The adult entertainment industry is experiencing unprecedented growth every day. Yet, this expansion comes with a dark underbelly — an escalating number of chargebacks that are giving adult entertainment retailers around the globe sleepless nights. These businesses often have to grapple with some of the highest chargeback rates, primarily attributed to fraud.
Unfriendly “Friendly Fraud”👥
This seeming paradox termed “friendly fraud,” or the intentional action of launching a chargeback to deceive a business, accounts for a staggering 70% of all fraud cases at present. A significant portion of these victims are adult businesses, which are more prone to attract a suspicious clientele compared to conventional companies.
The prevalence of such fraud has intensified as adult entertainment retailers venture into the digital marketplace, where heightened risks are rapidly threatening to overshadow potential benefits.
👀 Why Adult Businesses are More Vulnerable to Chargebacks
There are multiple reasons why adult entertainment retailers are at a higher risk of chargebacks compared to their mainstream counterparts. One significant factor is the possible embarrassment some clients might feel from charges to their credit cards from adult entertainment businesses, leading them to deny the transactions.
For example, it's not rare for a customer to contact his credit card provider to dispute the charge as unfulfilled or fraudulent, even if they have received the service, such as meeting with an escort and finishing the appointment.
Moreover, many customers are quick to raise alarms at the slightest hint of suspicion about the adult business, given the industry's reputation for being associated with illegal activities.
Take, for instance, if a client observes a discrepancy between the business name on their credit card statement and the name they recall from booking the service. Such a discrepancy might trigger their fraud alert, prompting an immediate call to their credit card provider to demand a chargeback.
Friendly fraud also comes into play here. Some adult entertainment customers, despite being satisfied with the service, might falsely claim their expectations weren't met and demand a chargeback. This tactic enables them to retrieve their money, causing a loss for the company since the provided services can't be reclaimed.
🛡️ Safeguarding Adult Businesses Against High Chargebacks
The industry-wide threshold for chargeback rates is 1%, a figure that adult businesses frequently surpass, thereby labeling them as high-risk.
However, chargeback ratios aren't the only concern. Reviewers also scrutinize a company’s records and credibility to ascertain if these high chargebacks have legitimate grounds.
As an adult entertainment retailer, it is critical to establish preventive measures to shield your business against these high chargebacks.
Your most potent defense is a transparent and precise policy, coupled with a solid foundation of expectations between the service provider and the client.
Technological precautions, such as thorough credit card verifications, are also key to preventing any fraudulent activities from infiltrating your system. If you detect anything suspicious about a transaction, alert the bank immediately to initiate an investigation before the client has a chance to file a chargeback and defraud you.
💳 The Ongoing Struggle with the Payment Industry: A Storied Tale of the Adult Entertainment Sector 🎭
Back in 2002, credit card giants Visa and Mastercard revised their policies regarding payments to "high risk" websites, inflicting special fees on credit card issuers for such transactions. Notably, these fees seemed designed to disproportionately affect adult websites, causing substantial harm. This was merely a single episode in an ongoing saga, with the payment industry maintaining significantly stricter standards for the adult entertainment industry than for mainstream merchants.
Regrettably, the adult entertainment industry continues to confront systematic obstacles in terms of payment processing. However, these challenges need not spell doom for these businesses. This article delves into the payment industry hurdles and risks faced by adult entertainment businesses and offers insights into circumventing these issues, thereby safeguarding access to a merchant account, even if it falls under the "high risk" category.
Merchant Account Challenges in Adult Entertainment: A Closer Look 🔍
Adult entertainment merchants grapple with numerous specific challenges regarding their merchant accounts, including:
- Leading payment providers like PayPal and Stripe usually avoid working with adult entertainment merchants.
- Card brands and issuers levy extra fees and requirements for payments to adult entertainment merchants, similar to those discussed above.
- The adult entertainment industry has a higher than average risk of fraud and chargebacks.
- Generally, the only merchant accounts available to adult entertainment businesses are "high risk" accounts, characterized by elevated fees, lower limits, and longer payment processing times.
Some of these challenges, like higher volumes of chargebacks, are justifiable, while others stem from the payment providers' desire to distance themselves from industries they perceive as less respectable or controversial. Regardless of their validity, these challenges are a reality for adult entertainment businesses.
Why Are Adult Entertainment Businesses at a Greater Risk for Fraud and Chargebacks? 💳
Certain elements of the adult entertainment industry inherently carry higher risks of chargebacks, reflected in the high chargeback ratios (above 1%) of many adult entertainment merchants. The reasons behind this high rate of chargebacks include:
- Consumers may buy adult entertainment products or subscriptions and later deny the transactions due to embarrassment or to avoid confrontations with spouses or other family members. This leads to chargeback requests, ironically constituting an act of chargeback fraud.
- Some consumers, motivated by embarrassment or age restrictions, may resort to fraudulent means (such as stolen payment card information) to make adult entertainment purchases. When the cardholder detects the fraudulent charge, they request a chargeback.
- Many adult entertainment merchants use discreet language in their billing descriptors for client privacy. Customers may not recognize their purchase and request a chargeback, contributing to Visa and Mastercard’s policy changes in 2002.
- Certain unprincipled consumers may target the adult entertainment industry for fraud based on misguided notions of morality or legitimacy.
- Banks and payment processors may hesitate to support adult entertainment businesses in payment disputes due to legal uncertainties or image considerations.
- Many adult entertainment businesses employ a subscription model, which, despite its benefits, inherently risks chargebacks.
Can Cryptocurrency Offer a Solution? 🪙
Some players in the adult entertainment industry have turned to cryptocurrency payments to mitigate these difficulties. In fact, some sex workers have even developed a cryptocurrency, named Spank, specifically for industry use.
Cryptocurrency, being a peer-to-peer digital currency, sidesteps intermediary payment processors that often enforce stricter regulations on the adult entertainment industry. It also eliminates most chargebacks, since there's no bank from which consumers can request one. However, cryptocurrency has its own set of risks and limitations, given its volatility and largely unregulated nature. Further, the majority of consumers do not use cryptocurrency, limiting its current viability as a broad-based solution.
Navigating the Turbulence: Best Practices 💡
Being confined to high-risk merchant accounts doesn't mean adult entertainment businesses must resign themselves to the consequences of high chargeback rates. These businesses can adopt several practices to protect their merchant accounts and businesses, such as:
- Clearly explain billing descriptors to consumers to reduce instances of friendly fraud.
- Choose business partners carefully. While high-risk merchant accounts may be inevitable, unreliable payment processors aren't.
- Emphasize customer service and communication to prevent consumer issues from turning into chargebacks.
- Simplify the cancellation process. A cancellation is less costly and troublesome than a chargeback.
- Use chargeback management tools. These can help monitor payment disputes and chargebacks, enabling businesses to address potential sources of chargebacks before they balloon into substantial problems.