Could bitcoin be a boon for the adult entertainment business? At least one payment processor is trying to get bitcoin exchanges and payment firms on board.

Maria Sparagis, CEO of payment processing firm DirectPayNet, makes a living helping high-risk merchants make a living. She handles payment processing for businesses that the banks are often loath to touch. The adult entertainment industry figures highly in her portfolio, as do online gambling companies, some travel sites and merchants who just have problems getting credit.

She is hoping to bring bitcoin and high-risk merchants together, and make a little money on the side. “Let me help you make more money or B⃦,” says her Twitter slogan.

“I deal with clients in these kinds of spaces on a daily basis, because we focus mainly on medium- to high-risk markets and we listen to their challenges, and bitcoin seems to resolve a lot of them,” she said. “They can get automatic approval, they can process payments from anywhere around the world.”

The big problem

Banks don’t necessarily have any moral issue around porn companies (they just tend to follow the money and there is a lot of money in porn). Many banks will happily process credit card payments for large adult entertainment firms, especially those with a good fraud scoring. The problem is that fraud is a constant problem in the adult space. There are two kinds, explains Sparagis: friendly and unfriendly fraud.

Friendly fraud is straightforward buyer’s remorse. Someone might take out a subscription to an adult site and then feel guilty or worry about being found out, leading them to charge back the transaction. Unfriendly fraud is methodical and ruthless: boiler room operations use adult sites to test out stolen credit cards to see if they are valid.

“Porn sites have one dollar trials, so it’s an easy price point to see if the credit card is good for a further transaction. I learned that the hard way,” she said. The burden of proof falls to the merchant in these cases.

Every time a chargeback occurs, the merchant pays $25-35. If the ratio goes above a set threshold, the merchant must pay additional fines and can even be blacklisted. Even with sophisticated fraud scrubbing in place, times are tough for porn peddlers.

Early adopters

Some sites have already jumped on the bitcoin bandwagon. Alternative culture erotica site BlueBlood began taking bitcoin in April, as did high-end porn site MetArt. Indeed, there are now directories of bitcoin-enabled adult sites and some of them seem to be acting as arbitrators, taking bitcoin payments on and then reselling accounts on large sites purchased in fiat currency.

One of the advantages of bitcoin is that payments sent are irrecoverable: there are no chargebacks with the crypto currency. The relative anonymity of bitcoin (as long as people know what they’re doing) also helps, she said, because consumers often don’t want compromising company names showing up on their credit card bills. Even when sites or payment processors try to report an innocuous business name on a credit card statement, a diligent Googler can easily figure out what a spouse, for example, has been buying online.

The adult industry is known for its technological innovation. It was among the first to stream video commercially, for example. “I’m convinced that once the big players go in the underground world, the mainstream guys will follow,” said Spargaris, who used to work for adult entertainment giant Manwin, which owns several huge porn brands. “They’ll see that people are making money off this.”

But it hasn’t happened in significant numbers yet and one of the biggest reasons, other than the concern about regulatory issues and the general lack of awareness, has been bitcoin’s lack of support for recurring payments.

Many sites have taken credit card information for a subscription and have told a buyer that they will keep charging until told otherwise. There is no support for recurring payments in bitcoin’s rudimentary system, and even when the new Bitcoin Payment Message feature emerges in version 0.9, recurring payments won’t be a feature.

This may prove less of a problem in the future, however, said Tony Gallippi, CEO of BitPay, a payment processor specializing in bitcoin payments. “That’s where the chargebacks came from,” added Gallippi, who spoke about bitcoin earlier this year at the XBiz Summit adult entertainment conference.

“The problem is that whenever they do bill someone and the customer doesn’t like it, they have a whole customer support department that have to handle the phone calls. They then have to go and undo these transactions, which is a lot of work for them. So the industries want to get away from it.”

The Feds’ involvement

The US Federal Trade Commission is also tightening its grip on any companies that appear to be operating in a deceptive manner, said Sparagis. This is forcing people away from a recurring billing model that may rely on customers forgetting to cancel a subscription, or being unaware of the recurring fee.

The adult industry isn’t the only high-risk business. Gallippi argues that credit card firms hate dealing with companies selling gold and silver – especially those doing it over the Internet. Even some companies providing file backup and storage can have problems, he warns, because credit card companies can be spooked by the spectre of copyright infringement (this doesn’t seem to have stopped the likes of Dropbox from taking credit cards, however).

Sparagis also singled out the travel business as a high-risk merchant community. “That’s because of the future fulfillment,” she said. Many travel bookings are placed months in advance.

“Let’s say that I start a travel company today, I could go under six months from now, but I still have all these tickets that I need to honor,” she said, adding that she’s talking about smaller travel firms operating in markets such as timeshares and accommodation.

“If I sold tickets a year from now and I go bankrupt, all these clients will be looking for refunds, but the bank is responsible to refund all these transactions. That’s why anything with future fulfilment, anything past your 60-90 day span is considered relatively high risk.”

With so many high-risk businesses having problems dealing with the banks, bitcoin could present a viable alternative – if only merchants would adopt it, and persuade customers to do the same. Once again, bitcoin is in a catch-22 situation. It needs both sides to adopt the currency to achieve critical mass, and it is likely to be a slow, laborious process.