PayPal, Pornhub, and Financial Inclusion
Last week PayPal stopped allowing PornHub, an adult video site, to make payouts to its content providers. This is the latest example of payments de-risking. Worried about the extra expense that riskier customers pose, payments providers often opt to cut them off rather than bear the cost of serving them.
Denunciations were quick to appear. In a blog post, PornHub said that it was “devastated by PayPal’s decision to stop payouts to over a hundred thousand performers who rely on them for their livelihoods.” Other commentators accused PayPal of discrimination against sex workers.
Many saw PayPal’s decision as a general indictment of the financial system. Like electricity or running water, payments systems are necessary for survival. Yet here is a segment of society that is being excluded from something as vital as being paid.
In the U.S., pornography is protected by the First Amendment. And while many people have moral issues with porn, there are good reasons to be in favor of connecting PornHub content providers to the payments system. Sex workers are always going to find a way to ply their trade. Performing online is a relatively safe outlet for them.
Unfortunately, cutting content providers off from receiving payments by conventional means may force them to turn to fly-by-night electronic payments options. Or they may pivot to riskier types of work, like face-to-face sex with strangers, where they can be paid in cash.
So if Pornhub’s disconnection is a sign that the payments system is broken, how do we fix it?
Cryptocurrency fans saw PornHub’s deplatforming as a “bitcoin fixes this” moment. Since bitcoin is decentralized, it’s impossible for anyone who uses it—porn stars included—to be shut off. Another potential remedy for endemic financial de-risking could be a universal government-provided digital currency, say FedAccounts for all. Or maybe a consumer bill of rights that forces firms like PayPal to do business with everyone could be the solution.
I don’t think any of these exotic fixes are required. Rather, I’m pretty sure that, left to their own devices, PornHub and the existing ecosystem of competitive payments providers will quickly engineer their own patch. To see how, let’s dig into the details of how PornHub pays its content providers.
Losing PayPal functionality is a pain, but Pornhub’s content providers were never entirely reliant on PayPal for payouts anyways. They continue to be able to receive payouts via direct deposit. This is the same method by which many of us receive our salaries.
Basically, PornHub tells its bank, say Wells Fargo, to deposit $500 to SusieX’s bank, Chase. These instructions get batched with millions of other Wells Fargo payment instructions and sent to the Federal Reserve’s Automated Clearinghouse (FedACH). The Federal Reserve nets out all Wells Fargo-Chase payments and then provides a final end-of-day amount that Wells Fargo owes. Actual settlement between the two banks occurs the next day via the Federal Reserve’s Fedwire large value payment system. Chase then proceeds to credit SusieX’s account for $500. Voila, she has been paid.
Now it could be that SusieX doesn’t want to use direct deposit. Maybe she is worried that Chase will notice she is being paid for sex work, and will cut her off. These sorts of things have happened before. Or perhaps she doesn’t have a bank account.
Fortunately, Pornhub also has access to other payment processors which don’t require the recipient to have a traditional bank account. Content providers can be paid via Paxum, an online wallet. A wallet is a payments account that a non-bank provides to the public. The wallet provider is able to indirectly access vital central bank payments tools like FedACH and Fedwire by using a traditional bank as an intermediary.
SusieX can now send $500 from her PornHub account to her Paxum wallet. She can then tell Paxum to send some of the funds to her regular bank account. Alternatively, if she doesn’t have a bank account she can apply for a Paxum prepaid card and link it to her Paxum wallet. SusieX can then spend her earnings as she would a regular bank account-linked debit card.
Like Paxum, PayPal is a wallet provider. But PayPal gears its wallet towards a mass market. To avoid attracting controversy, it specifies in its terms of service that users may not use PayPal for “certain sexually oriented materials or services”.
Paxum, on the other hand, actively embraces the adult entertainment market by marketing itself at adult entertainment trade shows, conventions, and awards ceremonies all over the world. And it seems to be good at what it does. In addition to PornHub, other sites like BongaCams, Chaturbate, SoulCams, xHamster, and AmateurCommunity use Paxum’s wallet.
Nor is Paxum the only adult-friendly wallet provider. It competes with CosmoPayment, ePayServices, ePayments, and a number of other wallet providers that specialize in serving a high-risk clientele. Each of these wallets can be linked to a prepaid card or used to transfer funds on to a regular bank account. With PayPal no longer available, PornHub could very well adopt any of these to replace it.
So the payments ecosystem surrounding services like PornHub isn’t broken. It appears to be quite vibrant. There are a host of payments providers competing to serve content providers. And, when one provider drops out, say because the risk of operating in the segment is deemed too risky, others will race to fill the void.
To support a vibrant ecosystem of payments providers, it is important that central banks and regulators have a policy of allowing open access to underlying central banking tools like Fedwire and FedACH. If one bank or wallet provider vacates a specific market, a new one must be free to take its place so that customers can be promptly reconnected to the payments system.
But if central bank officials or regulators try to prevent certain types of licit businesses from accessing core central bank tools, the system breaks down. No new competitor will emerge to fill the void.
While PayPal’s de-risking of PornHub is unfortunate, there are many alternative payment options available to PornHub’s content providers. Competition saves the day. For now, at least.
J.P. Koning
J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.
Koning earned his B.A. in Economics from McGill University.
