The controversy once again casts an unwelcome light on the symbiotic relationship between porn operators and the legitimate companies that allow them to thrive by quietly processing their credit-card payments and providing server hosting. One of the biggest victims of Visa's actions is the otherwise conservative
InterCept (nasdaq:
ICPT -
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people ). The financial services firm, which had 2002 sales of $227 million, is based in the bucolic Atlanta suburb of Norcross, where it's still against the law to serve liquor by the drink. In a move that must have seemed smart at the time, InterCept last year paid $104 million for something called
Internet Billing Co., or iBill, which acts as a third-party credit-card processor for Internet businesses that are too small or shaky to deal with credit-card banks directly. IBill makes its money by taking a 15% cut of every transaction. You wouldn't know it from iBill's plain-vanilla Web site, but as much as 85% of the $400 million in credit-card payments it processes come from such naughty sites as "Bareback Boys Club," "Midget Sex Zone" and many too nasty to mention. IBill and firms like it have become so influential in the porn trade that they act somewhat as policemen by weeding out extra-sleazy operators and frauds. IBill also helpfully cloaks porn purchases from the prying eyes of wives and loved ones by discretely referring to the purchases on credit-card bills by its own generic name. To solicit business, the company is a fixture at such industry bacchanals as Internext, where its executives rub shoulders with porn stars and similar ilk. Make that
was a fixture. Even though InterCept never disclosed the privately held iBill's revenue at the time of the acquisition, there's no question that the deal has had an outsized impact on the larger InterCept, which also had to take a $20 million charge in last year's fourth quarter to cover fallout from iBill and a smaller acquisition. InterCept's stock collapsed to a recent $4 from as high as $34 last year, after the revelation that iBill lost as much as 20% of its processing business due to the new Visa rules driving away porn sites. Insult to injury,
MasterCard recently declared that iBill was in "noncompliance" with the credit-card association's chargeback rules, resulting in an assessment of almost $6 million. Chargebacks, one of the biggest headaches of processing credit cards for porn sites, typically occur when, say, someone's wife finds out he's been buying porn. Rather than owning up, the aggrieved party tells the credit-card company that he's shocked--shocked--that someone else was purchasing porn on his card, and demands that the charges be removed. Due to that and other reasons,
American Express (nyse:
AXP -
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people ) has refused to handle porn transactions since 2000, and
PayPal, now owned by
eBay (nasdaq:
EBAY -
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people ), will cease to deal with the trade beginning in May. But the revelations come too late for InterCept, which now says it's trying to "focus our sales effort on mainstream businesses." Plaintiffs lawyers are circling with the predictable shareholder lawsuits, many complaining of "material misrepresentations" and "false assurances" made by InterCept about iBill's dependence on porn (a press release at the time of the acquisition benignly referred to iBill's clientele as "Web merchants," while management claimed that adult sites represented less than 10% of iBill's transactions). "We disagree with the allegations and plan to defend vigorously," says an InterCept spokeswoman in a written response to questions from Forbes.com. In the meantime, iBill's former president and chief executive has quit, and the business has been restructured into a new InterCept Payment Solutions division. Now Visa is extending its reach to "age verification services," the Napster-like portals that allow subscribers access to thousands of sex-drenched Internet sites for a monthly fee. But again, one business most directly affected by the crackdown is the big financial services outfit
First Data Corp. (nyse:
FDC -
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people ). The company's First Financial Bank subsidiary recently received a letter from Visa demanding that the bank make sure that any age verification services and the Web sites in its so-called merchant portfolio are "evaluated and appropriately registered with Visa U.S.A." Just in case the bank didn't get the message, Visa's letter warned of "significant financial penalties including the imposition of conditions" if the bank failed to comply. First Data spokesmen didn't return calls or e-mails seeking comment. Beyond the impact on InterCept's and First Data's businesses, lawyers for the porn industry now see the heavy hand of the U.S. government behind Visa's rules. Visa also didn't return calls for comment, but porn industry attorneys
Lawrence Walters of
Weston, Garrou & DeWitt and
Gregory Piccionelli of
Brull, Piccionelli, Sarno, Braun & Vradenburgh were happy to spin about what they see as a possible setup for the time when the government decides to wage war on Internet porn. "The requirement of creating more and more records and information could lead one to conclude that they either have been asked by the government to make sure these processors are generating this information, or a more objective concern that now that the information is out there, the government can get it," says Walters. "The threat of obscenity prosecutions makes this a real concern." Piccionelli, who had just been dealing with a client whose Visa processing rights had been summarily yanked due to excessive chargebacks, complains that Visa is abusing its power and "tightening the noose around the adult industry." "Absolute power corrupts, and Visa and MasterCard are dangerously empowered monopolies," he declares. "There are no checks or balances. They have the potential to become a worldwide currency." At least that's their theory. Having proven itself able to survive other crackdowns, the slippery porn business is unlikely to go away anytime soon. But for legitimate firms such as InterCept, the damage has already been done.
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