[Industry Focus] Fraud Risk Profile for Adult Entertainment Retailers

The adult entertainment industry has long had a reputation for being a hotbed of fraud due to the suspicious clientele they often attract. As adult entertainment retailers expand into the digital marketplace, they find themselves increasingly exposed to these fraudsters. Credit card processing is a must for these retailers, but the costs associated with credit card fraud and high-risk merchant accounts can be catastrophic to their bottom line.

So what can adult entertainment retailers do to minimize their fraud exposure and maximize their protection efforts?

Why Fraud Is a Problem for Adult Entertainment Retailers

Fraud shows itself in the adult entertainment industry in three significant ways.

Increased Risk of Chargebacks

Chargebacks are costly and time-consuming for every business; the adult entertainment industry is no exception. In fact, the industry generally has a higher chargeback ratio than mainstream companies relative to the amount of business they do. Adult entertainment customers frequently call their credit card provider and deny charges as fraudulent, unpurchased or unfulfilled.

With the potential to exceed $75 per dispute, chargebacks can swiftly eat away a company’s profits. Some credit card processors have lower thresholds for stripping retailers of their merchant accounts based on chargeback ratios, putting retailers at the mercy of high-risk merchant accounts.

Concern About Fronting Illegal Activity

The adult entertainment industry has a longstanding reputation for being the source of — and attracting — fraudulent behavior, so traditional credit card processors are often concerned such businesses are a front for illegal activity.

And rightfully so. Fraudsters frequently establish fake websites and collect payments for products and services that aren’t even available — even convincing online users to send money or release sensitive data.

Card-Not-Present Transactions

Adult entertainment retailers are frequently the victim of card-not-present (CNP) transactions. Criminal activity is rampant in the industry, with fraudsters skimming credit card information, hacking bank accounts and stealing identities. Many merchants, like online dating sites, include site disclaimers warning clients not to send money or provide credit card information to anyone they’ve met on the site.

Reputable adult entertainment processing solutions can help drive repeat product purchasing, increase conversions and protect against online fraud. But the number of legitimate processors is shrinking, forcing merchants to accept substandard processing solutions that leave merchants increasingly vulnerable to fraud.

What Fraud Can Look Like for Adult Entertainment Retailers

From CNP fraud to chargebacks, adult entertainment fraud can take several forms.

• Recurring subscriptions. Much of the industry’s fraud comes from friendly fraud for recurring subscriptions. Users don’t remember when their free trial ends and forget to cancel before the subscription period begins. When the first charge hits, customers initiate the chargeback process instead of canceling.
• Concealing activity. Some online daters want complete privacy, and they may dispute a dating site’s credit charge to conceal their activities. Or perhaps a husband doesn’t want to admit to his wife about an adult entertainment credit card charge and feigns innocence, so the wife initiates a chargeback.
• Displeased with service. Some customers will dispute a charge if they are in any way unhappy with the product or service they received.
• Offshore credit card processors. Some adult entertainment merchants use offshore credit card processors to avoid the fees associated with high-risk processors. While this seems like a reasonable alternative, it’s not without risk for the merchant. For example, offshore merchants aren’t guaranteed FDIC protection.
• Fraudulent users. Criminals may use stolen credit card information to create multiple premium accounts on dating or other adult entertainment websites. They then use these profiles to scam users into sending money or disclosing sensitive data.

How Adult Entertainment Retailers Can Protect Themselves Against CNP Fraud

Chargeback fees can be devastating for any business, and the adult entertainment industry is no exception. As a high-risk merchant, adult entertainment retailers need a safe and secure credit card processing solution that won’t break the bank.

Even more important, retailers must be able to distinguish between legitimate and fraudulent transactions to minimize chargeback fees, safeguard their merchant accounts and protect against friendly fraud.

At ClearSale, we’re committed to helping merchants in every industry maximize their sales and protect their profits. Contact us today to learn more about integrating a fraud protection solution that will protect you against the rising threat of CNP fraud.