If you haven't heard about the new Paypal policy and the major controversy that surrounds it, you would do well to read about it. The Electronic Frontier Foundation's article has a pretty clear and succinct summary of the situation. As far as I can tell, the author of that article is not an erotica author, nor does she appear to have any vested interest in the subject.
The general consensus is that Paypal's new policy and the reasons they give for it is nothing more than a cover for puritanical censorship. Erotica writers have been quick to cry foul and claim persecution and vendors who are tied to Paypal have been split between pointing their fingers (albeit with their hands supposedly tied behind their backs) and openly coming out with some sort of quasi-moral statements in support of the new policy.
One of the most eloquent bloggers on the subject is Remittance Girl. Her posts here, here, and here cover the topic in great depth and with careful analysis. The comments and discussion that follow make for interesting, thoughtful reading.
If it were about the money, Paypal and the vendors like Smashwords would rally together to ensure the distribution of the works in question rather than squelch them. Database technology is advanced enough that it would be entirely possible for Paypal to work with vendors through some sort of verification system to develop an adult purchase vetting process. When I buy a sex toy online, I get a big huge warning that says "Sex toys are not refundable under any circumstance whatsoever. ARE YOU SURE YOU WANT TO CONTINUE." Would it really be so hard to do this with an e-book with taboo contents? "This book contains graphic depictions of rape, bestiality, or other content (okay, the lawyers can mess with the wording on that.) No return credit will be granted under any circumstances." So, seriously, Paypal etal if you want me to think it's about the money, you need to try a little harder.
If it were about the money, you'd be working harder to please the customers, i.e. the readers. The consumers of taboo erotica are out there. Take a look at the graphic above. On Elliquiy, the roleplay forum I frequent, the largest roleplaying board is "NC: Human-Freeform Solos." After socializing, non-concensual roleplay is the biggest thing happening over there. Within the top ten, in fact, are two non-con boards and the extreme board. I do believe that says something. There is a market out there, and it's way bigger than people think it is.
The unfortunate thing I see in all of this, is that the typical reader of taboo Erotica is not very likely to stand up and protest this sort of censorship. It takes a great deal of courage and fortitude to do so. I can't even begin to count how many times people join Elliquiy and express their delight at the non-judgmental nature of the forums. I hear how people have been so afraid and ashamed of their fantasies that they can hardly even admit to them on a closed, adult forum. It's akin to coming out of the closet. Openly admitting to fantasies that broach sexual taboos carries a huge social burden. I don't honestly see readers openly protesting Paypal in defense of their often hidden and shame-inducing reading materials.
I don't know what the solution is. If I were an entrepreneur, however, I would be finding a way to start a new business called "Freedom To Purchase What I Want With My Money, Thank YOU" to go head to head with Paypal. The name might need to be a little more marketable and shorter to stuff it into an easy box for clicking, but seriously, where is the competition with some cojones?
EDIT: Given some further reading...particularly this response by Mark Coker, founder of Smashword, I will just say, that someone, somewhere along the line, has to stand up to the banks and funding institutions that are supposedly behind the whole mess. It begs the question, whose IDEA was the ban and what was really behind it? I seriously doubt the returns on erotica sales is much of a blip on the radar.