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Crypto exchanges: Solving chargeback issues

For cryptocurrencies exchanges, a common issue can be a higher than desirable chargeback rate. But why is this such a frequent problem, and what can be done about it?

The rise of cryptocurrencies has been one on the most easily identified global trends in financial services for the past few years. Since the explosion of the value of bitcoin and other major cryptocurrencies in late 2017 public interest in acquiring or trading cryptocurrencies has skyrocketed, and with this has come the growth of the industry enabling consumers to exchange fiat currencies into crypto. For these cryptocurrency exchanges, however, operating successfully is no easy feat despite the public interest.

A lack of regulatory framework and the challenges of onboarding

Firstly, legislation governing how exchanges should operate can vary wildly for country to country, meaning exchanges can fall into regulation grey areas or areas where there is no regulation at all. This can often pose a problem with securing a banking or payments partner to support the business; only payment providers with expertise in this field have the competency to take this on.

When attempting to secure a payments partner, there are key actions crypto exchanges must take in order to prove they understand the regulatory framework that they are operating within and that their business is legitimate and trustworthy.

At top of this list is a robust policy on anti-money laundering supported by credible third-party monitoring tools. Money laundering and terrorist financing are two of the most serious issues crypto exchanges encounter and absolutely must be combatted in the most rigorous terms. Legitimate payments providers and banks simply will not work with exchanges that fail to meet the required threshold in this area.

The payments services provider also has responsibilities to monitor and take appropriate action in this area. For a crypto exchange, taking time to diligently research payment services providers that offer best in class standards in these areas is worth the investment.

Why crypto chargebacks are unique

Another issue that is particular to cryptocurrency exchanges is an extremely high chargeback rate. Chargebacks are significantly more common for crypto exchange transactions than traditional eCommerce, and can often even be many times more prevalent than other high risk verticals.

For the exchange, and for their payments services provider that should be advising them on the issue, understanding why the chargeback rate is high is the first action that must be taken. In the small minority of cases outside of legitimate claims where card details have been fraudulently used to make a purchase by a third party, this may be a deceitful claim i.e. the customer buys crypto which then loses value against fiat currencies, and so the consumer abuses the chargeback process to attempt to secure a refund.

However what is far more common, and the reason that chargebacks in the crypto exchange industry is unique, is that once a consumer completes the transaction to acquire crypto, they then use the crypto to make a subsequent transaction that is unsatisfactory. Currently there is very limited scope to submit a chargeback request against the merchant that has not delivered the advertised product or service, so the alternative method of recourse is to file a chargeback request against the exchange with their issuer or bank. And because some financial institutions often don’t understand the nature of the transactions that have taken place, they support the claim.

Partnering with an acquirer that is familiar with this scenario and the actions that need to be taken to defend these claims is perhaps the most important criteria exchanges should consider when evaluating payments services providers. For example, our exchange partners successfully defend approximately two thirds of the all the chargeback claims made against them, retaining a significant volume of revenue in the process.

But exchanges must do more than simply be successful at defending claims. An extreme rate of chargebacks can be derailing, as the fines imposed by the card schemes when the percentage of transactions that generate a chargeback exceeds 0.9% start at £25,000 and can escalate quickly from there. And this rate doesn’t consider whether the claim is successfully defended or not, so even when a chargeback is incorrectly submitted this can have a negative financial impact on the exchange.

So communicating with account holders in a timely an accurate manner is critical. Exchanges that have a reputation for working with account holders to resolve disputes directly are less likely to experience complaints being automatically escalated to the bank. And in addition, having clear and easily found terms and conditions are key. These must explain the exchange will not be held responsible for future transactions; the relationship between the exchange and the customer is purely the buying of crypto, and once this has been delivered the obligation of the exchange is complete.

Moving forward

Interest in cryptocurrencies, and their future uses in commerce and day-to-day transactions, is only going to grow further. The role of exchanges is therefore also going to become more relevant as crypto filters further into the mainstream, but they must be managed in the right way if they’re going to thrive. Partnering with a payments provider with expertise in the space is a cornerstone to doing so.