The crypto world is ripe with investment opportunities. Many potential investors are looking for trustworthy, secure options to delve into the market of cryptocurrencies. Yet, not all financial options are available in the crypto world. One of the most common examples is credit cards. While it is possible to use credit cards to buy cryptocurrencies like Bitcoin, the truth is that most credit card companies don't allow these kinds of transactions. So, it begs the question, why can't I buy crypto with my card? Credit card companies are trying to protect themselves from high-risk businesses like crypto exchanges because customers can declare the charges as false and request refund, putting the credit card company at risk of having to pay back the customer even if their reason is not justified or they're lying.
In this opportunity, let's delve deeper into the topic of credit card crypto investment and why many companies don't allow it.
The Risk of Chargebacks
Invented in 1974 with the Fair Credit Billing Act in the US, credit card chargebacks help protect consumers against credit card fraud. If the user detects an unauthorized charge on their credit card registers, they can request a refund from the issuer. This has helped immensely in preventing credit card fraud; it has also created many problems for credit card companies, as they don't have such protection and can quickly lose money to unscrupulous clients who want to try their luck at crypto investment without risking their money, or to hackers that obtain the credit card info and proceed to make crypto purchases with it.
The Chargeback Process
The cardholder initiates the process once they notice an unauthorized charge. The user contacts their credit card issuer to dispute the charge and request a refund. The issuer is responsible for investigating the dispute and determining if the chargeback is warranted.
If it's deemed legitimate, the charge is reversed on the cardholder's account, and our refund is requested from the merchant or company. At this point, the merchant has a small time frame to bring evidence to dispute the chargeback and support their position.
Once the evidence is submitted, it is reviewed by the issuer, and a final decision is made. If the decision favors the cardholder, the merchant has to refund the cardholder and might have to pay a charger fee. On the other hand, if the decision favors the merchant, the charge is reinstated.
Friendly Fraud and Chargebacks
While chargebacks help protect users against fraud, they can also cause a slew of negative effects on the issuer. The credit card company might put some penalties on the issuers if their chargeback ratio is too high, penalties such as higher fees or sterner restrictions. Not only that, credit card issuers also face the risk of friendly fraud. In this scam, the user makes a purchase using their credit card, such as buying crypto to invest in. But then they request a refund because they are dissatisfied with the conditions of the products, or in the case of crypto purchases, they say they never authorized that purchase.
What Are They Avoiding?
To better understand the reason why can't I buy crypto with my card? Let's take a closer look at some of the most common scenarios credit card companies try to avoid when forbidding crypto purchases with their credit card.
Unauthorized Crypto Purchases
One of the two most common scenarios credit card companies face is unauthorized crypto charges on a user's credit card. Usually, scammers obtain credit card information from their victims through phishing scams or other digital strategies. Once they have that information, they use it to purchase crypto on a crypto exchange platform utilizing an account already created by the victim.
At this point, the user finds out about the unauthorized charge and requests a cancellation and refund from the bank. Due to customer protection laws, the bank has to return the funds on to the customer's credit card. Yet, the company or bank cannot return the purchased cryptocurrency, so they lose their money. With information stealing scams becoming more common and sophisticated every day, these represent a real risk both to cardholders and issuers. However, while the law protects the cardholder, the issuer has to fend for themselves.
The Friendly Fraud
Credit card companies and issuers also face an inside enemy talking about chargeback fraud. As mentioned, cardholders can use their credit cards to invest in the crypto market. Yet some unscrupulous users do so to invest without risk. First, the user buys crypto from an exchange using their credit card. Then, thanks to the volatility and unpredictability of the crypto market, they lose money while trading or the value of their crypto goes down. Regretting their decision to buy crypto or merely to take advantage of the law, the user then files a fraud complaint to get the money back. As we've mentioned, the law obligates banks and card companies to return the money, so the whole transaction becomes a no-risk investment for the client and a money loss for the issuer.
More Risks
While the two previous scenarios account for the majority of credit card chargebacks, they are not the only factors. Poor customer service or product quality and processing errors (like double charges) are risk factors for chargebacks. Yet, they are a tiny percentage; the most significant risks are frauds.
The Means of Protection
While it is true that once a chargeback request has been made, it will most likely be approved, credit card companies and issuers have developed their own ways of protecting themselves.
Fraud Detection Software
Since fraud is the most common reason for credit card chargebacks, implementing fraud prevention software is one of the easiest ways credit card companies and issuers reduce the number of chargebacks they receive. These programs analyze website requests, mobile apps, and APIs in real time to identify patterns and anomalies indicative of fraud. If something suspicious is detected, such as a surprise crypto purchase attempt, the process is blocked immediately. Since scammers don't carry out these transactions manually, instead using automated scripts and malware to detect and carry out fraudulent purchases with vulnerable merchants, a good fraud detection program can stop the process before it begins.
