One way to get a merchant’s ears to perk up when the idea of accepting crypto payments comes up is to mention one big benefit: no chargebacks.
That’s simply a factor of the technology. Cryptocurrency transactions are immutable — irreversible and unchangeable — once written onto the blockchain. That finality is core to how blockchain technology overcomes the doubles spend problem.
Technically, that takes as much as an hour on bitcoin, as new blocks of information are added every 10 minutes and about six more are needed before the transaction is truly considered final by most exchanges. Ethereum’s 12-second block times require about 12 minutes to be considered finalized.
But that finality isn’t really the same thing Mastercard, Visa and banks mean when they talk about finality from chargebacks. In this case, cryptocurrency exchanges and experts mean the amount of time 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 it requires extraordinary expertise and resources.
When it comes to crypto payments, chargebacks don’t exist. Which is obviously a big deal given that chargebacks cost merchants $35 billion in 2021.
“It takes 10 minutes to confirm, but the transaction’s instant,” Stephen Pair, CEO of crypto payments technology firm 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 to make that payment final. It takes Visa and MasterCard 90 days to do the same thing. So, bitcoin is way faster.”
That’s one reason Pair believes that “more and more companies are going to prefer it [cryptocurrency] as a payment method” in the long term.
Leading U.S. cryptocurrency exchange Coinbase, which has a payments processing division for merchants, puts it this way: “Because cryptocurrency transactions are irreversible, your payments are protected from chargebacks. This also discourages chargeback fraud. If a customer wants a refund, they must contact you directly to complete this process.”
Or contact their shipper for a somewhat onerous process of getting damaged goods covered when a package arrives looking like it was run over a few times before being delivered.
While simply paying with crypto doesn’t mean a customer is going to commit fraud, it’s easier to get away with. That’s because, aside from 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 user’s identity remains hidden.
But the anonymity of crypto means that even an exchange with know your customer (KYC) procedures in place can’t be sure that a digital wallet used to purchase crypto wasn’t compromised.
That’s why cryptocurrency exchanges are, ironically enough one type of business where crypto chargebacks are particularly problematic. As soon these exchanges allowed customers to purchase crypto with credit and debit cards as soon as the providers and banks allowed their customers to make crypto purchases — in the last couple of years — they have seen a skyrocketing chargeback rate from customers claiming their purchase of crypto was fraudulent.
“The ease of transacting in cryptocurrency and the lack of chargeback support structures have led to an influx of fraudsters seizing the loopholes in the system,” according to a May blog post by Justt, a chargeback mitigation solution provider. “Unfortunately, exchanges often incur chargeback-related costs whether they lose or win chargebacks.
It estimated that smaller exchanges with thinner margins can find chargebacks eating up 10% to 15% of their net profits.
There is, of course, a glaring hole to this. If payment comes through a Visa- or Mastercard-branded crypto spend card, or PayPal’s merchant network, the normal rules apply. But again, that’s a technicality as the merchant never sees the crypto, only fiat earned from instantly selling those digital assets when the card is used.
And there is genuinely a fraud in crypto buying. Another sign of this came in February, when PayPal announced it would cap claims for the fraudulent sale of NFTs containing collectables and other forms of media at $10,000.
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