Adult Payment Systems
By Dalip Mahal, PayCash.us
In the previous two issues we investigated the reasons why the credit industry is withdrawing its support from the adult industry. We then explored: 1) historical and current attempts to fix the defects of the credit card industry and 2) historical and current digital cash alternatives. This month we focus on the parties to a transaction for the purchase of adult related materials, their ideal requirements, and how existing alternatives to credit cards match the requirements of the adult industry.
Ideal Payment System Characteristics
There are three key parties to every purchase transaction: the buyer, the seller, and the currency provider intermediary. When you purchase coffee at Dunkin' Donuts there are the consumer, the merchant, and Uncle Sam who issued the currency being used. We sketch out the desires of the consumer and merchant and the obligations of the currency provider relative to the payment system using the coffee example.
The consumer wants:
- To be sure that the currency is valid
- To ensure that he is the only one who can spend his money
- To ensure that no more currency than necessary is exchanged
- To make sure that it is easy to use the currency
The consumer does not want to find out that he is paying with a counterfeit bill, he wants to make sure that no one else has access to his wallet, he gets the correct change for whatever currency he extends, and that it is not a hassle to use the currency.
The merchant wants:
- To be sure that the currency is valid
- To make sure that valid transactions can't be reversed
- To ensure that no less currency than necessary is exchanged before delivering the goods or services
- That it is easy to accept the currency
The merchant does not want to discover after the transaction that the currency was counterfeit, he wants to make sure that once he has delivered the goods or services that the money stays in the bank, and he wants to make sure that he gets at least as much currency as was stated in his offer.
The currency provider needs:
- To make sure that currency is only issued to valid consumers
- To charge reasonable fees as an intermediary
- To provide assurance that the currency is not debased
- To provide proof that transactions took place
The currency provider is a broker who needs to be mindful of the supply and demand economics of the payment system; that there are sufficient consumers willing to supply the payment method in the market, and that there are sufficient merchants who demand the payment method. The currency provider needs to provide a marketplace where the consumers can find merchants so that currency can be exchanged. It is the currency provider's responsibility to minimize fraud within the system - and to provide mechanisms to ensure a fair exchange of currency.
Brief Definition of Money
ABOUT CYPHERMINT
Headquartered in Marlborough, Mass., Cyphermint is a provider of Global Electronic Cash Payment and e-commerce infrastructure/integration solutions. Our core technology, Pay Cash is used in three major areas: (1) Internet Cash Payment Systems, for B2C e-commerce via the Cyphermint Pay Cash System, (2) Kiosk Solutions - delivering Web-enabled self-service B2C merchandising systems, and (3) The Pay Cash Now Debit Visa Stored Value Card. Cyphermint's Kiosk Integration Division provides solutions to online retailers enabling full integration with kiosk networks and also sets up existing kiosk networks with e-Commerce capabilities. Cyphermint's core technology, the Pay Cash System provides businesses complete turnkey solutions.
Visit the corporate website at: www.cyphermint.com and tour the Pay Cash operations website at: www.paycash.us.
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To get slightly technical for a second, one simple way to categorize currency is either as M1 or M2. M1 is real currency, and once a merchant receives it the money has been transferred irrevocably; the only M1 exchange mechanism that does not involve a physical exchange of currency is a wire transfer. The following are M1: cash, cashier's check, traveler's checks, money orders, gift certificates, wire transfers, and gold. Once the merchant verifies the integrity of the device (i.e. security features) the money has been transferred irrevocably.
The following devices are not M1: checks, credit cards, ACH (Automated Clearing House) and bank transfers. These instruments are part of M2, which means that they can be converted into M1 quickly, but are only based on M1. The problem is that non-M1 sources of money require a clearinghouse to settle the transaction. Since it takes time to settle a transaction, this means that the money can be in two places at the same time, e.g. when a $100 dollar check is deposited, the destination account is credited before the source account is debited. If there are insufficient funds, the transaction is reversed from the destination account.
Ideal Adult Payment Systems
There are some additional features required for the Adult Industry involving proving identity and providing anonymity. This industry operates primarily over the Internet and as such the ability for the consumer and merchant to verify each other's identity falls to the currency provider.
In our increasingly conservative culture, anonymity is desired by many consumers. This primarily manifests itself when a spouse discovers charges to an adult site and the consumer disavows knowledge of the transaction; the so called 'gak factor' leads to reversals of legitimate charges.
