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• New registration fees: initial ($750) and annual ($375).


• The required filing by Sponsored Merchants with VISA of new registration forms that must then be approved by VISA. (An example form can be found here.)


• The compulsory funneling to VISA by the IPSPs of monthly sales and chargeback data for every URL.


• A new policy that states that IPSPs can register Sponsored Merchants only in the country where the Sponsored Merchant has a presence.


• MasterCard will be instituting several new rules of its own in the near future, but for the time being the company has decreed that the MasterCard logo may not be displayed on clients' sites, something that VISA has yet to stipulate.

Other less controversial emendations have to do with changes to the descriptors on the cardholders' credit card statement, the displaying of IPSP Terms and Conditions on join forms, and other labeling requirements.

Regarding the timetable of these changes, the announcement says, "October is the month to implement these changes," and includes a timetable for Webmasters to follow to have everything completed by Nov. 1. The rapidity with which these changes are being ordered is also of some concern in certain quarters, as it leaves precious little time for Webmasters to review their options and decide whether they want V/MC to have direct access to all the information the companies are asking for.

The IPSPs
We asked the three companies that issued the announcement for some clarifying comments. All responded except iBill.

Epoch
Rand Pate of Epoch Systems generously took the time out from an inevitable avalanche of Webmaster queries to respond to some questions. Keep in mind that these answers were provided immediately after the announcement was released, and some of the questions have since been fully answered.

What regulations are new?
"The enforcement of reporting down to URL levels all credit and chargeback activity to VISA [is new]. Epoch has been doing this for over a year, so although nothing is new to us, it is now being "enforced" by VISA."

Are all these fees new?
"Yes."

Why is this happening now?
"All I can really say is what we've heard over and over again.... If adult Webmasters don't learn to police themselves, someone will do it for them. Guess it's happened."

How long ago were you informed that this was going to happen?
"We've known about much of the regulations for several weeks, and some for several months. The regulations were not released from acquiring banks, however, until now."

Is there any significance to you now being called an IPSP?
"It's VISA's designation for online third party processors. By defining us and being familiar with our business, they can understand how IPSPs help fight fraud and manage a section of business for them they would not otherwise want to deal with."

Are you aware of any other new regulations that are not included here?
"Not that I'm aware of. The new MasterCard regs have not yet been released, however."

"IPSPs can only register Sponsored Merchants in the country where the Sponsored Merchant has a presence." Do you know what this means? Does it mean where their servers are, their headquarters, their P.O. box?
"I'm waiting for clarification of this myself. It does appear that if you process in the U.S., you must have a presence there; same for the U.K., Canada, or wherever." (We have since been told that VISA has clarified its "presence" requirement to mean that all companies must actually have staff in the United States, though VISA has not yet confirmed this to us, or explained what exactly constitutes a "staff.")

VISA wants to see all monthly statements, chargebacks, etc., down to the URL, and reserves the right to terminate specific URLs. Is this new? Is it significant? Are they trying to exert more centralized control?
"They are trying to ensure that programs causing damage to their product and unacceptable customer issues are not able to hide in third-party portfolios or by spreading their business out among multiple processors."

CCBill
Tom Fisher of CCBill spoke with AVN Online's Technology Editor, Kathee Brewer, who reported his follow-up comments as follows:

The new rules, as Fisher understands them, apply to all IPSPs, not just those who deal with certain kinds of clients. He said the introduction of the acronym "IPSP" is to facilitate referential "shorthand" for VISA.

Regarding the requirement that "IPSPs are required to provide VISA with monthly sales, chargeback and credit data," Fisher said, "That information has always been available to them [VISA], but what they're doing is putting the burden for reporting it on the processor. It means a little more work for us."

