Although it is difficult to get accurate figures on the overall size of the worldwide adult industry, the pornography industry alone was approaching $100 billion in revenue as early as 2006. If we assume that the other areas of the adult industry are also bringing in billions of dollars every year, we are talking about a truly massive industry with a truly massive market. Technological developments such as the Internet and virtual reality continue to give it more avenues for growth. Which makes the need for adult merchant payment processing all the more necessary.
The term “adult industry” covers a very broad range of products and services, and in its vagueness might not be the most helpful in understanding what exactly we’re talking about. However, as Kristen N. Jozkowski writes in The International Encyclopedia of Human Sexuality, “adult industry generally refers to the sale of sexually explicit material or services, including legal and illegal exchanges, for profit in commercial marketplaces.”
As Jozkowski later points out, most of the adult industry consists of what is often referred to as “adult entertainment.” However, it ranges from sexually oriented toys to pornography to sexually explicit stage shows and live video streaming to phone sex and prostitution in all of its various forms. Some of the most common types of business operating legally in the adult industry are as follows.
If you are operating any of these types of business, or other related/similar types of business, one challenge that you have to deal with is that the adult industry is considered to be high risk by most banks and other financial institutions. That complicates the establishment and operation of your business, and increases the number and weight of demands on you and your business, in terms of both money and time.
So, what is it that makes banks and other financial institutions view the adult industry—or more specifically, opening merchant accounts and processing payments for the adult industry—as high risk? The two most common reasons that a company is labeled “high-risk business” are a high chargeback rate and a high frequency of fraud. These both apply to the adult industry overall.
That fact alone would likely get it placed in the high risk category, but there are other aspects of the industry that contribute to that categorization as well. Those aspects include:
Every business that accepts payment by credit card must deal with the issue of chargebacks. The nature of the adult industry, however, has an additional factor that can lead to a higher rate of chargebacks than other industries. Customers in the adult industry tend to want to keep their purchases private. If they believe that they have been “found out,” they may dispute charges and say that they did not purchase the product or service, etc.
It also sometimes happens that people really do have their credit card information stolen and used to buy sexually explicit content. If the purchases are in small enough amounts, and the name of the merchant is vague enough on the billing statement, a lot of time might go by before the cardholder realizes what has happened. If it continues over a number of months, the total amount can be significant.
The adult industry also has an increased potential for “friendly” fraud. For example, let’s say that a teenager uses his mother’s credit card, without permission, to buy pornography online. He doesn’t mention it to his mother because he doesn’t want to get in trouble for using the card and because he would be embarrassed if she knew that he was viewing pornography.
When the billing statement arrives, the teenager’s mother sees the purchase but doesn’t recognize it. She contacts the bank or credit card company to ask about it, and finds out that the payment was made to an adult entertainment website. She might ask her son about it, but he will most likely deny knowing anything about it.
The mother assumes that her card information has been stolen, so she disputes the charge. If she successfully initiates a chargeback, she will have unintentionally committed fraud in the sense that the purchase she disputed was actually made by someone for whom she had legal responsibility.
This type of “friendly” chargeback fraud can happen in other industries, of course, but the higher likelihood that the guilty family member, etc., will be extra secretive means that there is a higher degree of motivation to deny making the purchase in the case of the adult industry.
Credit card companies typically charge a registration fee for high-risk merchant accounts. Ordinarily, it must be paid each year. As of this writing, Visa and MasterCard charge $500 per year. Some credit card companies do not have a set annual registration/renewal fee, but will require payment of other fees based on the number of payments that are processed and other factors.
Be sure to check with the credit card company and your payment processor for specific requirements and other details.
Political/social debate and controversy tend to surround the adult industry, and there are often legal requirements and restrictions placed on businesses in the industry that are not placed on businesses in other industries. Compliance with laws, regulations, and industry standards has become a major pressing issue in every industry, and the United States is especially strict toward the adult industry.
Some of the requirements may even be somewhat unexpected. For example, it’s not surprising that there are laws and regulations that prohibit the sale of pornography to minors. Merchants in the adult industry usually understand that and take it into consideration when starting their business. On the other hand, they are much less likely to be aware that there are laws that set requirements for something like record-keeping related to simulated sexual conduct (U.S. Code § 2257A).
Be sure to look into the relevant laws and regulations thoroughly and make compliance a priority in your business. Your high-risk payment processor should be able to help you with this, so if you are unsure, don’t hesitate to ask. One of our staff members at Zen Payments will be glad to help you.
A high-risk payment processor can be a highly effective resource in helping you get things set up in a way that your adult merchant payment processing will be in compliance with laws and regulations from the start. Because the payment processor specializes in high-risk businesses, it can help strengthen your protection against risks that are specific to your industry and that could do serious damage. The ideal is to find a high-risk payment processor that has a good level of experience in payment processing, etc., for the adult industry.
The penalties for non-compliance can be significant, and violation of relevant laws could result in having your merchant account closed, leaving you without a way for customers to make payments. Ask as many questions as you need. Neither your business nor the payment processor will benefit from a bad match between your needs and the processor’s capabilities.
Wherever you are in the process of starting and operating your business, Zen Payments can answer your questions and provide solutions that meet your specific needs. Our team specializes in helping you ensure that your business fully complies with the relevant laws and regulations so that your merchant account is always ready to accept your customers’ payments.