Bogus Charges, Surprise Fees: Inside Coinbase's Credit-Card Pain

(Bloomberg) -- Coinbase, the largest U.S. cryptocurrency exchange, risks seeing its burgeoning business choked if it doesn’t work smoothly with the traditional finance industry.

Right now, both sides are bickering.

The troubles began snowballing early this month when several U.S. banks said they would block credit-card purchases of Bitcoin and other digital currencies on venues around the world. Soon, Coinbase users whose banks still supported sales were flocking to online forums to complain that hefty “cash advance” fees were appearing on card statements. Days later, phantom charges -- typically duplicates of earlier purchases -- began appearing, too.

Coinbase, which has said its business won’t work without public confidence, has been firing off accusations on Twitter, blaming banks and card networks such as Visa Inc. for the troubles. But behind the scenes, some in the financial industry are pushing back, noting there’s one common denominator: Coinbase.

Threat and Jab

“Coinbase has been informed that erroneous charges were not our fault,” the exchange said in a statement Friday. It said it’s working with firms involved in card purchases to resolve the issues quickly and fairly for customers.

It then upped the ante: “We will be evaluating our long-term payment methods to ensure our customers are not impacted in the future.”

And it tossed in a jab: “We’re the ones taking this the most seriously.”

Coinbase, one of the most prominent startups in the financial-technology world, relies on debit and credit cards for about 20 percent of its total sales, according to a person with knowledge of the company. The percentage is even higher for newer users, said the person, who asked not to be identified discussing its finances. So cutting off those channels would be a drastic measure, signaling deep frustration.

But three people close to the situation say frustrations also are running high in the traditional financial world, where payments systems have been honed for decades and routinely handle trillions of dollars in transactions annually. In that realm, disagreements between parties are fixed discreetly -- and especially not on Twitter.

Taking to Twitter

Earlier this month, Coinbase publicly accused Visa and Mastercard Inc. of changing the exchange’s so-called merchant classification code, prompting banks to treat card purchases on the venue as cash advances.

The codes are arcane but important: They help financial firms track lending risks and detect fraud. For Coinbase customers, it meant banks could charge a cash advance fee on transactions, making digital coins less attractive as a means of commerce or investment.

The problem with the codes started in November, when U.S. banks complained to networks about the credit risk associated with cryptocurrencies, according to one person familiar with the matter. Coinbase planned to meet with the networks in late January to discuss their concerns, the person said.

Hours before the meeting, Coinbase was told its code would change to 6051, a number for non-financial institutions like those involved in foreign currency, money orders and travelers checks, the person said. The change was take effect that day, the person said.

For their part, Visa and Mastercard have insisted there was no change in code. Instead, they said, they merely clarified to banks which code they should’ve been using all along for transactions at cryptocurrency exchanges. It’s then up to banks, not networks, to decide whether to impose fees, Mastercard spokesman Seth Eisen said last week.

Hurt Customers

Coinbase works with a so-called merchant acquirer, Worldpay Inc., which serves as a link to the credit-card world. Worldpay revised the code three weeks ago, and within days, customers raised alarms on Reddit about new cash advance fees. This week, more complaints rolled in from users who said they got charged twice for the same transaction.

In theory, Coinbase customers shouldn’t end up paying double if their bank reverses an initial transaction and replaces it with one using another code. But if a bank doesn’t promptly erase the first one, a double charge appears -- and that can trigger other trouble. For example, if the maneuver drains a bank account, it can generate unfair overdraft fees. That’s what some customers are complaining about online.

Worldpay spokesman Andrew Ciafardini said the company is working with card networks, lenders, other processors and Coinbase to resolve the issue. Visa said it didn’t make any system changes that would result in duplicate transactions. And both companies said that any erroneous charges that did occur have been reversed.

“Our customers are being hurt and we need this to be made up to them,” Coinbase said. “At the end of the day, we want the best possible outcome for our customers.”

©2018 Bloomberg L.P.