Clear Refund Policies
Clear and concise refund and return policies are also a massive shield for issuers and credit card companies to defend themselves against unsubstantiated chargeback requests. Being clear on which type of transactions are allowed when using their card, its limitations, and liability in case of financial losses due to high-risk transactions such as gambling or crypto purchases can help issuers and banks steer clear of fraudulent chargeback processes.
Higher Fees for Higher Risk
While high-risk transactions are usually not permitted with a credit card, some credit card companies give their users the option to lift this restriction if they pay high fees. This usually dissuades the user from using their card in high-risk transactions, thus lowering the amount of chargeback requests.
High-Risk Industries: What Are They?
Explained in a simple way, high-risk businesses and industries are the ones more susceptible to chargeback, fraudulent activities, legal processes, financial instability, etc. They face significant challenges in several areas due to their higher risk level. For example, payment processing can be quite a hurdle for a high-risk industry or business. Cryptocurrencies are a prime example of a high-risk industry due to their instability and volatility. Yet, cryptocurrencies are far from the only sector considered high-risk:
· Collections and Financial Services: Collection and money lending businesses are often considered high-risk, mainly because it is uncertain that a client will pay their debt. While most clients follow through on their agreed payment, it’s not uncommon for unscrupulous clients to make up excuses or outright disappear to avoid paying their debt.
· Adult Entertainment and Online Gambling: Online gambling sites and adult entertainment sites, like Only Fans, are often not considered respectable businesses by the general population, so associations with these industries are usually something credit card companies avoid so as not to tarnish their reputation. Also, these industries are vulnerable to fluctuations in regulations, which can become an unneeded complication.
· Healthcare: The healthcare sector demands high compliance with its regulations and regulatory bodies, such as the FDA in the United States. The number of trials new medicines or drugs require often leads to long waiting periods and high capital investments that might not pay off.
· Arms Dealing and Military Business: Businesses that handle the production and distribution of firearms and those related to military personnel training and deployment are usually considered high-risk due to the sector's bad publicity and the high value of gun-related fraud. Chargebacks on gun purchase fraud cases are generally much higher than average, so credit card companies prefer to steer clear of this sector.
All of these industries share at least one of the factors that credit card companies consider to deem them high risk. Let's now take a look at some of these factors.
Financial Risks
The term covers a broad spectrum of concerns. Credit card companies might consider high dollar sales or high monthly sales volume indicators of a high-risk business, as both factors increase the likelihood of excessive chargebacks. This necessarily doesn't mean that a specific market is unstable, but it paints the picture of possible risks. In the case of cryptocurrencies, as we mentioned before, their volatility and stability are the main factors that place them in the category of high-risk industry.
Reputation
Businesses that handle products considered questionable by the general population can become a high-risk factor to potential investors' reputations. Prime examples of this are the adult entertainment industry and legalized drugs like cannabis in the United States. For cryptocurrencies due to the many crypto scams carried out in recent years and the general lack of knowledge about the market, their reputation is questionable at best. Yet, efforts are being carried out to show the general population the high growth potential of the market, the best example being Bitcoin's adoption by many countries as a legal currency.
Legislation
Well-defined regulations are often considered to determine if a business opportunity or industry is high risk. Markets in which rules are not well established or are unclear are considered high-risk opportunities. Again, we bring back the example of legalized drugs. Drug regulations vary widely between countries, so potential investors must think and investigate carefully before investing in this market.
Crypto Purchases: Why Refuse Them?
We have talked extensively about why the crypto market is considered a high-risk industry, but now it's time to delve deeper into the answer of Why can't I buy crypto with my card? Let's now see how all the factors we've mentioned before come into play when banks decide to allow or refuse crypto purchases with credit cards.
Crypto Bans or Lack of Regulation
While it is true that many countries are beginning to accept cryptocurrencies as part of their economy, there is also the other side of the coin. Many governments have imposed harsh bans on cryptocurrencies, and if your credit card were issued in one of these countries, you most likely wouldn't be able to use it to purchase crypto in a crypto exchange. Governments impose regulations and compliance measures that need to be followed by banks and issuers, and also these companies need to follow protection policies such as anti-money laundering (AML) and know-your-customer (KYC).
Thanks to the decentralized nature and anonymity of cryptocurrencies, they are often considered a rebellious challenge to the system; that's why some banks prefer not delving into that market. Uncertainties around taxation, compliance, and regulatory changes are also reasons why many banks prefer to wait on the crypto business until regulations are more defined.
Volatility
Except for the case of stablecoins, cryptocurrencies generally tend to be highly volatile, so it stands to reason that banks prefer to avoid additional risk. Sudden price drops often result in an increase in chargeback requests and might also impact the reputation of the bank. The lack of knowledge from the general population about how a cryptocurrency works and the basics of its decentralized nature usually means that when they lose money, the blame is shifted towards the financial institution.
