Card schemes have liability rules in place their members must comply with, in particular in the case of fraud, unauthorised transaction, or payment execution issues. These rules regulate liability and refund mechanisms often known as charge-back between the payer’s and the payee’s payment service provider.

Whether the risk of contingent liability to which an acquiring bank is exposed to in the course of the merchant acquirer business qualifies as an off-balance sheet item according to Annex 1 of Regulation EU) No 575/2013 (CRR) depends on how the relationship between the parties involved is structured. At least two cases can be distinguished:

(i)                the acquiring bank is subject to charge back rules set up between acquiring and issuing banks and as such is responsible for meeting chargeback claims raised against the merchant by the card holder through the issuing bank including in case of the merchant bankruptcy, if the terms of the contract provide so.

(ii)               the acquiring bank is only responsible for the execution and settlement of a payment transaction, i.e. that the payment itself is executed correctly and is not fraudulent. The responsibility of the acquiring bank does not extend to the execution and delivery of the goods and services themselves. If a payer was to ask for his/her money back due to him/her not being satisfied or the goods not having been delivered for instance, any such claims and any related open balances would have to be settled directly between the merchant, the issuing bank and the card holder.

In case (i), the acquiring bank is exposed to a contingent liability that classifies as an off-balance sheet item within the meaning of Annex 1 of the CRR. This off-balance sheet item exists as long as the card holder or the issuing bank has the right to raise a chargeback claim against the merchant.

Consistent with the approach applied in Q&A 2198, depending on the specific nature of the commitment made by the acquiring bank, and also having regard to any relevant card scheme rule/s and/or merchant agreement/s, since the contingent liability as described may not correspond directly to any of the items explicitly described in Annex 1, this should either be treated according to Annex 1, item 1(k), or item 2(b)(iv), or item 3(b)(ii), or item 4(c), i.e. ‘Other items carrying [full, medium, medium/low, low risk, as appropriate] and', where applicable, 'as communicated to EBA'.

However, with specific regard to cases where the contingent liability covers merchant bankruptcy such that in the case of a chargeback where the merchant defaults on its obligations to refund the issuing bank and the acquiring bank has explicitly committed to fully cover this loss, this would necessarily be a full risk item.

Where the relation between the parties involved is instead structured as described in (ii) above, the acquiring bank is not exposed to the credit risk of the merchant, as it is only responsible for the settlement of the card transactions. Therefore, in this case there is no off-balance sheet item according to Annex 1 of the CRR.