Dirty Little Secret

This article is more than 2 years old.

Online porn racks up over a billion in sales. A few (little-known) banks make it happen

Porn buyers spend over a billion dollars a year procuring dirty pictures on the Internet, browsing the offerings of Housewife Harlots, Man Lover, Porky Babes and thousands of other naughty or depraved Web sites.

Hidden behind all that forbidden skin is the engine making Web porn possible: the banks that handle the credit card purchases. They are a secretive lot, mostly unknown for their porn patronage. Among the banks currently or previously facilitating the titillation trade: Minotola National Bank of Vineland, N.J.; Heartland Bank of St. Louis, Mo.; Benchmark Bank of Dallas; Amtrade International Bank of Atlanta; and First Data's First Financial Bank.

The banks' role is revealed in several lawsuits that have roiled the online porn biz. The main driver of two of those legal spats is a firm known mainly to porn peddlers: Paycom Billing Services of Marina del Rey, Calif. Last month the firm, one of a few obscure processors of credit card purchases outside the mainstream, filed a lawsuit against MasterCard alleging antitrust violations and fraud. The suit is pending in U.S. District Court in Los Angeles. MasterCard denies the charges.

Before that Paycom initiated another battle in the same court, suing middleman Payment Resources International , which used to line up banks for porn companies, alleging it schemed to rip off tens of millions of dollars in porn charges due to Paycom. PRI , of Newport Beach, Calif., countersued, claiming $60 million in lost business. Bizarrely, the suit drags IBM into the mess, giving new meaning to the nickname Big Blue. Paycom accuses IBM's Denmark unit of taking part in the alleged rip-off. IBM has moved to dismiss itself from the case.

Paycom's suit also targets Minotola National Bank, accusing it of "purposefully" bungling the billing for its account. Minotola, with $500 million in assets, characterizes itself as "a legend in hometown banking." It settled the Paycom complaint by returning the $1 million in credit card funds Paycom claimed Minotola was withholding. Beyond the $1 million, says Minotola's attorney, Thomas Robins, in Los Angeles, "Minotola was so clean in all of this that we didn't part with any money."

Robins, acting on behalf of a receiver, has sued a bank in another case related to porn peddling: Heartland Bank and its since spun-off credit card processing unit. The suit was related to Heartland's alleged role in a notorious porn scandal involving the theft of 800,000 credit card numbers from yet another former porn bank--Charter Pacific. The case was dismissed on summary judgment last year.

"We thought we understood what we were getting into, but we didn't," says Robert Carr, chief executive of Heartland Payment Systems, adding that the processor has stopped handling porn purchases altogether. "You're not dealing with the most ethical people in the world."

So why even try it? Because of sexy returns. Heartland was able to charge more than the fees it levied on other merchants--a 3.5% take compared with only as much as 2.25% typically. Paycom in turn charges its porn clients up to 15%. One porn peddler paid $3.6 million to Heartland for handling $72 million in purchases. Paycom, in its suit against IBM and the others, says IBM and the banks took 30 cents per transaction plus up to a 6.5% slice.

But it's an ugly business. PRI had the unenviable task of trying to find banks that would handle Paycom's porn clientele. No sooner did PRI find a bank willing to serve than it claims the bank got fed up with the high incidence of disputed charges and dropped the Paycom account. These "chargebacks" are the bane of the porn trade: Your spouse finds a suspicious charge on the monthly Visa bill, and you deny making the purchase rather than fess up and catch hell.

In such snags, the credit card company usually just wipes off the charge and zings the bank (who zings the merchant) for an outsized processing fine. This is the crux of Paycom's suit against MasterCard, which Paycom accuses of abusing its power to unfairly penalize Internet merchants for chargebacks.

PRI says it first lined up Benchmark Bank of Dallas for Paycom, then landed Amtrade International Bank of Atlanta, which was shut down last fall by the Federal Deposit Insurance Corp. for other reasons. After that deal soured, PRI placed Paycom with Minotola and Banco Uno, a Costa Rican bank. Those deals flopped, too. Paycom, "desperate to find a replacement," then hooked up with Global Payment Systems Ltd. of Britain, PRI says. And because Global did business with IBM, IBM's Danish unit found itself holding $17 million of Paycom's porn loot.

Paycom and PRI agree that IBM held Paycom's money hostage because of a "prior unresolved dispute" with Global, according to PRI. PRI in turn sued Global Payments and settled with a deal to jointly finance a separate lawsuit against IBM. An IBM spokesman declines to comment; an outside lawyer for the computer maker quips that he will "dive for cover" when this story comes out.

Even if it wins its various lawsuits, Paycom and the rest of the Internet porn industry face tough times. Chargebacks and general annoyance with the less savory aspects of the business have prompted credit card companies to crack down on the sex trade. They now force every individual merchant to register directly--and lay bare intimate business details. Paycom's latest bank, First Data's First Financial, recently received notice from Visa that it must identify and report on thousands of independent merchants in its portfolio, not just a porn aggregator such as Paycom.

One Paycom rival, WebsiteBilling, suddenly shut down in May, blaming the Visa crackdown. Besides First Data's bank, just two other banks are known to handle porn in the U.S.: Redwood Empire Bancorp of Santa Rosa, Calif. and Roseville, Calif.-based Humboldt Bancorp's Humboldt Merchant Services unit, which was recently sold to a privately owned bank. The rest of the pleasure underwriters operate overseas.