On the side of the banks, they have no control whatsoever over digital currencies, a stark difference from fiat. Thus, this threatens the financial system's safety, soundness, and stability. Not being able to exert some influence on the price may create a sense of distrust in both businesses and individuals. So, simply refusing to partake in crypto exchanges is the simplest and most effective way for banks to avoid the risk.
Double Conversion
Double currency conversion happens when you exchange money in two different currencies while using a third one as an intermediary. This conversion process is usually used when the exchange is unfavorable and can create extra charges on the user’s side. For example, let’s say you want to buy Bitcoin using USD, but the exchange rate for Ethereum to Bitcoin is better than USD to Bitcoin. The process would be from USD to ETH and then from ETH to Bitcoin.
This often creates confusion and an extra charge on the user's side, and these are viewed as unnecessary problems by many banks, so banning crypto transactions is their best option. To give a bit more context, merchants dealing with cryptocurrencies must identify their transactions with the MCC 6051 code. Basically, this means these transactions are likely to be approved. Still, the customer is usually charged an extra fee on top of their regular credit card commissions, often leading to complaints and chargeback requests.
Crypto Fraud Reputation
The sad truth is that the crypto market is widely considered the most fraudulent one for several reasons:
· The high level of client anonymity.
· There is serious difficulty in prosecuting and convicting criminals thanks to the fact that all the participants, namely the victim, the scammer, the crypto exchange platform, and the bank, are almost always located in different countries with different legislations.
· The almost impossible process of finding evidence showing that the victim was in any way forced to give their money away.
· There is a lack of modern fraud prevention systems included in the crypto market for many of the industry's participants.
· There are many crypto scams and schemes related to money laundering using crypto.
· There is a lack of clear and effective cryptocurrency legislation worldwide.
Considering all these factors, many banks prefer to either decline or outright ban crypto purchases to protect their customers from potential fraudulent activities, unauthorized transactions, and the risk of compromising their accounts and information.
Even though banks have strong security measures in place to protect their customer's funds and avoid unauthorized access, cryptocurrencies represent a threat to the system. The potential risks associated with the process of securing and safeguarding cryptocurrencies for customers are the main reasons for banning these types of transactions.
Lack of Infrastructure and Demand
The crypto market is still relatively new when compared to the traditional Fiat currencies, so many banks lack the necessary infrastructure and integration with cryptocurrency exchanges to be able to process any transaction seamlessly. Also, while blockchain transactions are on the rise, the general amount is still meager when compared to other currencies, which is not a good motivator for banks to consider investing time and money into building this infrastructure. While, as we've mentioned before, many countries are adopting cryptocurrencies like Bitcoin into their economy, the general truth is that the overall adoption rate and demand for crypto transactions are still meager. This means the potential cost benefits of crypto services for their clients might not be worth the investment. As long as the demand for crypto transactions is low or is not aligned with their customer base, banks prefer not to handle these kinds of transactions.
My Card Was Declined, What to Do?
If your credit card is declined when trying to purchase crypto, it could be because your bank doesn't allow those particular transactions. But it could also be a different scenario, and this one can be resolved. It might just happen that your bank allows cryptocurrency transactions with credit cards, but your credit card is restricted from transactions with high-risk businesses. In this case, the solution is straightforward. Get in contact with the bank representative and ask if crypto transactions are allowed or if your credit card is restricted from high-risk business transactions. If it is the latter, you only need to ask the bank to open the restriction to be able to purchase crypto with your credit card.
This will also allow you to use your credit card for other high-risk businesses like gambling, should you decide to. However, keep in mind that this is a risky operation, and if you choose to lift the restriction, the bank might have you sign a waiver in which you accept all responsibility for any scam or losses you might incur.
PlasBit, Another Solution
Suppose it is entirely impossible for you to carry out your crypto purchases using your credit card. In that case, PlasBit offers another solution, as our platform allows you to buy crypto through bank wire. So, you would only need to create an account on our platform, wire funds into your PlasBit account, and then purchase the crypto you wish.
Conclusion
The cryptocurrency market is a relatively new venue ripe with opportunities for investment and growth. Nevertheless, the crypto world contains several factors that make it a high-risk industry. The volatility of cryptocurrencies, the instability of the market, the low reputation, and all the cases of crypto scams make it a risky business that many banks prefer to avoid. Nonetheless, using your credit card to purchase crypto is possible depending on the country where the card was issued and if your card is restricted from carrying out high-risk business transactions. At PlasBit, we also offer an alternative solution for crypto investment, focusing on our users' security and safety. So, if you ask why can’t I buy crypto with my card? We might be the answer to your problem.
