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Why are chargebacks such a big concern for payment processors?

6 points by mmmmmmmmmmmmm ↗ HN
Card processors designate certain industries as "high risk" and/or will ban individual businesses because of chargeback rates over a certain threshold (typically ~1%). Adult content businesses, attorneys and even furniture stores for example have a high chargeback rate that makes it difficult for them to find processors that will work with them.

Why are chargebacks such a big concern for the processors, given that the merchant is the one on the hook for chargebacks and associated fees? I understand why they would require an account minimum reserve, but don't understand why processors would want to completely exclude merchants with chargeback rates higher than the 1% threshold if the risk of those chargebacks is borne fully by the merchant. Stripe already has a minimum period before being able to withdraw funds, so why don't they and other major processors simply implement an account reserve requirement for businesses that go beyond a certain chargeback percentage?

3 comments

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Trias11
Chargeback carrying compliance liabilities for many providers, especially considering that quite often there is fraud, money laundering or some other shady activity could be at the core of it.

Payment processors are under strict regulations and compliance and don't want to be part of anything shady

dingusthemingus
I was at a bank/credit card company as a software dev, we were always just warned about it being a cluster fuck for business people that have to make a lot of excel reports due to those kind of issues.

From my perspective, if a client(like a porn co) repeatedly had high rates of charge backs, fraud teams are aware of that being possible fraud, business teams know that its causing a clusterfuck and might be losing the bank/cc company money, so its easier just not to support that client so less work has to be done.

smarri
High volumes of chargebacks are an indication of fraud which is a larger issue than the fees. Especially if a processor uses a big bank to use the payment rails, the bank will monitor fraud levels of the processors and will exit a processors business altogether if it's too high, meaning the processor is out of business. That's why processors won't work with high chargeback risk businesses, keeps the average low.