The Dilemma of Chargebacks and Upcoming Solutions
E-PROCESSING
Adult content businesses are having an increasingly difficult time turning profits on the Internet. In the mid 90’s, any webmaster with an erotic domain name and a few torrid photos could throw his content up on a site, charge a monthly fee for access, pepper the site with links to other xxx destinations, and watch the money flow in.E-PROCESSING
Adult content businesses are having an increasingly difficult time turning profits on the Internet. In the mid 90’s, any webmaster with an erotic domain name and a few torrid photos could throw his content up on a site, charge a monthly fee for access, pepper the site with links to other xxx destinations, and watch the money flow in. Lots of money, too, in ’97, during the “golden age of online porn.” The digital sex market stood at about $1 billion. Back then market intelligence companies predicted the industry would continue growing at an annual rate of 75%. Profit margins were close to 80% and, between banner ads and affiliate deals, adult site owners could earn $20,000 per month.
The market for online adult content in 2002 is not as generous; in fact it’s lagging. Independent adult sites are struggling to survive, profit margins are down, and customers are almost impossible to retain. In fact, the market for online erotica has been flat for over a year, with more than half of online porn sites grossing less than $20,000 a year.
Many in the industry believe that these problems stem from the glut of cyberporn sites. According to recent estimates there are approximately 100,000 operational sites, many of which mercilessly employ advertising spam techniques, attacking the surfing public with an endless barrage of pop-up applets, come-ons, and advertisements desperately clawing for web surfers’ click-throughs. The emergence of free porn sites and the increasingly fickle and distrustful nature of adult content customers pose additional problems for the industry.
But the greatest of obstacles to the marketplace’s profitability is the credit card chargeback dilemma. A chargeback occurs when a customer declines to remit payment to his credit card company for a transaction appearing on his billing statement. An inquiry ensues; the customer will typically claim that his credit card number was fraudulently appropriated and used to conduct unauthorized transactions. Merchant banks that process the credit card sales then penalize the websites in question forcing them to pay fines of $10 to $100 per chargeback. Considering that monthly chargeback rates can range to 15% and higher, chargebacks are quite a hindrance to smaller porn sites striving to achieve profitability.
At the root of the cyberporn-chargeback issue is a fundamental premise governing the relationship between banking and credit institutions, cyberporn customers and erotic web sites. Consumers know that if they refuse to pay their credit card company for a piece of content or for a subscription they bought at a cyberporn site, they will ultimately not be held accountable. As far as the banks and credit card companies are concerned, the world of porn is one of questionable integrity. This stigma disqualifies adult companies from being able to make just claims against sneaky end-users. In chargeback disputes, the end-users always win.
In addition to rampant consumer abuse, a new type of chargeback fraud has come to the fore in the online adult space. Porn sites have become the optimal place for thieves and hackers to test out stolen credit card numbers. When victims learn that their credit card information has been misused, they immediately cancel the most recent charges, many of which were submitted to porn sites. The porn sites then must pay heavy fines to credit card processors in order to maintain their merchant accounts. In these instances, the cyberporn companies are literally paying for the criminal behavior of miscreants.
One solution that several sites have begun to investigate is to employ credit card alternatives. Some transaction processing companies already accept payments from Paypal, e-checking services like Telecheck, direct bank debits, and prepaid phone cards. Our company, ComCharge, supports alternative payments. By offering credit card alternatives to payment on porn sites, ComCharge eliminates the chargeback problem altogether.
Although third party payment companies typically charge their own discount rate for processing transactions, many adult content vendors are beginning to see the benefits of outsourcing the headaches that attend collecting money from consumers. ComCharge especially offers additional payment and business policy management applications that no content vendor would ever develop on its own. The ability to integrate both pay-per-view and a variety of subscription options, as well as the functionality to change or update prices and promotions in real time, are services adult content providers agree are worth a few percentage points. With 24/7 web-based customer service, unlimited scalability, and multi-currency processing capacity, alternative credit card companies may just be the solution adult content vendors are desperately seeking.
ComCharge has developed a technology that helps online content vendors in the adult marketplace process transactions without the hassles typically associated with credit cards, such as chargebacks. The ComCharge technology also provides an optimal level of flexibility vis-a-vis creating business policies. To reach Elliot Belle at ComCharge email elliotb@allcharge.com or call (212) 679-9445.