The news has spread like wildfire. Unless you’ve been living in Afghanistan for the past month in a cave befriending Bin Laden, you will have heard from one source or another about the new Visa policy regarding chargebacks for adult-oriented sites.The news has spread like wildfire. Unless you’ve been living in Afghanistan for the past month in a cave befriending Bin Laden, you will have heard from one source or another about the new Visa policy regarding chargebacks for adult-oriented sites.

A chargeback (or “CB”) occurs when a Visa credit card holder reverses a transaction. It’s similar to a refund except that the Visa cardholder claims that the transaction was somehow fraudulent. A CB has different consequences than does a refund. When a transaction is charged back, the party on the receiving end of the CB can face large fines.

According to the new Visa policy, merchants / Webmasters and third party billing companies are required to maintain a CB ratio of 1% or less for U.S. transactions. If this ratio is not met, the merchant could be virtually blacklisted from doing business online and both the merchant and third party billing company (if one is being used) could face fines in the thousands of dollars.

While chargebacks are nothing new, they’ve been cited as the primary reason for many of Visa’s seemingly “radical” new policies toward merchants in the adult industry. Nobody seems to be immune. But what do these recent changes and trends really mean and how will they affect those who continue to do business in adult? Is this a conspiracy to shut down pornography on the Internet? Will Webmasters, sponsors, and third party billing companies be faced with expectations that are unreasonable?

The information in this article will be nothing new to prudent Webmasters and companies that have strived to provide quality service and content to surfers at a reasonable price. It will come as news and possibly a dire prediction for those that believed making a profit even at the expense of surfer satisfaction is a good business practice. But, let’s be clear. There are exceptions, and not all companies being negatively affected endorsed bad business. On the contrary, some honest companies are forced to modify methods of marketing for many reasons other than their own conduct, such as taking directions from their billing company.

There are many different ways of doing business in the adult industry and some ways are more susceptible to certain policy changes than others. The new Visa policy toward chargebacks appears to affect companies offering trials, free trials, cross sells and pay per signup (“PPS”) programs. This does not mean that these methods are a poor way of doing business. It’s not that simple. In fact, more than a handful of companies like CECash and Hustler that use one or more of these methods are bucking the trend by increasing payouts and offering a wider variety of trials for their sites. However, these companies are generally the exceptions rather than the rule.

When a company decides to use trials, cross sells or PPS, it is especially responsible for being as informative as possible to all potential customers surfing its sites. The reason is obvious. When users sign up, they are going to incur a lot of costs unless they cancel shortly after subscribing. Therefore, communicating what is offered and for how long it is offered and at what cost, is important. And once the customer is inside the site, the promises of what is offered should be kept and the ability to cancel the subscription should be presented.

Poor communication can lead to CBs. When a user subscribes to a site costing $4.95 and then receives a whopping charge of $120+ on his bank statement later in the week, he’s likely to chargeback. It’s important here to note that there are a growing number of surfers that understand exactly how subscriptions work and intentionally manipulate the subscription process knowing that they can retrieve all of their money relatively easily through CBs. Many companies know for instance that even when the site lives up to the expectations of the surfer, the surfer will sometimes refund or chargeback for no apparent reason. However, that is clearly the minority of surfers which explains why many programs can exist and make profits.

The decision to keep CB ratios at 1% is more likely a reaction to the abundance of overzealous merchants who have for years gone above and beyond CB ratios that are acceptable in any business arena. In other words, the few but proportionally large group of bad apples in the adult industry ruined it for the majority. We must acknowledge too that there is probably much more fraud on the part of surfers online than customers in the “real” world.

The anonymity of the Internet provides or did provide extra “protection” for insidious merchants and surfers alike. Unfortunately, while there is not much that can be done to regulate the surfer (although measures are being taken so that it’s not as easy for a surfer to claim he didn’t pay for a product or service when he really did), a lot can be done to regulate Webmasters providing the services. Put in this perspective, the new Visa policies make some sense. It seems less of a covert operation to eradicate pornography online but rather a way to contain an industry that has abused an inordinate number of credit card holders.

What has the Visa chargeback policy meant for the adult Internet? Well, we’ve seen many popular sponsor programs decreasing payouts, changing free trials to paid subscriptions, and eliminating cross sales altogether. For instance, Silvercash has decreased payouts and TopBucks has replaced their free trial with a paid one on their Adult Verification site.

Overall, this is a positive and much needed change. It will certainly present a large hurdle for greedy merchants to become compliant with the new rules who previously escaped Visa’s radar and whose programs rely upon seedy means to make sales. It will also keep payouts for sponsor programs at more honest and profitable margins. Instead of being forced to offer $70 payouts, sponsor programs can offer realistic payouts of $25 – $35 allowing for more stable programs and increased competition among sponsors. The focus will shift from simply making a sale to ways to retain members.

If adult ecommerce can ever regain the trust of the average surfer, sales are bound to increase. But after years of scams and overpriced sites, it will probably take many more years to correct the damage that has already been done.

In order to be fair, it must be said that many honest companies are facing compliance problems not because of their business methods, but because of the Webmasters who use their programs. As noted in a newsletter by third party billing company CCBill, the pay per signup program model invites fraudulent referrers. If a Webmaster knows he can make $70 on each sale he may try to find ways to generate a large number of “fake” sales to fatten his wallet. With lower payouts due to the new Visa policy, companies running PPS programs may once again be able to focus more on surfer satisfaction and less on Webmaster fraud, which is undoubtedly a large problem.

So, what’s a Webmaster to do? The Visa changes regarding chargebacks mean less to the average Webmaster than all the hype in industry forums would have you believe. Quite frankly, most Webmasters can continue to market the sites and programs that they did before without feeling much of a pinch. There will be exceptions to this, and that’s unfortunate. One thing is certain: Webmasters have to choose programs to promote that they believe will be able to adhere to the CB rules so that they still have a program to promote months from now. If a Webmaster promotes a program that uses deceptive marketing to create sales, it’s a real possibility that the program could be shut down, taking all of the Webmasters’ recurring sales along with it.

Choosing a program to promote shouldn’t be difficult. Staying with large programs known for honesty is important. It’s also important for the Webmaster to do some of their own investigating. Checking out the sites they’re promoting, seeing how they’re marketed, and looking inside the members’ area can provide clues as to what programs will be around months from now.

Some Webmasters might also try other types of programs like Adult Verification Services (“AVSs”), which offer the surfer plenty of content for a cheap subscription fee. Even with AVSs, however, it’s important to use a program that offers quality. Most often an AVS’s premium program such as the one offered by AdultsAllowed provides the surfer a wide variety of quality content at a very fair price.

The adult industry is volatile. This presents great opportunities but it also comes with its own risks. Adapting to change is necessary to continue making money and the changes being made by Visa (at least the changes asked to date) are relatively easy to adapt to. For years now, the adult industry hasn’t been the free-for-all that it once was. Webmasters who launched their businesses in the earlier years made a lot of money very easily. But, we’re now dealing with an industry that is restricted by the very institutions that serve as its lifeline – the credit card companies, the banks, and the billing companies. As long as the policies of these institutions remain reasonable, the adult industry will continue to prosper.

Mike Farber is Managing Director of Sales for AdultsAllowed and consultant for PrivateVoyeur.com. Both of these sites are proponents of Premiere Investments Inc. Under the direction of Mr. Farber, Premiere Investments Inc. became involved in ecommerce in early 1999 and has continued with a run of non-stop successes ever since. He can be reached at support@adultsallowed.com.