May 03, 2007
Interesting Aside About Porn Industry
Posted by Christine Hurt

In the NYT Magazine last Sunday, a fascinating article depicted the world of online pornography, profiling one company that at least by those quoted was seen as being a very good employer.  Employees have benefits, including 401(k) plans, and the headquarters reaches out to the community.  Prof. Bartow doesn't believe all the press and writes about it at Feminist Law Professors.

What interested me about the magazine article were two small tidbits:

First, the payments systems for online pornography have become more complex, paralleling the payment systems for online gambling.  PayPal apparently exited the pornography industry in 2002, one year before it exited the online gambling industry.  Credit card companies preceded PayPal in denying charges to porn sites.  However, unlike funding online gambling, funding pornographic viewing was not seen by financial institutions as potentially illegal, but as potentially uneconomic.  Porn sites apparently have a huge "charge-back" rate -- the rate at which users complain to credit card companies of overcharges or fraudulent charges.

Second, in quoting someone about the difficulties in creating payment systems for porn sites, the article quotes Gary Kremen, who it describes as the person "who founded both the porn site and the dating site in the mid-90s."  I don't think I'll ever look at those commercials the same from now on!

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Comments (2)

1. Posted by Adam L. on May 3, 2007 @ 15:33 | Permalink

The adult industry has driven some interesting payments developments because of its unique risks and adult consumers' premium on anonymity, and I suspect it will continue to do so. As the NYT Magazine article noted, there is a high rate of credit card charge-backs (contested and unwound transactions) in the adult industry. Chargebacks are very expensive for merchants; when you make a return on a credit card purchase it actually costs the merchant a fee.

The typical merchant accepts card transactions through an acquirer bank. The acquirer takes a percentage of the transaction amount as a fee (the discount rate). For most industries, the discount rate is in the range of 2%-4%, but for the adult industry, it is typically 15% of the purchase price. This is because of the fly-by-night nature of many adult website providers--they have no tangible assets and do not generate enough transaction flow for the acquirer to feel confident that it can protect itself via set-off.

PayPal is not an acquirer bank; instead, it works like a factor. . It essentially purchases merchants' credit card accounts receivable at a discount and then submits them to its own acquirer. PayPal is able to get a better rate than most Internet merchants, so it leverages its creditworthiness to capture the spread between its rate and the amount by which it discounts the accounts receivable to the merchants. PayPal assumes the chargeback risk, and because PayPal has a flat discount rate for all merchants, it cannot afford to deal with high risk merchants.

I suspect that an initial factor in the rise of PayPal's popularity, besides eBay, is the privacy that a consumer gains from a PayPal transaction because only PayPal, not the merchant, sees their payment information. Consumers are more interested in anonymity in adult transactions than typical transactions, so PayPal was likely an attractive option for privacy-minded porn consumers when adult websites were able to offer it as a payment option.

To my mind, the absence (at least to my knowledge) of a widely accepted, relatively anonymous payments intermediary for the adult websites creates a market, and the product that manages to fill that niche is likely to do well outside of the adult market.

2. Posted by Jay Taber on May 4, 2007 @ 13:21 | Permalink

How about those pension plans for child prostitution rings in Cancun! Dental plans for sex slavery smugglers! So much good news.

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