You mean Square. A little of both. The WSJ reported that their gross margin shrank from 27% to 21% in 2013 and specifically mentioned fraud as a component. (Interchange didn't change much.) [1]

With very easy signup with minimal due diligence, plus next day payout, it's an attractive target for fraudulent sellers. Even with relatively honest but low volume sellers, chargebacks may be hard to collect once the money's paid out, so Square is left holding the bag. With a gross margin of barely more than half a percent of the transaction amount, one bad merchant can erase the revenue from a great many good ones.

Stripe and PayPal face similar issues in the ecommerce world, and you can see how annoying PayPal has had to become to tighten up their fraud controls (lots of bad experiences with funds getting frozen).

[1] http://online.wsj.com/news/articles/SB1000142405270230382560...