• It acts as a basket where funds accumulate before being transferred into a merchant’s business bank account.
• It transfers some of the chargeback risk from the merchant to the underwriting bank.

This second function is the core element of the payment process for a merchant.

What is chargeback risk?

Chargeback risk is not related to financial charges or credits. Instead, it refers to a dispute over a charge that has shown up on a customer’s credit card statement.

In using credit cards, customers may be paying with money that they don’t have. When the underwriting bank transfers money to the merchant’s business bank account, the underwriting bank takes on the risk that the customer won’t pay. This risk is called chargeback risk.

An example of chargeback risk

Here’s an example of how chargeback works.

1. A customer calls the credit card association and refuses a charge. This call must occur within 180 days of the disputed charge.
2. The credit card association sends the merchant a retrieval request asking for proof of sale. This usually consists of copies of the signed receipt.
3. The credit card association considers the merchant’s proof of sale against the cardholder’s dispute and makes a judgment. If the credit card company finds the merchant correct, then the customer pays for the
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