By Theodore F. Monroe
Attorney at Law
Most banks know their business model depends on public trust. Thus, banks are naturally averse to risks that can undermine the trust of their employees, clients, shareholders, regulators or the general public.
Chief among such risks is reputational risk. Reputational risk broadly refers to the risk of possible damage to a bank's brand and reputation, and the associated risk to earnings, capital or liquidity arising from any association, action or inaction that could be perceived by stakeholders to be inappropriate, unethical or inconsistent with the bank's values, beliefs, policies or standards.
However, banks can be subjective about what they perceive as reputational risk and have an old fashioned view of what they consider their stakeholders view inappropriate.
To combat reputational risk, the Federal Deposit Insurance Corp. and Office of the Controller of the Currency alike counsel that an acquiring bank must: exercise extreme caution with regard to outsourcing any part of its merchant processing business; closely monitor the quality, appropriateness, and marketing of its products and services, including those provided through third-party service providers; and perform strong due diligence on prospective merchants and third-party organizations, as well as ongoing evaluations of existing relationships.
This means payment facilitators, payment processors, ISOs and other third-party service providers must be equally concerned about reputational risk issues, particularly regarding the types of merchants with whom they do business, to safeguard their relationships with acquirers. Chief among businesses shunned due to reputational risk are those involving sex.
Cindy Gallop's experience is a poignant example. She said she launched MakeLoveNotPorn.com at a TED conference in 2009 to "make it easier for the world to discuss sex openly and honestly, both in the public domain and privately, in our intimate relationships." In 2013, she expanded the platform and launched MakeLoveNotPorn.tv, "an entirely user-generated, crowdsourced site where anyone from anywhere in the world can share videos of themselves having #realworldsex."
Make Love Not Porn is the antithesis of porn. It is female-centric and life affirming, and seeks to displace the role of hardcore pornography as "sexual education by default" by promoting examples of real intimacy. Yet reputational risk has effectively barred Gallop from the payments system. Paypal and Stripe are not options, and it took her more than four years just to find a bank that allowed her to open a business bank account.
Most such businesses, even those that are "socially positive" find huge difficulty obtaining payment processing. Gallop noted, "Not only has MakeLoveNotPorn been received positively around the world ever since launch in 2009, but because we are social sex and couples watch our videos together, we have a virtually zero chargeback record. We are a fully legal, ethical, transparent business, and you will not find a more values-driven venture than MakeLoveNotPorn."
Gallop coined the term SexTech to describe, "any form of technology or tech venture designed to innovate, disrupt and enhance in any area of human sexuality and sexual experience." There is a female-driven SexTech movement afoot. Yet they all confront this same issue.
Enter intimate.io Ltd., which developed a tokenized blockchain solution for payments across the adult industry to make an end-run around acquiring banks and their reputational risk concerns. Crypto may ultimately prove to be an effective solution for some merchants.
But any merchant doing business in a controversial vertical that wants to enter the traditional payments system will need to spend significant time finding a reputable agent to champion the merchant's cause, ensure that the business presents no other risk concerns (such as consumer protection or credit risk) on top of reputational risk, and be prepared to pay premium rates.
Thus, even if you run a perfectly legal business that does not present any chargeback, credit or consumer protection risk issues, you may still find it nearly impossible to obtain credit card processing and other financial services if you operate in certain verticals. 
The information contained in this article is for educational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, e-mail him at monroe@tfmlaw.com or call him at 213-233-2273.
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