How Crypto Protects Against Chargeback Fraud
- Nanna Course
- on Aug 23, 2022
One way to tease a merchant’s ears when the idea of accepting crypto payments comes up is to mention a big plus: no chargebacks.
It is simply a factor of technology. Cryptocurrency transactions are immutable – irreversible and immutable – once written on the blockchain. This purpose is central to how blockchain technology overcomes the problem of double spending.
Technically, this takes up to an hour on bitcoin, as new blocks of information are added every 10 minutes and around six more are needed before the transaction is truly considered final by most exchanges. Ethereum’s 12-second block times take around 12 minutes to be considered finalized.
But this finality is not really the same thing as Mastercard, Visa and the banks mean when they talk about the finality of chargebacks. In this case, cryptocurrency exchanges and experts mean how long it would take to be safe from a 51% attack that would let bad actors take over a blockchain. While doable on smaller, less populated blockchains, it is effectively impossible on bitcoin and ethereum. And that requires extraordinary expertise and resources.
Read more: Bitcoin’s 10-Minute Block Time Lots and Fluctuating Transaction Fees Give RTP an Edge
When it comes to crypto payments, chargebacks do not exist. Which is obviously a big deal considering that chargebacks cost merchants $35 billion in 2021.
“It takes 10 minutes to confirm, but the transaction is instant,” Stephen Pair, CEO of crypto-payment technology company BitPay, told PYMNTS’ Karen Webster earlier this year, noting that the 10-minute gap is largely invisible on BitPay. “It takes 10 minutes to confirm and make this payment final. It takes 90 days for Visa and MasterCard to do the same. Thus, bitcoin is much faster.
See also: BitPay CEO: Bitcoin Payments Will Explode in 2022 as Crypto Hits Inflection Point
This is one of the reasons why Pair thinks “more and more companies are going to prefer it [cryptocurrency] as a means of payment” in the long term.
Leading US cryptocurrency exchange Coinbase, which has a payment processing division for merchants, explains it this way: “Because cryptocurrency transactions are irreversible, your payments are protected against chargebacks. also discourages chargeback fraud.If a customer wants a refund, they should contact you directly to complete this process.
Or contact their shipper for a somewhat onerous process of covering damaged goods when a package arrives looking like it’s been run over multiple times before delivery.
While just paying with crypto doesn’t mean a customer is going to commit fraud, it’s easier to get away with it. Indeed, besides immutability, the other half of the equation is pseudonymity – while transactions made with bitcoin and most other cryptocurrencies can be traced on a public blockchain, the identity of the user remains hidden.
Read also : Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?
But the anonymity of crypto means that even an exchange with know-your-customer (KYC) procedures in place cannot be sure that a digital wallet used to purchase crypto has not been compromised.
This is why cryptocurrency exchanges are, ironically enough, a type of business where crypto chargebacks are particularly problematic. As soon as these exchanges allowed customers to buy crypto with credit and debit cards as soon as vendors and banks allowed their customers to make crypto purchases – in the last two years – they saw a skyrocketing chargeback rate from customers claiming their crypto purchase was fraudulent.
“The ease of conducting cryptocurrency transactions and the lack of chargeback support structures has led to an influx of fraudsters seizing on loopholes in the system,” according to a May. blog post by Justt, a provider of chargeback mitigation solutions. “Unfortunately, exchanges often incur chargeback costs whether they lose or win chargebacks.
He estimated that smaller exchanges with thinner margins can find chargebacks consuming 10% to 15% of their net profits.
There is, of course, a glaring hole in this. If payment is made via an encrypted Visa or Mastercard branded credit card, or via PayPal’s merchant network, the normal rules apply. But again, this is a technicality as the trader never sees the crypto, only the fiat earned by instantly selling these digital assets when the card is used.
And there is genuinely fraud in buying crypto. Another sign of this came in February, when PayPal announced it would cap claims for the fraudulent sale of NFTs containing collectibles and other forms of media at $10,000.
See more : NFT Chargeback Exclusion Indicates Growing Fraud Concerns
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