A Disputed Transaction
Meet Sarah, a diligent consumer who regularly checks her credit card statements. One day, she notices a transaction she didn’t make.
Sarah, understandably worried, contacts her bank to report the unauthorised charge.
The bank initiates a process known as a chargeback, a consumer protection mechanism designed to address situations like this.
During the investigation, the bank’s experts carefully examine the evidence provided by Sarah and the merchant, including invoices, correspondence, and transaction details.
After the investigation, the bank reaches a decision. In this case, they find in favour of Sarah due to the clear evidence of fraud.
The bank reverses the unauthorised transaction, refunding the amount back into Sarah’s account. It’s as if the transaction never occurred.
This process highlights the crucial role reversible transactions play in consumer protection. They provide a safety net, allowing consumers to dispute transactions when issues like fraud, billing errors, or unsatisfactory purchases arise.
Knowing that reversible transactions are available instils confidence in consumers. It assures them that they won’t be left shouldering unjust financial burdens in cases of disputes or fraudulent activities.
Bitcoin Transaction are final
Now meet Alex, a Bitcoin user who’s sending some bitcoin to a friend. In the Bitcoin network, transactions are processed immediately.
When Alex hits the send button sending the bitcoin to his friend, it’s akin to handing over physical cash. There are no delays or intermediaries.
The reason that Bitcoin transactions are final is because of the blockchain. It is an immutable and decentralised ledger. Once a Bitcoin transaction is confirmed and recorded in a block, it becomes an indelible part of the ledger.
Think of it this way, when you have cash in your hand, and you hand it to someone, that action is final. Similarly, a Bitcoin transaction, once confirmed, is a direct and irreversible transfer of value.
there is no 3rd party that you can go to if you have a dispute or you make a mistake.
Lets say when alex is sending the bitcoin to his friend, but he makes a simple error in the recipient’s address.
Due to Alex’s mistake, the Bitcoin is now in the hands of the unintended recipient. The consequence is clear – financial loss. The Bitcoin is gone, and there’s no way to retrieve it.
Bitcoin’s security and finality require users to take on greater responsibility. It’s vital to double-check addresses and transaction details to avoid these irreversible mistakes.
There are practical steps users can take to minimise the risk of irreversible mistakes, such as using QR codes for transactions, copying and pasting addresses, and using trusted wallets.
Scammers want your money
Scams have been on the rise, affecting individuals from all walks of life. The scammer’s primary objective is to separate you from your money.
Economic hardships, such as those brought about by the global pandemic, have left individuals more vulnerable. Scammers exploit financial uncertainties, promising quick solutions.
In the world of cryptocurrencies like Bitcoin, when a transaction is confirmed, it can’t be undone. It’s similar to cash transactions in the physical world. Once it’s done, it’s done.
This could seem like a failure of bitcoin, in these situations it would be good to have transactions reversible and return the stolen asset back. But even in the traditional banking world these transactions might not be reversible. Often the bank will tell you that you authorised the payment so there is nothing that they can do and that they are not liable for the loss. It will then only be when it is proven that the bank is at fault they will reimburse the funds.
So in this case where it might be beneficial to have it reversible even traditional banking is not.
Isn’t allowing reversible transactions for consumer protection a good thing?
The protections are only in the consumers favour, which can set up the incentives for fraudsters to request refunds even when nothing is wrong, which can hurt the business you are buying from.
Reversible transactions can sometimes lead to over-reliance on intermediaries, potentially increasing the risk of fraud in the long run. It can also mean that people stop taking responsibility for their purchases and just rely on being able to chargeback if they change their mind.
Chargebacks can also be used as a threat to try and incentivize merchants to stick to fair, above-board practices. A way for consumers to have some level of control.
Sometimes people request a chargeback when they probably shouldn’t, here are some of the non valid reasons that people make charge backs that hurt businesses:
Contacting the bank seems easier:
You have an established relationship with the bank, which can create a sense of trust and make you more comfortable seeking assistance. Communication with the bank can often be quicker and more straightforward than trying to identify the right point of contact elsewhere and the bank has a vested interest in maintaining your trust, which can incentivize them to resolve issues in your favour.
Buyer’s remorse:
Buyer’s remorse can occur when you realise that your purchase doesn’t fully align with your expectations. You may have initially believed that the product would fulfil certain needs, only to discover that it falls short of those expectations, or that your actual needs differ from what you originally thought.
So with the regret of buying it you file a chargeback on the product or service to get your money back.
A family member used your card:
In this scenario, a family member, with your consent, makes a transaction using your card, which is initially considered a valid transaction. However, due to a lack of communication, you are unaware of the transaction, and you decide to contact the bank and request a chargeback. This can lead to an unintended chargeback for the business or individual, even though they have not engaged in any wrongdoing.
You do not remember making the purchase:
At times, when you examine your statement, the listed activity may not clearly correspond to the purchase you made. When you can’t recall the specifics of a transaction, it can trigger concerns about potential fraud. As a result, you contact your bank, and they may proceed to issue a chargeback.
The Impact on Stores
Large retailers often face a lack of sympathy, with the assumption that they can absorb any challenges that come their way. However, the reality is quite different, and it’s the smaller businesses that often bear the brunt.
The issue lies in the substantial fees incurred by the seller when a chargeback is issued. These fees can pose a severe financial threat, potentially jeopardising the entire business. In some cases, merchant providers might decide it’s too risky to continue providing credit facilities to these businesses due to frequent chargebacks.
While a world where everyone acts in good faith would be ideal, the presence of bad actors complicates matters. Even on a smaller scale, there are individuals who might exploit the chargeback system to exert leverage on a business. Perhaps they feel slighted, whether for real or imagined reasons, and resort to initiating chargebacks.
It’s essential to recognize that when a cardholder files an unjustified chargeback and retains the product or service, they are essentially engaging in theft, akin to cyber-shoplifting. The impact on stores, particularly smaller ones, is significant, both in financial terms and in the potential for manipulation by those who misuse the chargeback process.
How does this affect crypto
Let’s say you want to purchase some bitcoin from an exchange using your credit card because of its convenience.
Sometimes the exchange will only allow the purchase using other crypto or have a large transaction fee to use your credit card.
This is about mitigating risk and also about fraud prevention, Chargebacks can be exploited by individuals engaging in fraudulent activities, and exchanges take steps to deter such behaviour.
If it is just crypto buying crypto then it is a lot safer because both are non reversible.
Irreversible Transactions in the face of regulations
The lack of reversibility in cryptocurrency transactions could open crypto to an attack by regulators to restrict or discourage businesses from using crypto as a payment channel.
Regulators could introduce mandatory requirements for cryptocurrency transactions to be reversible. This would essentially eliminate most cryptocurrencies currencies since one of the key benefits of is irreversibility. By requiring transactions to be reversible, they claim the aim is to make cryptocurrency transactions more similar to traditional financial transactions, where chargebacks and reversals are common.
Regulators could mandate strict monitoring of cryptocurrency transactions, with the power to halt or reverse transactions if they suspect any wrongdoing. This would require businesses to comply with extensive reporting and surveillance requirements and again be able to reverse the transaction if they have an issue with it.