelines, mandates, questions, answers, problems and solutions had to go through the merchant provider, and be subject to the interpretation of the merchant provider. To further complicate these matters, if the banks did not provide the information, then these billing companies were flying blind. What happens if you are told two different stories from two different merchant banks? Who can you call? What is your resolution? Again… ZERO connection allowed to the associations.
As the crow flies… accepting payments over the Internet for Third Party Billing Solutions became more and more difficult. Several of the largest companies – even though they competed against one another – have kept open lines of communication to share information, and have always attempted to band together in a unified front to validate the TPBS business model. Obviously, some banks also pushed for this validation since they too are making money running transactions, and don’t have to eat any charge back fees or pay the fines from VISA. It’s important to note that even though there was no direct relationship to VISA/MC, the billing companies had to comply with all of the associations’ regulations with little or no representation – compliance included how data is stored, multiple secure lines, firewalls, secure buildings, signup page compliance, customer support compliance, disclosure to consumers, background checks for all employees, etc. In addition, the billing companies HAD to keep their charge backs to a specific level (which has dropped every year) or they would be fined. The fines range from $25 to $100 per charge back depending on how much trouble they were in, on up to $10K per URL to $25K per URL. Therefore, each company kept a balancing act between multiple bank accounts and charge back levels. And should they exceed the charge back limits, after all the penalties are paid, they still stood to lose their own merchant account. (Some smaller solutions have done just that, and are forced to process “off shore.”) At the same time that this is going on, the billing companies are paying for all these upgrades to their systems, employees to keep the systems compliant and up and running, and not floating the increases down to the Webmasters. They strived to build a better and more efficient machine.
Several months ago rumors started that VISA was going to acknowledge and classify these Third Party Billing Solutions as “IPSP” which stands for Internet Payment Service Provider. With that there would be changes to how these entities process transactions. Of course no information was provided since VISA was in the process of actually deciding what to change. VISA, which is listed as an “Association”, is broken down globally into six regions, all of which have sales quotas. The new cross border processing rule did not come from VISA USA, but from VISA International. Why? Because 90% of all Internet commerce is performed by U.S. based companies! And therefore, the International Division was losing a significant amount of business. In addition, by utilizing an IPSP, the “sub-merchant” didn’t have to apply for its own personal merchant account. This is important to note since when opening a personal merchant account for adult content (or digital goods) the site must be registered with VISA, which is $1,000 to $1,250 in addition to the merchant providers’ fees. Therefore, the IPSP’s were circumventing revenue!
Why was this information not sent out before now? Because the IPSP’s did not have anything in writing – only conjecture and speculation based on their bank’s interpretation of rumor and conjecture. Before they created panic in the market they needed real facts, which again had to come from their banks. When the information was received it did not take into account the true business model (which as you know the adult industry does business like no other on the Internet) and therefore more “interpretations” were needed. With that, the larger of the IPSP’s tried to band together and do a joint release since they all were affected, and they were pulling together to share any shred of news they could. (This of course would make me very nervous since this is your COMPETITION that we are talking about!) The statement was released, and all hell has broken loose. With a situation like this, it’s no surprise that emotions are running high and misinformation is hitting the industry chat boards.
Information that is received is being put into the market. The IPSP’s stand to lose a significant amount of business due to this cross border issue. Also, the IPSP must:
· Register each contract and supply $500 to VISA and $250 to their merchant provider (no billing solution is making a profit);
· The major providers are charging no additional fees and the required re-writing of scripts is being paid out of their own pockets to comply;
· The Webmaster or company must provide either a valid social security number or a business license;
· Valid U.S. mailing address needs to be on file;
· International wires at this time do not appear to be affected but having a U.S. bank account is recommended (painting a worst-case scenario);
· Webmasters that do not register cannot process VISA but may continue with other credit cards. The MasterCard logo must not appear on the site per se (unless they have a personal merchant account);
· The fee is applicable to each IPSP, therefore, if you process with multiple companies, that will be $750 each;
· Any company or person not registered (even if already in the U.S.) by the deadline will lose their right to process VISA and lose re-bills. Payment is required up front with registration;
· Any company that runs a merchant account and loses said account “TMF” (Terminated Merchant File) may not be allowed to go to an IPSP to process;
· IPSP’s will register each company with VISA, which allows some protections versus forcing the Webmaster to go direct;
· The payment is per company and/or contract… NOT PER URL!;
· Referrers are not affected, but Webmasters need to monitor where their charge backs are originating and root out rouge referring partners;
· This situation is global and those Billing Companies that are promising that they are not are running risks, not only endanger themselves but also Webmasters.