The subscription nature of the adult industry is ideal for interested consumers and merchants; at least until a viable micro-payment solution becomes available. However, consumers want to be able to cancel a subscription at will and the merchant wants to know that payments won't be stopped without their knowledge.
In general, the easier it is to move money between a consumer and a merchant over the Internet the more opportunities there are for fraud. In an industry where instant gratification is the key, this inevitably leads to high fraud levels and costs being borne unequally among the three parties. In the next section we investigate alternatives to credit card payments and see the advantages and disadvantages of each of these systems.
Alternative Physical Payment Methods
Physical payment methods are covered since they are being used by the adult industry. These methods do not allow instant gratification, as there is at least a mail delay to get the funds.
Check
ADVANTAGES
- Consumer controls amount spent, no fear of recurring billing
- Relative anonymity for the consumer
DISADVANTAGES
- Merchant must deposit funds manually to his bank account or set up a lock box
- To ensure that funds settle the merchant should wait up to 12 days
- Merchant must have a process to handle NSF checks
For an online alternative to checks visit www.echeck.org.
Money Order (Traveler's checks)
ADVANTAGES
- Consumer controls amount spent, no fear of recurring billing
- Merchant can verify amount of money provided
- M1 currency, minimal fraud
- Complete anonymity for consumer
DISADVANTAGES
- Manual processing required by merchant
- Merchant must either deposit funds at his bank or set up a lock box
Alternative Bank Payment Methods
Bank transfer via ACH
ADVANTAGES
- Set-up can be done over the Internet
- Recurring billing possible.
- Funds transfer done within 24 hours
DISADVANTAGES
- Consumer can reverse ACH easily within 60 days, and without too much difficulty over six months
- Merchants must monitor bank account activity and then activate subscriber accounts
The ACH system was created in response to utility companies who were processing millions of checks each month. The system was designed for a utility to enter a request for funds to transfer between US banks and have the funds move and settle quickly. The downside is that there is minimal verification involved in the process and any company on the ACH system can initiate a bank-to-bank transfer. Since all verification is done after the transfer, it is easy for a consumer to retract ACH bank transfers.
To minimize consumer fraud with ACH transfers, you need to determine that the bank account provided by the consumer really is their account. One way to do this is to send small ACH transactions to the consumer's account to establish identity before allowing the consumer to use ACHs.
Wire transfers
ADVANTAGES
- Funds transfer done within 24 hours
- Money exchange cannot be reversed by the consumer
DISADVANTAGES
- Wire transfers are expensive to the consumer
- Repetitive wire transfers are possible, but clumsy for the consumer
- Merchant needs to scan bank accounts to determine payments
Alternative Internet Payment Methods
YowCow, iKobo, and ePasseporte allow funding via credit cards and suffer from the same problems outlined in the previous two articles. Payment systems funded by credit cards have the advantage that the merchant's name does not appear on the consumer's credit card statement; this is counterbalanced by the potential for phishing attacks.
Duocash
ADVANTAGES
- High consumer anonymity as there is no paper trail
- Complete customer control of spending
- No chargebacks
DISADVANTAGES
- Higher merchant fees due to phone company expenses, system ideal for micro-payments under $1
- Currency provider cannot connect merchants and customers.
- Recurring billing is impossible
Duocash is out to exploit the $5.2 billion dollars of prepaid phone cards already issued in the US market.
ePasseporte
ADVANTAGES
- Backed by Visa.
- Available in many countries world-wide.
- Stored value card can be used in physical locations.
DISADVANTAGES
- Consumer pays 5% to load value onto cards as well as initiation and annual fees
- Consumer must have a minimum of $50 in their account to make a purchase
- Recurring payments are prohibited
iKobo
ADVANTAGES
- Merchant pays fixed fees $0.29 + 2.9%
DISADVANTAGES
- All defects of credit card infrastructure
PayCash
ADVANTAGES
- Prepaid service, no chargebacks to merchant
- A flat 2% fee on withdrawals; no fees on funding or purchases
- No identity fraud, all transactions digitally signed by consumer and merchant
- No paper trail, all receipts are secured via password in the wallet
- Consumers can provide minimal identity information to merchant
DISADVANTAGES
- Requires software download to their machine
- PayCash accounts cannot be instantly funded with a credit card
The PayCash System has recently become available in North America; the technology is used heavily in former CIS countries where the system encompasses a large base of installed wallets and merchants. There are digital PayCash banks in the US, Russia, Ukraine, and Armenia.
