PayPal turns off the red light

eBay's PayPal unit will phase out payments for most sexually themed merchandise for sale on eBay and elsewhere.

PayPal, the payment service eBay purchased for $1.5 billion in October, this month published its revised policy on processing payment for adult material. Only PayPal members can access the policy statement.

The April revision amends a March decision that stopped payment for sexually explicit goods except those listed under eBay's "Mature Audiences." The latest revision includes eBay's merchandise in the virtual ban.

"The thinking behind the March decision was that because eBay had already put in place a number of steps that users had to go through to buy and sell items, it would be a logical step" to continue processing eBay's sex-themed goods despite the ban, eBay spokesman Kevin Pursglove said. "But users came back and said this made it very inconsistent and confusing. And they were right."

PayPal users will have until May 12 to process payments for intangible adult products such as online photos and streaming video. Sales of sexually themed tangible products can be processed until June 12.

Pursglove said the revised policy reflected a cost-benefit analysis, rather than legal or moral considerations. PayPal currently faces allegations by the U.S. Attorney's Office over its processing of gambling-related payments. The company is accused of violating the Patriot Act by processing payments tied to illegal activities.

"It came down to a simple business decision," Pursglove said. "As PayPal continued to grow and review internal operations, there were higher financial and other risks associated with these kinds of payments."

These risks included a higher proportion of "charge backs," or merchandise sent back with refunds to the buyer. PayPal also saw more complaints by buyers and sellers in the category.

PayPal has done well for eBay, which last week cited the new unit's revenue as one reason for exceeding its own earning estimates.

eBay has no plans to restrict its own "Mature Audiences" category, Pursglove said.

With the new policy, sexually themed materials join a long list of items whose sale by PayPal members is either forbidden or highly restricted. These include bootleg recordings, counterfeit currency and stamps, water pipes and wired cigarette papers, illegal drugs, firearms made after 1898, humans, corpses and human body parts.

PayPal has carved out numerous exceptions to its ban on sexually themed materials, including what it terms "fine art"--singling out Michelangelo's David as an example, should it come up for sale--and issues of the magazines "Playboy," "Playgirl" and "Penthouse" printed before 1980.

While sellers and buyers of pornography may find themselves inconvenienced by PayPal's decision, competitors might find opportunity in the new policy. Yahoo's PayDirect service, for example, makes no mention of "sex" or "adult" content in its terms of service. Yahoo could not be reached for comment.