Question: If three of the largest IPSP’s can’t get around this, how can the small ones? If the merchant bank does not pay the IPSP or goes under, the Webmaster has no recourse. They lose funds and rebills and cannot collect on funds due. I highly recommend researching ALL of your options before jumping.
What are the choices now for Webmasters? Let’s clear up the truth about rushing out and getting your own personal merchant account (again, for downloadable or digital content, NOT hard goods).
Merchant Account:
1. Must be a U.S. Citizen or U.S. Corporation. If it’s a U.S. Corporation, there must be a principle that resides in the U.S. (and they must have assets – the bank wants to go after some if they shut down);
2. Cost is roughly $1,000 – $1,900 for adult content. Merchant must register with VISA and the costs range from $1,000 – $1,250;
3. Merchant must pay transaction fees for AVS/CVV2 plus and must setup a gateway, processor and fraud scrubbing (each has a cost associated) at $.25 per transaction;
4. Merchant’s credit line is based on credit, length of time in business, personal assets and past processing history. Therefore, the merchant may have to get multiple merchant accounts to be able to process “volume” (whereas the IPSP has always given an open pipeline without qualification);
5. Reserves range from 10% – 20% depending on #4;
6. Some merchant providers require an upfront reserve to begin processing;
7. Fees are applied should the merchant exceed VISA/MC charge back ratios. These can range from $25 to $100 per charge back, and then fines start at $10K for exceeding ratios and continue to increase if charge backs are not in line. At this time the merchant has been placed on the “watch list.” The merchant bank can terminate the account at any time that the watch list is in effect without cause;
8. Merchants will have to handle customer service themselves;
9. Merchants must dispute charge backs themselves and the VISA regulations, for e-commerce states that the merchant is responsible for all charge backs, period;
10. Merchant must handle payment of all referrers;
11. Merchant must comply with VISA rules and CISP (security regulations) and are subject to audit;
12. Should a merchant lose its account, VISA has the right to ban individuals from “hiding” under an IPSP;
13. Processing of a merchant application takes from three to eight weeks depending on the paperwork and any/all complications (IPSP’s have set up functionality within 24 hours.)
What’s the bottom line? Well, considering everything, the IPSP’s have done a pretty good job of providing service to Webmasters. No IPSP is perfect, but considering the alternative, there are a lot of services provided included in the percentage that the IPSP has been charging monthly. Everyone should get one clear point: This is NOT the IPSPs making the changes… it’s VISA.
On a side note, there is another fact to consider. Over 90% of the funds used to finance the bombing of the World Trade Center in 1993 were tracked back to credit card fraud over the Internet. The banks are now requiring that there is some sort of registration and knowledge of where the funds are originating. This is a small part of what’s going on, but it is a factor. There is an honest push to get those abusing the system out of it, and in some ways, making processing credit cards easier for the everyday Joe, also made it easier for the scammers. We should all keep our eyes open and choose to do business with those individuals that we know to be reputable, considering that the next referrer that you take could put your business at risk. Take an honest look at where the charge backs are coming from and weigh the short-term gain for the long-term.
Could things have been handled differently? Sure, in a perfect world. We all need to keep our wits about us and make sure good information is received before making business decisions. Listen, learn and research before jumping on the emotional bandwagon. Don’t shoot the middle-man (IPSP), since they stand to lose the same if not more than you! Ask people you respect what their own personal experience has been with merchant accounts, merchant banks, and fraud, and then ask yourself WHY most are processing with IPSPs?
(Author’s identity withheld)