There's still quite a bit of confusion on the part of the IPSPs about what is meant by "IPSPs can only register Sponsored Merchants in the country where the Sponsored Merchant has a presence." Epoch, CCBill, and iBill are attempting to clarify that through their acquiring banks, because VISA doesn't seem to want to talk to the IPSPs directly about it, but basically, that particular point breaks down for Fisher thusly:

VISA is a consortium of banks that are broken into six regions scattered around the globe. The U.S. composes one region. Others encompass Europe, Asia, Australia, etc. Each region has a governing board composed of representatives from the acquiring banks (the ones that process the charges) and the issuing banks (the ones that issue credit cards - some banks do both). Each of the regions also has representatives on the board of VISA International, which is the main governing body. Each region is free to set its own rules for its member banks, and sometimes VISA International upholds those rules for everyone, but sometimes it doesn't. Fisher said he thinks this new set of rules comes down from VISA International.

Each VISA member bank has a contract with VISA under which both entities operate. In turn, merchants who accept VISA as a form of payment have a contract with an acquiring bank (the one that processes charges), not with VISA itself. When VISA makes a rule, it tells the acquiring bank with which it has a contract, "If you don't do this, then we'll fine you or yank your ability to process VISA payments." The bank, in turn, says to its affiliated merchants, "If you don't do this, VISA has threatened to fine us or yank our processing capability, so although we appreciate all the money you bring in, we don't want to lose all the money we make from our other clients. Violate this rule and we'll pull your ability to process VISA, plus we'll probably fine you."

Under VISA's definitions, IPSPs function as giant merchants. Their contracts are with their banks, not with VISA itself.

One of the problems in the Internet age is that acquiring banks were getting upset with each other because - since most e-commerce still takes place in the U.S. and the U.S. is home to all the big IPSPs - the banks in the U.S. region were getting the lion's share of the acquisition fees (which compose quite a chunk of their income). To address that, several years ago VISA International instituted a rule disallowing cross-border acquiring - meaning the bank and the merchant with which it had a contract for merchant services had to be located in the same geographic region (basically, in the same country). Until now, that rule hasn't been enforced very diligently (if at all). The new rule about registering sponsored merchants only in the same country is an attempt to get tough about that rule.

What the IPSPs are trying to clarify is what constitutes "same country" residence. Is it any branch office? Headquarters only? The country where the charge capturer and merchant pay taxes? "Web server and ISP location have nothing to do with it," Fisher said.

Fisher's entirely hypothetical example was Wal-Mart. (Wal-Mart, ironically, is suing VISA for alleged anti-trust violations.) Say Wal-Mart has a store in England through which it processes VISA charges. To minimize its expense and accounting red tape, Wal-Mart would like to run all those charges through one merchant account assigned to its corporate headquarters in Bentonville, Ark. British banks, understandably, probably would cry "foul!" because they'd be losing the acquisition fees to a U.S. bank, even though the purchases were made in England. VISA International steps in, and because it's already established a prohibition against cross-border acquiring, it says to Wal-Mart, "Look, we understand what you're trying to do here, but the money really needs to stay in the U.K. You're going to have to set up another merchant account for all your stores in England and process all the VISA charges through a British bank, or we'll fine you and/or yank your merchant account privileges worldwide. You'll never do VISA business in this town again."

PSW Billing
PSW Billling is a Rhode Island-based aggregator that did not participate in the issued statement, but did release a press release on Oct. 4 that dealt with the new regulations. The timeliness of the release, and the new services offered in response, indicate that these new services were on the drawing board long before the announcement last week. It reads, in part:

"In an ongoing commitment to keeping options open for clients and other industry merchants, PSW unveiled the following service updates and additions:

"ePaymentPro, a complete online billing solution, will allow clients to accept Online Checks, VISA, VISA Debit, MasterCard, MasterCard Debit, and JCB. The registration fees will be required for continued service provisions.

"ePaymentLite, an economical online billing solution, will allow clients to accept Online Checks, MasterCard, MasterCard Debit, and JCB. There will be no registration fee, no setup costs, and no periodic maintenance fees." [Notice, of course, the absence of VISA from this option.]

Jettis
California-based Jettis is another aggregator that was not party to the joint announcement, but followed with an Oct. 4 press release, which includes, in part:

"In response to these concerns, Jettis has decided to share the financial burden with all existing and new clients by absorbing this fee on their behalf. Jettis clients will need to pay the fee during the registration process, but will be credited back the registration fee against their normal Jettis processing fees.

