Chargeback

Family VIII · Regulation

Not to be confused with investor compensation scheme, client money protection, broker insolvency.

Chargeback is a consumer-protection mechanism in card payments: the cardholder's issuing bank reverses a transaction and withdraws the amount from the merchant's account, typically after the buyer claims the goods or services were not received, were defective, or the payment was unauthorised. It is governed by card-network rules rather than by the merchant's own terms of sale, and it is distinct from a voluntary refund issued by the merchant. The process usually involves a provisional credit to the cardholder while the merchant's bank investigates.

How the process runs

A chargeback moves through the card networks in stages. The cardholder first raises a dispute with the issuing bank, which may issue a provisional credit. The issuer then files a chargeback against the merchant's acquiring bank, which notifies the merchant. The merchant can accept the chargeback or represent it with evidence such as delivery confirmation, signed receipts or terms of service. The card network sets the time limits and the evidence rules, and these vary by network, card type and country.

If the representment fails, the chargeback stands and the merchant loses the amount plus any chargeback fee. If it succeeds, the funds may be returned to the merchant. Some networks also allow pre-arbitration or arbitration when the two banks cannot agree.

Worked example

The fee and the time limits are set by the card network and the acquiring bank, so the figures above are illustrative rather than universal.

Chargebacks and trading accounts

In retail trading, a chargeback can arise when a cardholder funds an account and later disputes the deposit, for example after a loss. Brokers and payment processors typically treat chargebacks as a risk event: the disputed amount is removed from the trading account, and the account may be restricted while the case is open. Because card-network rules override platform terms, a chargeback can succeed even where the broker's own agreement states that deposits are non-refundable.

Firms often maintain a chargeback ratio, the share of transactions disputed over a period. Card networks monitor this ratio and may impose fines or terminate processing rights if it exceeds thresholds, which vary by network and merchant category.

Often confused with

investor compensation scheme

An investor compensation scheme is a statutory or industry-funded arrangement that reimburses eligible clients of a failed or insolvent investment firm up to a specified limit, subject to national rules on coverage, eligibility and claim procedure.

client money protection

Client money protection is the set of regulatory rules requiring a firm to hold customer funds separately from its own money, so that client balances remain identifiable and returnable if the firm fails.

broker insolvency

Broker insolvency is the legal state in which a brokerage firm can no longer meet its financial obligations to clients and other creditors, typically triggering administration, liquidation, or compensation-scheme procedures.

See also

• anti money laundering check
• asic regulated broker
• broker insolvency
• broker license
• cftc regulated broker
• client money protection