Should Users Be Banned for Chargebacks?

I've seen users banned from platforms like Steam and PlayStation Network for filing chargebacks. This got me wondering if banning people for chargebacks is effective.

I’ll explain whether it’s possible, why you might do it, and how effective it is. Then, I’ll offer alternative ways to prevent chargebacks.

Let’s see whether you can do this, first.

Key Takeaways

• Merchants can ban users for chargebacks.
• Many customers abuse chargeback systems.
• No data proves banning reduces chargebacks.
• Banning isn’t the same as a blacklist.

Chargeback alerts are a better way to prevent disputes than banning. But, they can be hard to set up.

We make it easy. Learn how.

Could Merchants Ban Users for Filing Chargebacks?

Yes, merchants can ban customers for chargebacks. Businesses have the right to refuse service for certain reasons.

For example, Sony has banned many users from PlayStation Network for filing chargebacks. SaaS companies can also block access for the same reason.

But should you ban them?

If a cardholder abuses the chargeback system, yes. But there’s a catch. Yes, 75% of chargebacks result from friendly fraud [1]. But friendly fraud means customers unintentionally commit fraud.

This differs from chargeback fraud, where customers try to steal from the business.

Learn more about how friendly- and chargeback fraud differ here.

No one should lose access when they forget about an order or face actual fraud. Though, you could make the argument that a person’s account is compromised if they’re hacked.

Why not reset their password and add two-factor at that point?

However:

If a customer has a history of chargebacks, reconsider their access. Look for red flags in their account history. For instance, whether they’ve tried to file frivolous disputes.

We’ll dive into whether this is effective later.

For now, let’s see why merchants might ban customers.

Summary: Yes.

Why Do Merchants Ban Users for Chargebacks?

Merchants typically ban customers for disputes because they’re likely to do it again. Studies suggest 90% of customers who file a chargeback will do another [2]. Of those, 45% file again within 90 days.

This happens because customers who succeed feel emboldened. They believe they can “game” the system.

If you're a customer, it’s frustrating to get banned for using your rights.

But:

The statistics show that most customers who file chargebacks abuse the system.

Chargebacks have serious consequences for merchants. They lead to fines, account restrictions, and loss of payment processors. Merchants may also end up on a blacklist.

If forums are any reference to go off of, I’ve seen many smaller businesses and online streamers left in shambles because of chargeback abuse.

Thus, legitimate businesses need ways to protect themselves.

Summary: Because customers are likely to do chargebacks more than once.

Bans vs. Blacklists

A blacklist is an industry-wide list that includes information that can pose a high chargeback risk. For instance, chargeback abusers or locations with high rates. Anyone on these lists can’t make purchases.

They’re usually only accessible through chargeback or fraud management tools (e.g., Signifyd). Thus, you’re not controlling who you’re “banning.”

Bans are when businesses block specific users from shopping or using their services.

Now we know the differences. Is banning worth the effort?

Is Banning Users a Good Way to Prevent Chargebacks?

There are no case studies showing that banning or blacklisting reduces chargebacks. It's speculative if banning helps prevent them.

On one hand, it might stop some customers from filing fraudulent chargebacks. But it could also hurt your reputation and lead to negative reviews. Unhappy customers might share their bad experiences, driving others away.

Sony’s chargeback bans sparked controversy and pissed off a lot of users. Though, they could get away with doing this without losing too many customers because they’re such a huge company.

I didn’t find any numbers that suggested they lost money or prevented chargebacks with their changes.

Considering you’re likely not a business with a market cap of over $100 billion, I wouldn’t recommend doing this. If someone figured out that you banned users because of this, then they’d tell the world.

You could also face legal trouble. Governments might see this as preventing customers from exercising their rights.

Banning also doesn’t fix the root causes of chargebacks. Issues like poor product quality, bad customer service, or unclear billing still need attention.

As 30 – 40% of chargebacks typically come from merchant error.

Let’s say you still want to ban a user. Here’s what you should consider.

Summary: No.

Here’s How You’d Ban Customers for Chargebacks

If you really want to ban customers for filing a chargeback, here’s how you’d do it:

1. Collect & Analyze Chargeback Data

Gather data to find out why customers file chargebacks. Common reasons include fraud, false claims, or confusion.

We cover more reasons chargebacks happen in this guide.

Then record specific identifiers

• Customer locations
• Shipping addresses
• Device fingerprints
• IP addresses
• Email addresses

These identifiers will help identify who’s making the purchases and potentially find any strange patterns. For instance, a shipping address for a mail forwarding service could be a sign of fraud.

Look into your data gathering and retention laws before doing this, though.

Analyze these patterns to find common triggers. Use this information to inform your future decisions and prevent repeat issues.

2. Define Criteria for Banning Customers

Decide whether one chargeback or multiple will lead to a ban. Consider adding conditions based on frequency or evidence of suspicious behavior.

For example, ban customers if they file more than a couple chargebacks within 6 months or show signs of fraud.

Clear rules prevent inconsistencies and help avoid unnecessary bans.

