Consolidation Hits Web Site Payment Processors

It's been a turbulent month for companies offering credit card processing for web site operators. PaySystems discontinued its third-party transaction processing service Aug. 16, and last week's operations were disrupted by a distributed denial of service (DDoS) attack.

Now the status of online payment processor iBill is in flux after its acquisition by Care Concepts Inc. was rescinded. Both Care Concepts and the seller, Penthouse International, say they hope to complete the deal at a future date.

Payment processing services allow web site owners to accept credit cards without a merchant account, offering to process transactions for third parties for a fee. The growth of third-party processors opened the e-commerce market to smaller companies, especially web hosting resellers and operators of adult sites.

But payment processors' business model is not without challenges. While some customers simply cannot afford the overhead of a merchant account, many others don't have the financial profile to qualify for a traditional merchant account. Aggregating thousands of customers reduces the credit risk, but payment associations like Visa and Mastercard remain wary of the business, which was a factor in PaySystem's decision to exit the sector.

"Online third party billing is a market segment with limited long term potential," says Philip Fayer, president and CEO of PaySystems. "The aggregator merchant account model is increasingly viewed as high risk transaction processing by the credit card associations and acquirers." The company's hefty presence in the web hosting industry was reflected by the lengthy threads on industry forums, including one that stretched for nearly 70 pages.

iBill's customer base includes a significant number of adult web sites, which traditionally have higher chargeback rates than many other retailers. Care Concepts, which runs online auction sites, bought iBill from Penthouse on Aug. 31 for $55 million, but the closing was contingent on a review by the American Stock Exchange, where Care Concepts' stock is listed. On Sept. 20 the Amex said it would delist Care Concepts stock, citing concerns about the impact of the iBill deal.

The delay comes days after a court decision in which a judge denied an emergency motion to force First Data Bank to continue processing iBill's credit card transactions. In court filings, iBill said the motion was needed "to save its business from immediate collapse."