PayPal, Square and big banking's war on the sex industry

The discriminatory practice of redlining is reinvented for the 21st century.

For nearly a decade, PayPal, JPMorgan Chase, Visa/MasterCard, and now Square, have systematically denied or closed accounts of small businesses, artists and independent contractors whose business happens to be about sex. These payment processing authorities have also coerced websites to cease featuring sexual content under threat of service withdrawal, all while blaming ambiguous rules or pressure from one another.

Monday a federal appeals court ruled that pressuring credit card companies like Visa and Mastercard to stop doing business with speech-protected websites violates their First Amendment rights. Specifically ones that feature content from sex workers. And in June, the FDIC clarified that it's against the rules for businesses like PayPal, Chase and Square to refuse business or close accounts based on "high risk" assessments related to human sexuality. But it may not be enough to stop what's become an entrenched pattern of systematic discrimination by payment processors -- one that disproportionately denies financial opportunities for women.

We don't do business with your kind

In 2012 TED speaker Cindy Gallop launched a crowdsourced porn site based on her TED Talk, "Make Love Not Porn," which highlights unrealistic expectations about porn sex. Gallop had raised $500,000 from an undisclosed angel investor, but discovered her company "couldn't work with PayPal, couldn't work with Amazon, couldn't work with Google Checkout, couldn't work with any of the main merchant partner gateways."

Gallop said, "So, we thought, let's go back to Chase, we have a business banking account there, let's apply for a commercial account. Unfortunately, that application surfaced the nature of our business within higher levels at Chase. And it resulted in a meeting with a more senior guy, who essentially said to us, not only can we not give you a commercial account, but you now need to close your business bank account and take your business away."

One year after Gallop's rude awakening, Chase denied adult performer Stoya an account outright. The year after that, 2014, Chase conducted a campaign of targeted sex-industry bank account terminations -- but this time, the closures made headlines. Included in the sweep were well-known porn performers Teagan Presley (and her husband, by association), Dakota Skye, Layton Benton, Tieran Lee, Bonnie Rotten and Veronica Avluv.

But at the same time porn stars had been told their accounts were being closed, Chase refused to process payments for condom company Lovability, telling CEO Tiffany Gaines that "processing sales for adult-oriented products is a prohibited vertical." When news articles pointed out that Chase handles mergers and acquisitions for Trojan Condoms, Chase relented. However, Gaines said when the CMO of Chase Paymentech called to "apologize for the 'misunderstanding' she agreed to process my company's payments but would not agree to officially remove condoms from the 'prohibited adult' category."

"High risk" neighborhoods

A HOLC 1936 security map of Philadelphia showing redlining of lower income neighborhoods.

Redlining, outlawed in 1968, is the practice of refusing to do business with so-called "high risk" applicants from "high risk" neighborhoods who are otherwise completely qualified. Since the 1930s, actual maps with red lines were used by banks to demarcate black and hispanic neighborhoods, and redlining became a verb: To redline a community was to cut it off from equal financial access, rights and opportunities. Being redlined was a death sentence for getting out of poverty.

In 2014 Chase began a targeted campaign of account evictions in a neighborhood called porn. One of the victims, performer Teagan Presley, told press that Chase's stated reason was because it considered her line of work to be in a "high-risk" category. When reached for comment on the 2014 closures of porn stars' accounts, Chase told Engadget, "We did not make any blanket account closures related to this specific industry."

There are no literal lines on a map here, but it appears there are virtual ones around an entire section of the internet. So let's call this "weblining."

What's happening to female entrepreneurs in the sex business can no longer be written off as isolated incidents. Weblining's targeted populations are porn performers, sex workers, independent retailers, erotic writers and the internet's new generation of online pornographers: business sectors comprised of a disproportionately large number of women and LGBT people. When Engadget spoke with Chase regarding the impacts of weblining, Chase emphasized, "our firm takes pride in supporting LGBT, from our HRC score to our Pride and ally programs. We take this very seriously."

In all instances, when communicating with the account holders, the powerful payment processors cite an ambiguous policy related to obscenity, risk assessment, or terms prohibiting pornography, which it lists alongside illegal activities like selling narcotics. Or, they just invoke a "right to refuse business" clause.

PayPal pressures Patreon under threat of cutoff

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Indisputably, the Internet ushered in an empowered landscape for sex workers and porn stars alike to finally have their own voice and be heard. Interestingly, with this came an eager market for women-run and -directed porn businesses, as well as erotica by and for women.

Sadly, in this new sex-information ecosystem, denial of access to economic opportunity has also blossomed.