During the chargeback process, have customer support reach out. Learn why the customer filed a dispute. If it’s a reason that could suggest merchant error (e.g., bad product description), don’t penalize them for that.

Learn from these mistakes and improve your business.

3. Automate the Banning Process

Connect your chargeback data to fraud detection software or your CRM system. This lets the system automatically flag customers who meet your ban criteria.

Automation reduces manual oversight and speeds up decisions.

However:

Consider manually reviewing flagged customers before placing a ban. This adds a safeguard to ensure you don’t penalize legitimate customers by mistake.

4. Keep Your Ban List Updated

Chargeback fraud tactics change quickly.

Make it a practice to update your ban list based on new trends and incoming data. Look for new patterns in fraudulent activity and adapt your system accordingly. This helps prevent repeat offenders from exploiting weaknesses in your process.

Regular updates also minimize the risk of banning trustworthy customers.

5. Review Your Banning Process Regularly

Schedule periodic reviews of your ban criteria and process. Look at how effective bans are in reducing fraud and whether legitimate customers have been wrongly banned.

Make changes where necessary to keep the process fair and accurate.

Keeping false positives low ensures your business maintains good customer relations.

This same process works when whitelisting or blacklisting customers.

The easiest way to avoid all of this is by preventing chargebacks. I’ll get to that in a moment.

But first, you should know the potential consequences of having too many chargebacks as a merchant.

Can a Merchant Get Banned for Having Too Many Chargebacks?

Merchants can technically get “banned” for having too many chargebacks for too long. For instance, if you have too many chargebacks with Stripe and/or PayPal, they may suspend your account.

A chargeback rate over 0.90% can land you in a dispute monitoring program. Remaining in these programs for too long can result in you losing access to payment processors.

They also come with penalties like:

• Extra chargeback fees
• Fines (up to $10,000 or more per month)
• Merchant account termination (the technical "ban")
• Being placed on the MATCH list

Learn more about the different programs available here.

Termination means you can't accept a specific payment method. For instance, if Visa "bans" you, you can't take Visa cards.

What is a MATCH list?

The MATCH list is an industry-wide list of merchants with terminated accounts. Being on this list makes it hard to open a new merchant account.

Once blacklisted, a merchant may only get high-risk processors with much higher fees. If you end up on the MATCH list, you'll need to wait for removal or consult legal help.

We aren’t a legal team and can’t help with this.

The best way to avoid getting “banned” is by preventing chargebacks. Let’s see what options you have.

Alternative Ways to Prevent Chargebacks

Here are ways to prevent chargebacks without banning customers:

• Chargeback alerts: Warn merchants of potential issues before they turn into disputes.
• Fraud prevention: Tools that verify customer identity and reduce fraud.
• Business operations: Fix internal issues to avoid disputes caused by errors.

I offer more ways to prevent disputes here.

If you don’t even know what a chargeback is, I recommend starting with this guide.

Let’s take a closer look at each point.

1. Chargeback Alerts

Chargeback Alerts notify merchants when a customer has a problem with a transaction. This gives you a chance to fix the issue before it becomes a formal chargeback.

Some systems let you automatically refund customers based on preset rules. Others give you up to 72 hours to decide how to handle the pre-dispute.

Using a single alert provider can prevent over 40% of chargebacks. Combining Ethoca, CDRN, and RDR can reduce disputes by up to 91%.

What’s the difference between these alerts?

They mainly differ in the card networks they cover and how they handle refunds. Learn more about this here.

Alerts may not be right for every business, though. See the guide for more information

Providers like Verifi and Ethoca offer alerts, but setup can take time. Many merchants use third-party services to simplify the process.

For instance, we offer all these alerts in one spot. Learn how we can help you reduce chargeback rates.

2. Fraud Prevention

Fraud Prevention helps ensure the person making the purchase is the cardholder. 

Tools used include:

• Address Verification Service (AVS): Verifies the customer’s address.
• 3D Secure: 2-factor authentication.
• Fraud detection software: Checks orders for sketchy behavior.
• CVV checks: Verifies card numbers.

For instance, biometric payment options like Apple Pay add an extra layer of protection. Businesses using these tools can reduce chargebacks. As these methods make it harder for fraudsters to succeed due to requiring biometrics.

Actual fraud only makes up for 1% of chargebacks. But friendly fraud makes up for 75% of them. It’s difficult to tell these apart.

Learn more about third-party fraud here.

3. Fix Business Operations

Many chargebacks result from basic errors, like incorrect shipping or unclear terms.

To reduce disputes, ensure accurate shipping, honest product descriptions, and clear billing practices. Fast refunds and good customer service also help.

Wrapping Up

Banning users for chargebacks isn’t the best way to prevent disputes. But you still need a strategy to avoid losing your payment processing.

That’s when you should consider using chargebacks alerts.

Learn how we've helped businesses reduce chargebacks by up to 91% with these alerts.

Sources

• [1] Friendly fraud. Visa. 6/16/2022.
• [2] Chargeback facts. Chargebacks911. 1/23/2024.