Credit processor laid bare by porn deadbeats. (Up Front).

When a check bounces, the retailer is stuck and the checkwriter is charged.

When a credit card transaction is kicked back, whoever processes the sale takes the bit. For PayCom Billing Services Inc., a Marina del Rey processor of online credit card transactions, it's a big hit.

The company, which counts adult Web sites among the bulk of its clients, claims that MasterCard International arbitrarily seized more than $2.5 million in "illegitimate" fines during the past year from the bank account it uses to clear transactions with credit card issuers.

Last month, the company filed a $23 million lawsuit against MasterCard in U.S. District Court for Central District of California, in Los Angeles.

At the heart of the dispute is a battle that has squeezed companies that provide processing services for firms too small to handle them inhouse.

Processors of Internet transactions like Pay-Coin say they are increasingly victims of "friendly fraud" and "buyer's remorse" in which chastened customers of adult and other services, after seeing the charges listed on their credit card statements, challenge the transactions.

Since there isn't a surefire way to prove an online transaction is fraudulent or not, credit card companies increasingly guarantee customers they won't be held accountable for charges they claim not to have made. That leaves companies like PayCom holding the bag.

Credit card companies charge merchants or processing companies fees if their cancelled transactions reach certain thresholds. If the level of cancelled sales isn't brought down, those monthly charges will rise. A fee is also levied for each charge back.

PayCom alleges in its suit that MasterCard uses its "no fault" policies to purposefully inflate the number of fraudulent sales to increase the amount of fines it charges.

Industry standards

"To me it doesn't matter if it's books, cheeseburgers or dirty pictures," said Christopher Mallick, PayCom's chief financial officer. "We're a law-abiding business and we have rights under the law, and we're going to seek those protections."

In a one-page response, MasterCard dismissed the charges as "baseless" and a "gross abuse of antitrust and other federal statutes."

"it is nothing more than a brazen attempt to avoid complying with MasterCard rules that are designed to protect consumers, merchants and MasterCard's member financial institutions," the company said in its statement. "Our rules applicable to merchant aggregators like PayCom are among the most rigorous in the payments industry."

That's what has PayCom so upset. MasterCard, which claims a 36 percent share of the market for all credit card transactions, a shade more than Visa, sets a 1 percent threshold for bad transactions, the lowest in the industry. Anything over that amount would result in the credit card company issuing fines, according to the lawsuit. By constrast, Visa has a threshold of 2.5 percent.

A report from Celent Communications, a Boston-based research firm, found 2.1 percent of all online transactions are fraudulent, compared with .01 percent for purchases made in "bricks-and-mortar" stores.

MasterCard said in its statement that its low thresholds force merchants, or third-party billing services like PayCom, to act more responsibly and allow credit card officials to verify that each merchant is running a "bona fide" business operation.

"MasterCard recognizes that by enforcing its rules, it is imposing certain constraints on high-risk merchants," its statement said. "However, we believe that through the enforcement of its rules, MasterCard has maintained the security and integrity of a global payments system."

Adult approach

PayCom acts as the third-party cashier for Web-based businesses too small to set up billing functions in-house. A customer wishing to access the content of a client's Web site is directed to a PayCom Web page, which issues a user name and password after charging the individual's credit card.

It charges businesses, on average, a 15 percent cut of each transaction. Most of its clients are adult-oriented sites, and PayCom's name, not the Web site's, appears on the customer's monthly statement.

The company, which claims to be the second-largest processor of such transactions, manages its risk by limiting which clients it will deal with and where geographically it will accept credit card transactions. Web sites with illegal content or a high number of bad transactions are dropped, Mallick said. The company won't accept transactions from areas in the world with depressed economies and populations with little disposable income because these areas typically result in a high number of charge-backs.

"We have to be specific about where we allow sales to come in from," Mallick said. "That's just simple economics."

PayCom, a 200-person company formed in 1996, is not alone when it comes to transactional disputes.

InterCept, a Norcross, Ga.-based financial services company, which owns Internet Billing Services, or iBill, the industry leader in such online transactions, has been charged more than $6 million in MasterCard fines.

"As always, we continue to work with credit card associations on a regular basis to make sure we are in compliance with all of their rules," said a company spokeswoman, who declined to comment specifically on PayCom's lawsuit.

WebSiteBilling.com Ltd., a London-based online payment company similar to PayCom, closed on May 23 due to "administrative requirements brought down by Visa/MasterCard."

"Arbitrary fines by credit card associations, foreign banks and general harassment against so-called 'high risk' businesses made it impossible for WebSiteBilling.com to continue," said Evan Daly, the company's managing director, in a statement posted on its Web site.