Merchant failures are becoming a stress test for banks

Ron Rybicki is VP of data and analytics at Quavo, a fraud and dispute management platform serving financial institutions and technology companies.

In early May, Spirit Airlines ceased all operations. Within hours, thousands of cardholders did what consumers reliably do when a merchant disappears without notice: they called their bank. What followed was a 1,000% surge in chargeback claims rippling across Quavo's issuer network within a single news cycle.

The number is striking, but the more relevant question is how many institutions saw it coming. The pattern is predictable. The preparation isn't. 

Merchant failures are no longer isolated events. They are recurring operational shocks that expose how little visibility most issuers have into dispute risk developing outside their own walls. When a major merchant collapses, the challenge is not simply processing more claims. It is recognizing the pattern early enough to prepare, communicate with customers and respond consistently before volumes overwhelm operations teams.

The pattern that keeps repeating

Spirit is the most recent entry in a long, cross-industry pattern that financial institutions and fintechs have never quite figured out how to get ahead of.

When Rite Aid filed for Chapter 11 for the second time in May 2025, closing 1,240 locations across 15 states, millions of gift card holders and loyalty rewards customers were left with balances nearing expiration. State attorneys general issued consumer advisories, and a hard June redemption deadline followed. In the weeks between the bankruptcy announcement and final store closures, banks processed a significant wave of “services not rendered” disputes from cardholders seeking to recover the value of gift cards purchased or rewards they had preloaded. This was not a single morning of shock volume, but weeks of elevated claims with no coordinated issuer response.

In October 2023, Convoy, a $3.8 billion freight brokerage startup backed by Jeff Bezos and Bill Gates, shut down with no warning. Thousands of small carriers who had completed loads found themselves owed unpaid balances on card-linked accounts with no recourse through the company. The dispute claims that followed hit issuing banks across commercial card portfolios, most of which had no visibility into how many of their business customers had outstanding Convoy exposure until the claims started arriving.

And in November 2022, FTX's collapse triggered card-linked dispute claims across credit and debit issuers globally, as frozen withdrawals translated into "services not rendered" filings. Banks had little forewarning and each one was responding to its own slice of the same wave, in the dark.

The operating model is the problem

The vulnerability was not the spike itself. It was that every issuer was hit at once, and each responded alone.

Cross-institution intelligence closes a gap that internal staffing cannot. When dispute volumes for a specific merchant category code are surging at peer institutions, issuers can brief operations teams before the volume arrives, apply consistent decisioning at intake rather than improvising claim by claim, and distinguish legitimate “services not rendered” claims from the opportunistic friendly fraud that often follows a high-visibility merchant failure. Without that visibility, institutions are perpetually behind, and customers can tell.

These events also force a long-overdue conversation about where dispute operations sit organizationally. For too many institutions, disputes remain a back-office compliance obligation, managed with minimum viable resources because the full cost of doing them poorly is diffused and hard to attribute. The math of a surge event changes that. 

Cardholders who receive a fast, transparent resolution during a moment of genuine stress remember their institution positively. Those who face delays, opaque communications, or a rejected claim they believe is legitimate do not. The churn risk is highest when the customer is most vulnerable.

Getting compliance working for an institution, rather than against it, matters here too. Claims handled consistently, and with a clear audit trail, satisfy Regulation E and Regulation Z obligations regulators will scrutinize after a high-volume event. Ad hoc, claim-by-claim decisions made under pressure are where compliance exposure accumulates.

Institutions do not need to predict which merchant will fail next. They need processes that allow them to recognize emerging dispute events quickly and respond consistently when they occur. That means monitoring merchant-level dispute activity, establishing surge-response playbooks before a crisis hits, and treating dispute operations as a source of customer intelligence rather than a back-office cost center.

The intelligence gap is a choice

The infrastructure already exists to identify merchant-level surge events in real time, share those signals across issuing institutions, and apply that intelligence at intake. The question is whether financial institutions will treat dispute operations as a strategic function or keep absorbing the cost after each event proves that the old model is not working.

Spirit Airlines will not be the last merchant to fail abruptly and trigger a wave of dispute claims. Nor will it be the last event to expose the limits of issuers operating in isolation. The institutions that navigate the next disruption most effectively will not necessarily be the ones with the largest dispute teams. They will be the ones that recognized dispute intelligence as a competitive advantage before the surge arrived.

At this point, "we didn't see it coming" is no longer a credible explanation. It is an operational choice.