Nowhere is the practice of weblining more evident than with PayPal. For over ten years PayPal, the world's most ubiquitous payment processor, has emerged as the king of denying service, seizing accounts and freezing funds for anyone discovered to be associated with sexual content online -- even educational or artistic content.

The stories about PayPal's denial of financial services to anyone discovered to be in sex "neighborhoods" are plentiful. It's troubling to note just how much the impact is disproportionately on women.

PayPal's Acceptable Use Policy states that the PayPal service may not be used for activities that "relate to transactions involving ... items that are considered obscene ... [or] certain sexually oriented materials or services." Yet it's the way in which PayPal has chosen to enforce its policy over the years that make the comparisons with redlining seem not so far-fetched.

PayPal banned dominatrix January Seraph in 2010 and any business run or owned by her "for life." PayPal froze accounts and seized funds belonging to Dee Dennis Tess Danesi, whose transgression was publishing the NYC Sex Blogger Calendar. Blogger and adult industry writer Cara Sutra was banned for selling a corset. Former escort Vicki Gallas was banned from using PayPal to process payments for her memoirs, because they included sex work. Seattle Erotic Art Festival had their account frozen even though they only used the service to process fine art submission fees.

Apparently, PayPal also has no problem making other businesses to do its content policing.

In March 2014, PayPal nailed subscription-model crowdfunding platform Patreon, which emailed its users saying, "We got a notice from Paypal this morning that they were shutting down their entire integration with Patreon because of "adult content" on our site!" Patreon told Engadget, "Paypal informed us that we were violating their terms of service by using PayPal to support creators that made NSFW content. We complied and removed Paypal as a payment option for those creators."

Despite what companies like Square say about "leveling the playing field" for merchants, the company has followed in PayPal's anti-sex footsteps. Searah Deysach is the owner of Chicago's highly respected, indie, education-focused, woman-owned sex toy store Early to Bed. She said, "I tried so hard to work with Square for Early to Bed, but they would not budge." Escorts and dominatrixes report having their Square accounts closed or denied outright; feminist pornographer Courtney Trouble was denied services by both PayPal and Square.

PayPal's line is to blame credit card companies. Porn performer and producer Maggie Mayhem began a fundraiser to do relief work in Haiti. PayPal closed her account and seized her money after she linked it from her sex blog, telling Mayhem that the "dispute was ultimately with a Visa policy about blasphemy."

Passing the buck to Visa

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In May 2014, porn performer Eden Alexander's attempt to raise money for medical bills was shut down by WePay; she was dying of a severe infection that caused multiple organ failures. WePay said its terms "restrict fundraisers of a pornographic nature." Alexander lost the $1,100 she'd raised toward her $4,000 goal.

Like Chase, WePay backpedaled after its shutdown hit headlines, and offered Alexander help with a new fundraiser. But it was too late; Alexander had begun a new medical expense fund on Crowdtilt -- which promised not to remove it.

WePay blamed its actions on big banking and Visa, telling press it targeted Alexander because it had to "abide by the rules and regulations of its acquiring bank (the financial institution that processes credit card payments on behalf of WePay and our customers) and the operating regulations of the Card Networks (e.g., Visa, MasterCard, AmericanExpress)."

WePay trotted out the "high risk" excuse saying, "Both acquiring banks and the card brands generally restrict the processing of payments for any activity that is deemed unlawful, high-risk or "brand damaging" to the networks."

Michelle Austin is another sex-themed entrepreneur shut down by WePay, allegedly because her company was linked to an adult company (Austin is also a PayPal casualty). Queer porn star Andre Shakti attempted to raise funds to travel to the 2014 Feminist Porn Awards. But Fundly shut her out for being in the "adult" category, forbidden under their processor WePay's terms.

WePay blames credit card companies, Patreon blames PayPal, and PayPal blames the credit card companies.

Companies like Square are likely to blame to Chase's Paymentech, who, like JPMorgan Chase and other banks, operate under the Office of the Comptroller of the Currency (OCC) guidelines -- which puts the problem of weblining squarely on the US federal government's doorstep.

The circle of redlining 2.0's deniability would be complete ... if it weren't for the fact that both Visa and MasterCard issued statements saying they have nothing to do with the actions of PayPal, or anyone in the business of denying financial services to erotic material.

Those statements came in 2012, when writers and editors of erotica were purged from PayPal's business channels when it told book publishers Bookstrand, All Romance Ebooks, Excessica and Smashwords to remove any and all online titles the payment processor considers "obscene." PayPal referred to credit card companies as the impetus behind its demand that they be removed from internet retail outlets and its subsequent refusal to process these sales.