"We will offer a rebate to all clients processing with Jettis within this calendar year (2002) in the full amount of the required processing fee. We hope that this will help in some way to alleviate some concern and to keep you focused on the execution of your respective business plans.

"In addition, for those who wish to explore the possibility of setting up your own merchant account, Jettis would be happy to help you through this process. Jettis has a large base of clients who have their own merchant accounts and we are adequately prepared to help you obtain and manage a merchant account.

"In closing, while change is never easy, we think it is important that we not forget to recognize the positive. Many have been concerned over the years that VISA would pull out of this space completely, thereby eliminating our ability to accept a credit card that is widely held and used. These new regulations, while in some cases difficult to accept, demonstrate that VISA has accepted IPSPs as a viable business model."

Adult Check
Adult Verification Services (AVSes) are not IPSPs per se, but do share many of the same characteristics, such as a similar level of liability regarding affiliate member sites, and the responsibilities that come with supplying the billing services for those sites. AC Pay is Adult Check's billing/processing program. Immediately after the announcement, Adult Check Vice President for Business Development Brad Estes offered the following observations to AVN Online:

"Everyone has known about this for a couple of months and we are still analyzing it, but as of yet, we don't think it affects us, and we have no plans to implement any fees or change the way we do things.

"I think that people have a bit of a sticker shock to the $750, but in the grand scheme of things, it's not a ton of money if they're making a good income with their pay sites. Sure, there are going to be people who fall off, but those people will be able to get right back up again in terms of income by rolling it over to a sponsor.

"The way our industry always works is that you have a problem and then somebody comes up with an innovative solution that people continue using. I hope that smaller people don't go out of business, because a lot of them are really good Webmasters, but I also hope that they [the new regulations] clean up the act of some of the people out there who bounce around between billing companies and try to burn up accounts and take the money off the table.

"If the analysis dictates that we need to make a change, then we'll work out a way with our Webmasters to make it as painless as possible."

In a subsequent Oct. 8 press release regarding their AC Pay program, Adult Check explained why the company believes it is not affected by the regulations:

"First, due to our worldwide processing arrangements and seven years of experience at processing high volumes of transactions, AC Pay does not anticipate that the registration fees required by VISA USA will apply to our Webmaster Clients. In addition, our non-U.S. webmasters will not have to set up a corporate presence in the U.S. as some of our competitors are requiring.

"AC Pay has a presence in other regions of the world and processes its VISA transactions through VISA International, which has not adopted the new regulations made by VISA USA. There is a chance that VISA International may adopt these regulations in the future, however VISA International has traditionally had a much better track record of cooperation between itself and its acquiring banks and merchants.

"Our redundant banking relationships spanning the globe combined with the structure of our business mean that AC Pay is much more stable than other processors in the industry. AC Pay not only screens fraudulent transactions more accurately via our Profile Check scoring system, we also get more transactions processed due to our ability to attempt transactions through multiple banking channels in a fraction of a second.

"Second, AC Pay has strong and healthy relationships with VISA and MasterCard due to our professionalism and track record over these seven years in business. These relationships made us aware of the recently announced regulations over six months ago and allowed us to enter the pay-site billing marketplace with a quality product and a distinct advantage.

"Third, AC Pay values its clients, both large and small. We will keep you apprised of any future regulations that may impact the way we do business together. Further, we will always leverage our weight in the processing industry to make your voices heard and keep unnecessary costs down. We appreciate the fact that any fee impacts your bottom line and would never hide an announcement regarding fees until the last minute in an attempt to back you into a corner."

PayPal
A PayPal spokesperson told AVN Online via email that the new regulations apply equally to all IPSPs, and therefore they apply to PayPal as well. The spokesperson noted that while other billers are dropping processing for non-U.S. businesses, PayPal will continue to process for merchants in the U.S. and worldwide.

