Chargebacks were introduced as a form of consumer protection. But over time, cardholders have found loopholes in the mechanism to unrightfully take money from merchants. According to Juniper Research, eCommerce merchants lost over $17.5 billion in chargebacks in 2020 and this year they are expected to lose up to $20 billion. Most of those losses come from illegitimate chargebacks ranging from PayPal chargeback scams to unintentionally unrecognized charges.
In a bid to save themselves from the “demon” and still retain a pleasant and smooth shopping experience, many merchants are adopting new payment trends – such as Bitcoin. Since 2008, Bitcoin has steadily increased in value, and its technology promises transactional security and the elimination of chargebacks.
It’s easy to see why more merchants are accepting Bitcoin. But does it solve the chargeback problem? What pitfalls or hurdles should you be on the lookout for?
What is Cryptocurrency?
Simply put, cryptocurrency is digital money with the following properties:
- Digital – it exists only on computers. There are no physical notes or coins.
- Decentralized – it is distributed on a vast network of computers without a central server
- Peer-to-peer – people transact with each other directly.
- Anonymous – unlike Paypal or bank accounts, no personal data is required to send or receive cryptocurrency.
- Irreversible – Bitcoin or Ethereum transactions cannot be reversed.
- Volatile – value is tied to demand, i.e. activity on the network, and hence is unstable. At different instances in 2017, Bitcoin was worth $750 and $19,783.
- Complex – cryptocurrencies can be difficult to understand and hence challenging to dispute.
How Cryptocurrency Eliminates Chargebacks
With credit card transactions, merchants pull personal data from customers’ cards to authorize sales. During or after the transfer, customers are exposed to data theft by fraudsters. But with cryptocurrency, the transaction is protected from hacking and merchants don’t have to worry about fraudulent payments thanks to cryptographic protection.
This level of protection extends past transactions. With a credit card chargeback, the card issuer returns the customer’s money before reviewing the merchant’s side of the case. But with cryptocurrency transactions, there’s no one with whom to file a complaint. The crypto sale is final unless the merchant voluntarily offers a refund.
However, not all cryptocurrency transactions are irreversible and safe from chargebacks. For example, some crypto exchanges allow customers to buy Bitcoin through PayPal and credit cards; such cryptocurrency transactions are susceptible to chargebacks. And if successful, the customer keeps the Bitcoin and the dollar amount used in the transaction.
The uniqueness of crypto exchange chargebacks
Aside from the shocking fact that crypto chargebacks are possible, they are more prevalent than in traditional eCommerce transactions. In fraudulent cases, a customer purchases crypto coins which later drop in value and decides to charge back the process to get back their money. They do this by claiming their card details were fraudulently used by a third party to complete the purchase.
However, crypto exchange chargebacks are unique because in many cases a customer purchases cryptocurrency and then uses the same crypto to complete another transaction that proves unsatisfactory. Currently, there are limited options of filing a chargeback against the merchant for goods or services not delivered as advertised. So the customer’s best option is to file a chargeback against the crypto exchange with their card issuer. And since most financial institutions don’t have the full transaction details, they support the chargeback claim.
The best defense for crypto exchanges is using a chargeback mitigation service that has handled similar scenarios and understands the actions necessary to win the claim. Also, having clear terms and conditions helps the case. But, unfortunately, it’s not enough to just defend claims successfully.
Too many chargebacks can financially cripple an exchange, especially because card networks impose additional fees and fines for excessive chargebacks. Financial penalties start at a chargeback-to-transaction ratio of over 0.9 percent for Visa cards and 1.5 percent for MasterCard.
Should Merchants Adopt Bitcoins?
Cryptocurrency will not completely get rid of chargebacks, but it can reduce them, meaning more guaranteed transactions and money.
Other benefits include:
- Reduced fraud – since your trust is in cryptography and not third parties. You don’t need to know someone or ask for an ID to do business with them.
- New category of consumers – Many people have been buying cryptocurrencies that have skyrocketed in value in the last three to five years and aren’t willing to change them back into fiat currency. Instead, they want to spend their cryptocurrency. As such, merchants that implement cryptocurrency payment can seize a new market opportunity.
- Reduced transaction fees – over the years, cryptocurrency fees have increased. However, it’s still relatively low compared to other options like currency exchange fees and wire transfers.
On the downside, cryptocurrency fluctuates wildly. To make sense, merchants have to set up systems to convert it into fiat currency quickly. Also, while crypto payments protect merchants from chargeback and fraud, it does very little to protect or compensate defrauded buyers. Finally, since cryptocurrency transactions are final, customers have no one to turn to for refunds. Consequently, crypto transactions are riskier, and some might opt to walk away from the sale.
What’s the Future?
While cryptocurrency may have found a way around the chargeback problem, it doesn’t solve underlying causative problems like failed deliveries or subpar services or products. Without such a solution, a crypto chargeback mechanism might be birthed.
For merchants looking for a shortcut in cryptocurrency, this may be bad news. However, for those invested in customer satisfaction, it’s a positive that the technology is likely to evolve over time.
