New regulations instituted by the card associations in November intended to fight online fraud took their first casualty in January. The wounded party was not some high-tech crook but mid-tier transaction processor InterCept Inc., which said that earnings would be lower than expected in the fourth quarter because many of its merchant clients were affected by the rules.
That announcement caused a meltdown in InterCept's stock. But fraud wasn't the problem. Instead, fingers were pointing at the old bugaboo-adult entertainment, or X-rated Web sites. Such sites can be lucrative for processors but carry the risk of high chargebacks and some questionable merchants.
Norcross, Ga.-based InterCept's troubles began last April when it bought Internet Billing Co. (iBill) for $112 million ("Small Processors Add Muscle," June, 2002). In a Jan. 10 conference call with analysts, InterCept Chairman and Chief Executive John W. Collins confirmed that as much as 90% of iBill's business came from adult-entertainment Web sites.
Last fall, Visa U.S.A. and MasterCard International instituted new registration rules and fees for service providers like iBill that aggregate card transactions from individual high-risk inbound teleservices merchants. Adult-oriented Web sites fall under this code. The aggregators are known as IPSPs, short for Internet payment service providers.
Visa hit the IPSPs with a series of fees, including an initial registration charge of $5,000, a $2,500 annual fee, a $500 initiation fee per merchant along with a $250 annual registration charge. Each IPSP also is to be responsible for keeping address and ownership information about its merchants. There were also steep fines for any violations of the rule. MasterCard instituted similar though less expensive charges.
At the January conference call, Collins told analysts that InterCept's earnings would be in the range of 92 cents to 98 cents per share, down from the previously announced $1.11 to $1.15. InterCept also withdrew its earnings guidance for 2003. In the next couple of days, traders hammered InterCept's stock, driving it down from $18.51 to $7.00.
Collins said the tougher regulations caused delays in the re-registering of many of iBill's merchants. IBill also incurred costs during the quarter for switching its adult-oriented merchant processing from EPX, another InterCept subsidiary, to First Data Corp., Collins said.
InterCept wasn't prepared to detail the number of merchants or the transaction volume it had lost in the quarter because it was still rooting out any merchants that weren't following the associations' new rules. "If they are not in compliance, we will terminate them," Collins said. "So it's unknown how many merchants we will have."
Adult Websters had predicted that the associations' rules unfairly harmed smaller merchants that couldn't come up with the new fees ("More Costs for Adult Web Sites," December, 2002). The IPSPs passed their costs on to the merchants, driving the smaller ones off the 'Net, says Lawrence G. Walters, a First Amendment attorney with Altamonte Springs, Fla.-based Weston, Garou & DeWitt. "Billing companies have lost business as a result of the new regulations," says Walters.
Neither MasterCard nor Visa would comment on InterCept. Collins insisted to analysts that InterCept is still strong and will bounce back.
But analyst Gary Prestopino of Chicago-based Barrington Research says InterCept's equity value has dropped about $500 million since its purchase of iBill. "May be they should just close it," Prestopino says. "When there's a situation like this you head for the hills."
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