Citibank 2009 Annual Report Download - page 252

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Credit card merchant processing
Credit card merchant processing guarantees represent the Company’s indirect
obligations in connection with the processing of private label and bankcard
transactions on behalf of merchants.
Citigroup’s primary credit card business is the issuance of credit cards
to individuals. In addition, the Company provides transaction processing
services to various merchants with respect to bankcard and private-label
cards. In the event of a billing dispute with respect to a bankcard transaction
between a merchant and a cardholder that is ultimately resolved in the
cardholder’s favor, the third party holds the primary contingent liability
to credit or refund the amount to the cardholder and charge back the
transaction to the merchant. If the third party is unable to collect this
amount from the merchant, it bears the loss for the amount of the credit or
refund paid to the cardholder.
The Company continues to have the primary contingent liability with
respect to its portfolio of private-label merchants. The risk of loss is mitigated
as the cash flows between the third party or the Company and the merchant
are settled on a net basis and the third party or the Company has the right
to offset any payments with cash flows otherwise due to the merchant. To
further mitigate this risk, the third party or the Company may require a
merchant to make an escrow deposit, delay settlement, or include event
triggers to provide the third party or the Company with more financial
and operational control in the event of the financial deterioration of the
merchant, or require various credit enhancements (including letters of credit
and bank guarantees). In the unlikely event that a private-label merchant
is unable to deliver products, services or a refund to its private-label
cardholders, Citigroup is contingently liable to credit or refund cardholders.
In addition, although a third party holds the primary contingent liability
with respect to the processing of bankcard transactions, in the event that
the third party does not have sufficient collateral from the merchant or
sufficient financial resources of its own to provide the credit or refunds to the
cardholders, Citigroup would be liable to credit or refund the cardholders.
The Company’s maximum potential contingent liability related to both
bankcard and private-label merchant processing services is estimated to be
the total volume of credit card transactions that meet the requirements to be
valid chargeback transactions at any given time. At December 31, 2009 and
December 31, 2008, this maximum potential exposure was estimated to be
$60 billion and $57 billion, respectively.
However, the Company believes that the maximum exposure is not
representative of the actual potential loss exposure based on the Company’s
historical experience and its position as a secondary guarantor (in the case
of bankcards). In most cases, this contingent liability is unlikely to arise,
as most products and services are delivered when purchased, and amounts
are refunded when items are returned to merchants. The Company assesses
the probability and amount of its contingent liability related to merchant
processing based on the financial strength of the primary guarantor (in the
case of bankcards) and the extent and nature of unresolved chargebacks and
its historical loss experience. At December 31, 2009 and December 31, 2008,
the estimated losses incurred and the carrying amounts of the Company’s
contingent obligations related to merchant processing activities were
immaterial.
Custody indemnifications
Custody indemnifications are issued to guarantee that custody clients will
be made whole in the event that a third-party subcustodian or depository
institution fails to safeguard clients’ assets.
Other
As of December 31, 2008, Citigroup carried a reserve of $149 million related
to certain of Visa USA’s litigation matters. As of December 31, 2009, the
carrying value of the reserve was $121 million and was included in Other
liabilities on the Consolidated Balance Sheet.
Other guarantees and indemnifications
The Company, through its credit card business, provides various cardholder
protection programs on several of its card products, including programs
that provide insurance coverage for rental cars, coverage for certain losses
associated with purchased products, price protection for certain purchases
and protection for lost luggage. These guarantees are not included in
the table, since the total outstanding amount of the guarantees and the
Company’s maximum exposure to loss cannot be quantified. The protection
is limited to certain types of purchases and certain types of losses and it is
not possible to quantify the purchases that would qualify for these benefits
at any given time. The Company assesses the probability and amount of its
potential liability related to these programs based on the extent and nature
of its historical loss experience. At December 31, 2009 and 2008, the actual
and estimated losses incurred and the carrying value of the Company’s
obligations related to these programs were immaterial.
In the normal course of business, the Company provides standard
representations and warranties to counterparties in contracts in connection
with numerous transactions and also provides indemnifications that protect
the counterparties to the contracts in the event that additional taxes are
owed due either to a change in the tax law or an adverse interpretation
of the tax law. Counterparties to these transactions provide the Company
with comparable indemnifications. While such representations, warranties