The consumer downloads a wallet to set-up his PayCash account. This disadvantage is outweighed by the following advantages: 1) all payment receipts are encrypted in the wallet with 1024 bit technology, no password = no access, 2) no identity fraud is possible as the wallet must be running when a transaction is executed.
The merchant has no set-up fee to create a PayCash account, and there are no monthly maintenance fees; the merchant only pays a flat 2% fee on withdrawals. The merchant can be notified by e-mail; or optionally directly via a real time confirmation to the merchant's website. Once the merchant is notified of a payment the money is irreversibly in the merchant's PayCash account.
Merchant integration requires the same amount of work as integrating PayPal on a site, and the PayCash Payment Gateway (PPG) supports RTPN (real-time payment notification) which is like PayPal's IPN. For merchants with dynamic websites, the PPG allows the entire payment process to be transparent to the consumer who will never feel as if he has left the merchant site.
Phone Bill Methods (Dialers, etc)
ADVANTAGES
- No identity fraud.
- Recurring billing is unnecessary
- Direct billing is consumer's phone bill
DISADVANTAGES
- Requires software download to their machine
- High consumer costs, can involve long distance charges
- Large number of charges on a phone bill decreases anonymity
- Limited to dial-up access speeds or require tying up a phone line for broadband users
Dialers provide an alternative to non-credit card enabled consumers; however, abuse schemes with dialers have made consumers wary of downloading them. While the dialer is a viable alternative if credit disappears from the adult industry, it is unlikely to provide a long-term solution given its cost structure. Most dialers are current adult centric, but non-adult centric dialing solutions like eCharge are starting to emerge.
YowCow
ADVANTAGES
- Allows funding via a credit card
- Merchants pay flat $0.50 fee per transaction
- Available outside the US
DISADVANTAGES
- Consumers pay heavy fees to fund or withdraw money from the system
- Consumers must fax signature and photograph of CCV number to fund via credit card
- Credit card processing is based on Australian dollars (AUD) and can lead to billing discrepancies
Conclusion
It is fairly clear that the adult industry will face tougher restrictions with respect to credit cards in North America, assuming that the industry will continue to have access to credit at all. There are two distinct trends emerging: solutions based on the credit card infrastructure and those that are completely independent of the credit card infrastructure.
ePassporte, iKobo, and YowCow are trying to leverage the existing credit card infrastructure. As such, these systems may provide a good short term solution for the adult industry; long term these solutions are unlikely to remain competitive with other alternatives in their present structure. Keep in mind that any payment system that allows credit card funding will become the next target of the fraud artists who are causing credit to vanish from the adult industry. PayPal and StormPay no longer accept payments for the adult industry, which suggests that similar systems will either: 1) stop handling the adult industry, or 2) charge much higher fees to cover the costs of fraud.
Dialers, PayCash, and direct phone billing solutions are credit card independent and their challenge will be to build market share among consumers and merchants. If we include historical alternative payment systems such as SET, eCheck, and DigiCash, we can see that attempts to reduce identity fraud and provide additional transaction security require collocating software on the consumer's PC.
In considering alternative methods, a merchant needs to balance the speed of collecting the payment, with the fraud risks inherent in the method. The merchant must consider the privacy of patrons who wish to conceal their interest in the adult industry from their spouse and others; increasing patron anonymity will lead to a reduction in the reversal of legitimate transactions and remove a barrier to consumer spending.
All merchants who currently accept payments need to carefully consider all of the available alternatives and weigh the advantages and disadvantages of each mechanism relative to their business. All merchants in the adult industry should plan and invest in alternative payment solutions before credit vanishes entirely from the industry.
REFERENCES
1 http://xbiz.com/article_piece.php?cat=47&id=3169
2 http://www.webmastervault.com/tip-epassporte_stormpay.shtml
3 http://www.paycash.ru, site is in Russian and can be translated from http://translate.ru
4 http://www.cozyfrog.com/guides/money/articles/phonepaysites.asp
5 http://www.bananaguide.com/moneyphone.htm
6 This is invasive since these numbers are not supposed to be stored permanently by a merchant.
7 http://www.stormpay.com/stormpay/user/user_help.php?cat=5&faq=88
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