Ziff Davis Smart Business: Extortion Economics

Prostitutes in Amsterdam take MasterCard and Visa. But try to place a $10 bet at an online casino, and your plastic might be rejected. Credit card companies are cutting the lifeline to Internet gambling sites—and they're poised to shut down pornography, too.

Why this double standard? Morals are beside the point. You can bet that Columbian drug lords carry American Express cards. Former Enron executives won't lose their Visa credit lines even while rotting in prison. A shop sells coffee out the front door, Stinger missiles out the back. MasterCard is warmly accepted.

No, the reason Big Plastic is turning the screws on cybercasinos is the high rate of chargebacks. Customers are refusing to pay their bills after running up big gambling losses. Last year a California woman who lost more than $100,000 in online wagers argued in court that gambling debts weren't enforceable in the jurisdiction where she lived. The courts agreed.

The same problem arises with smut. Because a porn site can't prove that its content was actually downloaded to your PC, you can dispute the charge—as millions of people now do every month. Even though the porn site must eat the loss, the disputes are causing an exorbitant administrative expense for Big Plastic. So bye-bye, blackjack; adios, porn.

The moral of this tale: Once again, free, unregulated markets solve all problems, even moral decay. Wing-nut conservatives will drink this swill, but look closer and you'll see that Visa, MasterCard, and American Express actually form a cartel that distorts the market system more grotesquely than a North Korean politburo.

With four out of five credit card transactions denied, online gaming parlors are closing doors, even as new casinos emerge. In effect, Big Plastic is shutting down a $4.1 billion-a-year industry.

Boo-hoo, right? Free enterprise doesn't promise that every business will be a winner. But if porn sites and casinos lose their credit today, what's to protect online magazines, application service providers, Internet music and video shops, stock-tip bulletin boards, and a host of other industries that operate on the same principle? And who appointed credit card companies as industrial planners of the new economy?

Fact is, credit cards are the lifeblood of the Internet—and well they should be, for the protection against fraud they offer consumers. But as a cartel, Big Plastic now wields more power than the Federal Reserve and the IRS combined.

E-tailers pay credit card companies up to 66 percent more per transaction than their brick-and-mortar equivalents, and credit card fraud is 12 times higher online than on the street. Credit card companies make merchants eat the costs for fraud—and often levy fines against them as well—but do astonishingly little to protect against it. They gouge e-tailers and consumers alike with fees at every turn. And now they're picking winners and losers.

This is not friction-free capitalism. It's more like protection money paid to gangsters. At the very least, Big Plastic should come up with better security schemes for protecting merchants. The "Verified by Visa" program and MasterCard's "secure payment authorization" are jokes.

Lacking market incentives to beef up security, a federal prod may be useful. While they're at it, regulators should also look at the unfair costs Big Plastic levies against online merchants. As we learned from Enron, companies that gather enough market clout will try to get away with anything.

Wendy Taylor is the editor-in-chief of Ziff Davis Smart Business; Marty Jerome is a contributing editor. E-mail them at taylor&jerome@ziffdavis.com.