The Attorneys
AVN Online spoke with several industry attorneys regarding these developments, and received far more ominous assessments from them. This was to be expected, not only because of natural professional proclivities or because they have been warning for years that the industry was fatally vulnerable to regulatory crackdowns, but more importantly because, almost to a man, they believe the credit card companies (i.e. V/MC) are in the penultimate stage of fulfilling their part of a devilish pact they surreptitiously struck with the government in which they immolate the adult Internet industry in the United States in exchange for long-desired favorable bankruptcy legislation. [New U.S. legislation at the federal level restricts bankruptcy filings favorably for credit card companies.] This "theory" was first postulated more than three years ago, and now, according to Greg Piccionelli, an ardent believer, it is finally happening.

Gregory Piccionelli
Piccionelli is an attorney with Los Angeles-based Brull, Piccionelli, Sarno, Braun and Vradenburgh. He specializes in patent law, but also has a slew of the major adult Internet companies as clients, as well as a long history of dealing with entrenched corporate entities like V/MC. He offered the following remarks.

"I knew this was going to happen," he said. "We told a lot of our clients that this was going to happen, because we already knew about it." In fact, for years Piccionelli has been predicting that this policy crackdown was going to happen.

"In terms of the cover story," he continued, "VISA and MasterCard are tightening up their regulations ostensibly to further protect themselves from rampant credit card fraud on the Internet. That's what all of this is supposed to be about. (Now keep in mind the drama I've been beating for the last year, which is this vicarious-and-contributory, aiding-and-abetting conspiratorial liability. Keep that in the back of your mind throughout all of this.)"

According to Piccionelli, the seeds of the current situation were planted years ago, when the third-party aggregators took on their current role in the industry. "The aggregators set themselves up for this day when they moved into the position of being the billing entities for the adult online industry rather than each merchant having their own merchant relationship with a bank," he said. "At that point in time, they [the aggregators] were delighted, because they believed that this would once and for all solve the [industry's] problems, that they would manage things a lot more effectively, because that's all they did. And I remember telling them then that it's only a matter of time, because what is happening is that this is just making a smaller number of targets, and if and when the day comes that they [V/MC] want to bomb the industry, it's going to be a much more manageable endeavor.

"So that was the beginning of the process," he continued, "and the aggregators have set themselves up for this day. And now, either the federal or state government, or VISA, but somebody - and I have a strong suspicion, though I'm not going to go out on a limb and say I know, because I don't want to get sued - but I have a strong suspicion that somebody has gone to these aggregators and said, 'You know, you're liable for what goes on, on these sites, and we could nail you right now, but instead you're going to help the government clean up the Internet, and this is how you're going to do it. We're going to change the rules to require you to acquire all this information, and then you're going to get it to us. And we're going to give to you a series of criteria to use.'

"And if the sites don't comply with that criteria," Piccionelli continued, "it will be because the criteria is content oriented. In other words, it will have something to do with the nature of the content on the sites. Now, the government can't do that, because it would be content-based restriction, but VISA can as long as they're not doing it on behalf of the government. And look how nicely VISA has insulated itself from it; they've now gotten the third-party processors to do it. And of course, when the processors are finished with this process, they'll go down too.

"These are the most ominous signs that there have been yet that the war is coming," he said, "because reading between the lines, this is what's going on: One, the aggregators are going to become the parties that accumulate the information that will probably through some means be passed on to the government for evaluation for prosecution. If the aggregators say [to a Webmaster], 'We're not going to process for you anymore,' they may not even give a reason why, because if they do, such as, 'Well, we've been told that the kind of material you have on your site could subject you to criminal liability, and therefore us to criminal liability,' that would basically be an admission that they know that they've been processing for somebody that could have criminal liability. So they probably won't say that, but if, seemingly for no reason, the third party processors just say, 'We've done an evaluation, and we've decided not to take your business anymore,' start sweating bullets, because that probably means that that information about your site has now been turned over, either directly or indirectly, to somebody else."

