Ouch, this is pretty bad. Punishing unsatisfied users certainly damages the reputation, you have no right to do so. In the last case, you should return the money to the user if you do not want to allow him to use your service. This case will certainly cause much more damage and loss.

Unjustified retention of funds can be considered a fraud and it will certainly lead to a negative reputation.

If it is malicious or by competition, you cannot prevent it and you cannot influence such things much (blocking users and their money is only counterproductive), it's part of the business and you need to get used to such things.