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I have noted that a few online trading platforms have the following policy for withdrawal: they will send money using the same channel which the user deposit in the past. For example, if I deposit using PayPal, they will send me money using PayPal. I cannot, for example, deposit with a credit card and withdraw my winnings to a bank account, even if I can prove that I own both.

Why is that?

  • 17
    It probably makes it simpler to defend against identity theft/hijacking. What platforms are those? – RonJohn Feb 6 '18 at 8:37
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    Anti-money-laundering regulations probably play a large part. If they only send/receive money through one (well-vetted) conduit, it probably saves them a lot of bureaucratic headaches. – TripeHound Feb 6 '18 at 10:24
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    LOL: "winnings". – Pete B. Feb 6 '18 at 13:20
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    In the event of someone hacking into your account (e.g. phishing), this makes it harder for them to withdraw the funds to an account in their control. – pjc50 Feb 6 '18 at 14:27
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    @PeteB. consider that English might not be OP's native language... – 0xFEE1DEAD Feb 6 '18 at 15:26
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Because if they allow chaining, you can do the following scam:

  1. Deposit money via a credit card (possibly stolen).
  2. Withdraw money via PayPal.
  3. Withdraw the money out of PayPal.
  4. Trigger a chargeback on the credit card.

So if the credit card company awards the chargeback (which they tend to do if the card was stolen), then the platform is out the money. They can't chargeback the PayPal payment, as that money is gone.

If they always put the money back where they got it, then they are never vulnerable. You triggered a chargeback? They point out that they already refunded the money.

This is why if someone deposits money to your PayPal account and then asks you to send the money back, you should just do a refund instead. Because if you send the money back and then they do a chargeback, you can't say, "But I sent the money back in a separate transaction." Or you can, but they'll still take the money from your account.

You might argue that if you could prove that you own both the credit card and the PayPal account, that won't work. That's not entirely true. Consider if a thief steals both a credit card and a PayPal account from the same person. If the thief has access to the victim's mail, the thief might prove that both accounts are the same person. The thief withdraws the money from the PayPal account. Now, the victim finds out about the credit card. The bank reverses all the transactions. The platform is out the money.

Or take the possibility that you deposit the money via credit card and withdraw via PayPal. You do a chargeback. For the next six months, they don't have their money. They eventually fight off the chargeback. But they still lost the use of their money for the six months.

Their credit card processor may even have a requirement that they do things that way. Because the processor doesn't want to be in the middle of a chargeback either. If the processor can see the money going both in and out, then they can answer on their own. If they can't, then they have to go through the effort of collecting more information. And then what if you dispute the additional information? It's not theirs. They don't know whether it is true or not.

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    Two other reasons: 1) It makes their compliance with AML (anti money laundering) regulations much simpler. You can't possibly be using them to launder money if the money goes right back to the very same account it came from. 2) It ensures that they're not acting as an unlicensed money transmitter since they can't be used to move any money to a different place. – David Schwartz Feb 6 '18 at 17:13
  • @DavidSchwartz, make that a real answer. I was going to give that answer since that is the legal reason they only withdraw to the source. – ShadoCat Feb 6 '18 at 19:39
  • So that makes sense for merchandise returns or for transfer-out soon after a transfer-in, but does it really protect the platform if the trader withdraws net profits (or as the OP puts it, "winnings")? – david Feb 6 '18 at 19:54
  • Doesn't work, you can't chargeback a cash advance. The rules on chargebacks approach "never" as the goods approach liquidity. – Harper Feb 7 '18 at 2:57
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I think there's (also?) a different reason than in the accepted answer.

In general, credit card companies don't allow merchants to do cash-equivalent transactions, because they expect those to be done as cash advances.

So if you could deposit with a credit card and then withdraw cash, you'd bypass the implications that come with cash advance (interest fees, limits, etc.).

  • 1
    Do trading platforms actually let you deposit from a credit card (as opposed to directly from a bank account or via debit card)? I've not looked around, but the couple of (UK) share-dealing/investment companies I'm familiar with wouldn't accept a CC payment, and if they did, I'm pretty sure the CC company would treat it as a cash-advance in any case (as they would if "paying" an on-line gambling firm). – TripeHound Feb 7 '18 at 8:04
  • @TripeHound: I'm not sure, but the OP asked about this scenario so that's why I answered it. – Mehrdad Feb 7 '18 at 8:04
  • My point is that if it is possible (to load from a CC) then the CC companies would deal with it by treating it as a cash-advance (immediate interest etc.) and not by forcing the trading platform to impose a single in/out conduit. Doing the latter would still allow you to use the CC company's money "for free" to fund your investment/trading provided you "cashed-in" and returned the money before the grace period for interest was up. – TripeHound Feb 7 '18 at 8:12
  • @TripeHound: I'm not sure. I don't see CC companies allowing you to purchase Visa/Mastercard/AmEx/etc. gift cards with credit cards (even online), even though, like you say, they could allow it and treat it as a cash advance. The only exception I know is that some banks can be funded with credit cards, and even then, up to a limit that isn't too high. They seem to very much require you to take cash advances if that's what you want. – Mehrdad Feb 7 '18 at 8:57
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There is also (or maybe even most important) a legal reason: As soon as a company transfers money from a source to a different place (like it would happen in this case), it fulfills the definition of a bank in many countries like all EU countries. And this requires the company to fulfill all of the strict rules a bank has to fulfill (regarding funds security, money laundering and others).

  • 1
    Source? By your definition any company that sources money from its customers and transfers it to the accounts of its directors/employees (i.e. basically every company) is a bank. – OrangeDog Feb 7 '18 at 16:32
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    @OrangeDog IANAL but I'd assume the difference is that company takes possession of money in between and customers don't direct money to individual employees. On the other hand band/trading company doesn't own money in their accounts and the transfers are under full control of customers. (I'm not sure how it would work with tips but they are entered in EU separately so maybe CC company is dealing with it?). Bigger problem is that trading company usually is transferring money to investment funds/market makers so they would already fulfill the definition. – Maciej Piechotka Feb 7 '18 at 17:41
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    In some jurisdictions this wouldn’t quite classify a business as a bank, but rather as a money transmitter or money service business or a similar designation. Although these are usually not as heavily regulated as a bank, it may still be something the business may try to avoid. – Guan Yang Feb 7 '18 at 18:54
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To protect themselves against consumer fraud and protect their customers from malicious access where a fraudster logs in and then tries to withdraw funds.

Edit : Most firms won't disclose this for safety reasons but I did find reference in the Robin hood FAQs: https://support.robinhood.com/hc/en-us/articles/208650296-Transfers-to-Your-Bank-Withdrawals-

  • Welcome to PF&M. Are you able to provide a reference that would make your answer more authoritative? – Rupert Morrish Feb 8 '18 at 3:59
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    Sure! The knowledge comes from my personal experience working as a trading representatives and Anti-Money Laundering Investigator at two different major brokerage firms. Most firms won't advertise this so I'll try to find a link and add it. – austriker Feb 10 '18 at 0:13

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