Porn in the USA

Internet smut peddlers reaped millions from unsuspecting credit-card holders. Their partner in slime was right here in the heartland.

Xpics wasn't the only account that HPS landed from Charter Pacific. Carr says a former director at Charter Pacific convinced him HPS could turn a profit on porn. "She said, "If you did this business right, you could do this higher-risk business and do well and live by the rules,'" Carr recalls. And so Heartland opened its doors to smut and bet that it could do what Charter Pacific couldn't: reduce chargebacks for pornographers who were being forced to jump banks under pressure from Mastercard and Visa. Carr says HPS made no moral judgments. So long as the pornographers didn't violate obscenity laws, they were welcome.

HPS was soon besieged by Internet pornographers seeking accounts. "What we didn't realize, and the surprise to us, was, when we said we would consider these merchant types, they all came to us overnight," Carr recalls. "It was like a pack of mosquitoes. The word got out. And we didn't have caps (on transactions). The bank had enough capital. We basically wanted to have big volume." And HPS thought it had solved the chargeback challenge.

Shuster and Carmona contend HPS had a secret plan for eliminating chargebacks, which can be automatic for Internet businesses. They claim HPS told Visa that Xpics did some face-to-face transactions so that refund demands wouldn't immediately be classified as chargebacks. Carr says that's not true. "We honestly thought we could get them (chargeback rates) lower," he says. Visa did not respond to an inquiry from the Riverfront Times.

Founded in 1997, Heartland Payment Systems is now the largest privately held credit-card-processing company in the nation.
Founded in 1997, Heartland Payment Systems is now the largest privately held credit-card-processing company in the nation.

A chargeback is considered an involuntary refund. Less severe, at least in the eyes of Visa and Mastercard, is a retrieval, which means a cardholder who disputes a charge gets a refund within 14 days. Carr says HPS figured it could satisfy refund demands before they became chargebacks, thereby avoiding scrutiny from Visa and Mastercard. Money for refunds would come from a reserve account built from 5 percent of Xpics' transactions. HPS also had access to Xpics' checking accounts if the reserve account wasn't big enough.

The plan went haywire almost from the beginning. Carr expected some chargebacks from Xpics, but he wasn't prepared for 11,000 refund demands that hit Heartland headquarters in Clayton during the second month of the contract. "Think about 11,000 envelopes," Carr says. "Every one of them had to be answered" -- but not by HPS, which began forwarding the mail to Xpics. Shuster and Carmona were no better equipped to handle the flood than a company that had been in the card-processing business for barely one year. Refund requests went unanswered and became chargebacks. In many cases, the problem compounded itself when cardholders who had already disputed charges were billed for a second or even third month of unwanted service. Those second and third bills became additional chargebacks. In some cases, frustrated cardholders who couldn't cancel unwanted memberships canceled their credit cards. Mastercard last year fined HPS more than $140,000 for excessive Xpics chargebacks.

The matter ended up in court, with HPS suing Xpics (which is no longer in business) and Shuster and Carmona individually. HPS alleged breach of contract, arguing that Xpics was obligated to pay the Mastercard fine, as well as lost profits and outstanding chargeback costs. A St. Louis County jury on Nov. 2 awarded HPS $290,000, enough to cover the Mastercard fine and attorneys' fees, but not nearly what HPS demanded: an additional $1.9 million for unrealized profits and $101,000 for chargebacks that HPS says it ended up paying.

Xpics blames HPS for chargebacks, saying Heartland had agreed to handle customer-service inquiries and was so slow in notifying the company of refund demands that second and third bills went out before Xpics knew that initial charges had been disputed. HPS says Xpics had a threadbare customer-service department that couldn't handle refund demands. Carr recalls visiting Xpics headquarters in California in June 1998, about two months after HPS started processing cards for the company.

"These chargebacks were getting out of line," Carr recalls. "We were getting flooded with mail from irate cardholders. For the first time in our history, we were getting called by Visa saying we had a merchant who was breaking the rules. We went to their facility, and there weren't very many people there. We asked them (Xpics) how they could handle complaints when there wasn't anyone there to answer telephones." Carr says Shuster told him Xpics would hire more people. And HPS continued doing business with Xpics.


There was a more sinister explanation for the barrage of Xpics chargebacks than inadequate customer service. According to the Federal Trade Commission, Xpics was flat-out ripping off cardholders.

Less than two months after HPS opened the Xpics account, Visa investigator Alex Graham picked up on the scam when he saw an Xpics Web site that said a 30-day trial membership was free but that the company needed a credit-card number to verify the prospective member's age. "When he went into the Web site, it said "free, free, free' all over the place," Carr recalls. "Mr. Graham wanted that removed."

The FTC says Xpics immediately billed customers who provided card numbers thinking they wouldn't be charged if they canceled the service within 30 days. The FTC -- which sued Xpics in January 1999 for alleged violations of federal laws barring unfair and deceptive business practices -- also says Carmona and Shuster charged consumers who never visited the company's Web sites and made it impossible for cardholders to cancel trial memberships. In some cases, Xpics upgraded cardholders to more expensive memberships when they tried canceling by e-mail, according to the FTC. Cardholders who tried telephoning Xpics couldn't get through. It's not clear how Xpics got card numbers from cardholders who didn't visit the company's sites. Xpics settled the lawsuit in July without admitting any wrongdoing.

« Previous Page
 |
 
1
 
2
 
3
 
4
 
5
 
6
 
7
 
8
 
All
 
Next Page »
 
My Voice Nation Help
0 comments
 
Loading...