To stay afloat, the book publishers gutted content from their catalogs, essentially banning their own books.

Visa, MasterCard: "No involvement"

The writers and publishers in question organized themselves as Banned Writers, and contacted Visa and MasterCard to ask if either company could confirm or deny whether they pressured PayPal to enforce banning the sale of erotica books containing taboo subject matter.

MasterCard told Madeleine Morris of Banned Writers that it was all PayPal's doing. "To be clear, MasterCard had no involvement in the decision made by PayPal to refuse to process payments for certain books." It added, "In this particular scenario, MasterCard would not take action regarding the use of its cards and systems for the sale of lawful materials that seek to explore erotica content of this nature."

Visa's response was similar. Doug Michelman, head of Visa's Investor Relations wrote, "First and foremost, we want to clarify that Visa had no involvement with PayPal's conclusion on this issue."

He added, "Visa would take no action regarding lawful material that seeks to explore erotica in a fictional or educational manner. Visa is not in the business of censoring cultural product."

Feds gone wild

Closer Look Police Training

Two threats have emerged for weblining, namely the FDIC clarified its rules around "high risk" to edge out sex, and a federal judge strengthened First Amendment protections for websites by ruling speech can be irreparably harmed by withdrawal of payment processing.

Both events were brought about by the misconduct of US officials.

A federal appeals court ruled that the Sheriff of Cook County, Tom Dart, violated the First Amendment rights of classified-ads website by pressuring Visa and MasterCard to stop processing ad sales on the site.

Dart, who is openly anti-sex-work, attempted to sue Craigslist to shut down adult ads, and lost. To try and shut down sex work ads on Backpage, which he characterized as "merely expressing his disgust with Backpage's sex-related ads" he used his official position as Sheriff to threaten Visa and MasterCard to stop doing all business with the publication. They did. Backpage sued, and the judge ruled that Dart's actions violate the First Amendment by coercing payment processors to control a website or publication's content.

Just a few months earlier, the FDIC went on record this clarifying its "high risk" guidance for banks, and guess what? Sex isn't in them, not even vaguely.

That's thanks to a federal mess called Operation Choke Point, launched in 2013 by the US Financial Fraud Enforcement Task Force (FFETF). It targeted financial institutions working with third party processors (namely Paypal and Square) because they're bottlenecks for the flow of online payments.

Choke Point relied on a vague FDIC guidance document; this year, the House Oversight Committee found collusion between the FDIC and FFETF, stating "The Committee has obtained substantial evidence suggesting that as a result of coordinated actions by the FDIC and the Department of Justice, banks are terminating relationships with entirely legitimate and licensed businesses." This led to leading to hearings by the House Judiciary Committee and the House Financial Services Committee, and lawsuits against the FDIC.

Hence the FDIC's new, detailed guidance document for banks, one in which "reputational risk" is now omitted -- thus officially not enough a to deny or close an account. The FDIC's categories of "high risk" specify fraudulent goods and services, and tactics "such as aggressive telemarketing or enticing and misleading pop-up advertisements on Web sites."

While "unlawful Internet gambling and the illegal sale of tobacco products on the Internet" are singled out as FDIC "high risk" areas, PayPal's "items that are considered obscene ... [or] certain sexually oriented materials or services" are most definitely not.

It remains to be seen whether or not the ruling and new guidelines will change the entrenched practices of online payment processors in denying equal financial access, rights, and opportunities to small businesses, artists, and contractors whose business happens to be sex.

Ultimately the fact of the matter is, while keeping corporate mitts off free speech is everyone's business, sex is becoming a woman's business.

So why should this matter to companies like Chase, PayPal, and Square?

Chase Bank is spearheading initiatives in India for gender equality in business, "trying hard to ensure that women are not deterred from remaining in the workplace." PayPal's Retail Engineering Head Angie Ruan is in press with 5 Critical Steps Supporting The Growth Of Women In Tech; early this month PayPal launched Recharge "to bring women techies back to their jobs" -- and PayPal has been trying to position itself as a champion of diversity all year. Square is currently pushing its Code Camp, "A five-day immersion program that was built to inspire, educate, and empower the next generation of women in technology."

It matters because all women deserve business opportunities facilitated by Chase, Paypal and Square -- not just the women who live in what these companies consider the "right neighborhoods" on the internet.

This story has been updated to reflect comments received from JPMorgan Chase. The other companies involved have also been contacted and we will update this article accordingly if they respond.