The next piece of the Piccionelli puzzle has to do with the new geographic restrictions. "The territoriality thing is really a little bit brilliant," he said, "because it takes the argument that if you tighten the noose too much in the United States they're just going to go offshore, and turns it all on its head; which actually may be the government's intent. I think the whole idea is to shut down the adult entertainment business online in the United States; actually get it offshore, because then they can say to the conservatives, 'Look, we cleaned [the Internet] up to the extent that we could, and it will be up to some future Republican administration to come up with some sort of treaty,' and they'll just blame it on the Europeans, and everyone will just go, 'Well, of course, the Europeans.'"

To Piccionelli, one big nail in the adult industry's coffin is the fact that data is being requested by VISA down to the individual URL. "I think this should be a tremendous shot across the bow for the industry," he said, "because [typically] you bomb the enemy before you send in troops, and the equivalent of that here is that you do an investigation, you acquire all the information you need, and then you get indictments. And what we have here is that, Website by Website, they're going to know what's going on. Now, you have to understand that knowing what's going on Website by Website should be immaterial, because if you were going to take a look at the recurring billing situation of, say, a gym, would VISA and MasterCard care how many chargebacks come from the Westlake Village branch of 24 Hour Fitness versus the Van Nuys branch? No, they don't care. They just say it's one corporation and want to know what the chargebacks are for the corporation. So why would they be interested in chargebacks Website by Website? Well, because for criminal prosecutions based on content, it's Website by Website."

But that's not the only motive, according to Piccionelli. "[Another] reason why they [VISA] want [to receive data] Website by Website is because then they can say, 'New rule: Since the way that these sites acquire the customers that generate these chargebacks is through an affiliate program, we want to know who the affiliates are that are sending the traffic to that site.' Then they will say that if you are a merchant that affiliates with one of these people that have been known to send traffic that generates high chargebacks, they're going to terminate you. That's the 2003 turn of the screw, where all member sites that are in the crosshairs [will be faced with] the decision: Are we going to turn over to the IPSP our list of affiliates?

"In fact, I predict it'll go one more step down," continued Piccionelli, "and one day one of these IPSPs will knock on the door of one of the [sponsors] and say, 'We've been told by VISA that we have to terminate you, but they did give us an alternative. If you could clean up your act and try to identify where the traffic is coming from that produced the chargebacks, they'll give you three months to try and fix the situation.' And of course, some of these guys will say, 'No thank you; I've got processing offshore.' But others will [give them] the list, and those guys, when they're dealing with their IPSPs, will think, 'Great; saved again, thank you very much.' They won't know that when the three months elapse and they've given away all the information, the map, that they're doomed, along with their affiliates.

"By the way," added Piccionelli, "you should also notice that the merchants will now be called Sponsored Merchants. [What that means] is that if you are one of these new IPSPs, VISA can now say to you, 'If you want to stay in business you have to do it this way; you have to sponsor the merchant, which means that you are going to be responsible for these guys, and we're going to hold you accountable.' Now, what if 'hold you accountable' means that VISA lets these guys know that there are all these criminal laws out there, but 'we're not going to evaluate the sites that you're sponsoring, but maybe you should?'

"Now that you have a nice tight system where you know the affiliates of each one of the people who actually have the money," said Piccionelli, bringing the scheme full circle, "that's when you start going to the affiliates and saying, 'You have this harmful matter and all this obscene material on your site. We're going to prosecute you unless you go out of business and admit that you've been getting it from this [sponsor] and that they knew perfectly well [what was on your site], despite their terms and conditions.' After they do five, six, or 10 of these people, now they have all they need for a RICO action against the [sponsor], and then they go after them. And remember, it has to happen relatively quickly, because they've got to get [the Internet] cleaned up for the 2004 election."

In such a scenario, where an unsupervised para-governmental entity can potentially stage-manage the exile of an entire industry, one has to wonder why any company would allow itself to be manipulated toward its own banishment, not to mention to turn over on members of its own community. "Because the affiliate program Webmasters [sponsors] have made so much money they'll do anything to stay in business," explained Piccionelli, "just like these aggregators will also do anything to stay in business."

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