If your reaction is wondering if this is legal then you should be interested in the passing of new laws that make it unequivocally legal. Society should be able to govern itself.
As much as I'm not a big fan of PayPal¹ I use that rather than separate credit card payments/subs for online purchases including subs for things like hosting accounts. Stopping a payment from their web UI seems like it would be easier than arranging a chargeback or calling the CC company to put a block on future payments, and it reduces the number of companies that I hand my credit card details too. When I cancel a service I make sure that the sub is cancelled there as well. I always follow the cancellation procedure at the other end too, unless it is obnoxiously bothersome, as just cancelling the payment method feels like I'm being dickish².
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[1] I'm not sure that I'd risk a business account with them, and I hardly ever keep a balance there, due to the many stories of accounts being frozen for long periods with litle reason and inadequate review.
[2] You might argue that often they'd be more than happy to be dickish, hence the cancellation procedures, but I prefer not to stoop to that level whether they would or not.
I contacted PayPal, who opened a case, according to their agreement with Steam (which I'm not party to). PayPal found Steam to be in breach of their agreement (PayPal & Steam's). I was refunded.
Then Steam enacted petty revenge against me, and continue to do so.
PayPal acted laudibly, imo, but there seems to be nothing one can then do about any revenge a company might take against a customer.
A hypothetical might be that you return damaged goods to Amazon, then they refuse to sell to you in the future because you demanded your legal rights.
A computer retailer appears to have done similar. I had to return goods to them that were broken on arrival; they refunded, but closed my account (I have assumed that this was because of the refund request). They do have a general right to drop a customer, or refuse service (outside of protected characteristics) but it seems wrong that "making a reasonable demand in view of legislation" (a device was broken when it arrived) is apparently an allowable reason for refusal of future service.
What you really want is a system where a customer who issues a chargeback that isn't disputed gets the money back, but the merchant also doesn't get a chargeback fee because there is no dispute. And then if there is a dispute (and the customer still wants to do the chargeback), the chargeback fee is loser pays. Then you have a reasonable way for customers to issue legitimate chargebacks that still discourages illegitimate ones.
What we have instead is that if you do a chargeback, the merchant gets whacked with a chargeback fee in the range of $20-$50. Obviously the banks love this; they get the money. But the merchants respond by banning customers who do this, because if you make a $5 purchase with a $1.50 margin and then issue a chargeback, the risk that you do it again before you make enough purchases to even recover the first one is too large.
But if you prohibited merchants from dropping customers over that then there would be no deterrent to fraudulent chargebacks (or to using the chargeback system with the eye-watering fees instead of the merchant's RMA process), so there would be more of them, and merchants would have to raise prices on everybody else even more to cover the bank's fees.
Whereas if you had a balanced system that minimized fraudulent chargebacks while still allowing (and eliminating fees for undisputed) legitimate ones, that would minimize chargeback fees, which is exactly what the banks don't want.
If I've had to do a chargeback, I'm highly unlikely to want to spend further money with that company in future, so they can "ban" me all they like.
My original post in this trail described how I minimise the risk that I have to faf around because of the status quo, which also reduces the potential for my direct payment data leaking due to security snafus, in the absence of the virtual card option in my locale. The one you replied to questioned one point in your description, which seemed to suggest that being banned by a bad trader was a problem.
Though I'll grant that being blocked could be an issue if that merchant was the only supplier for something that you particularly need.