Understanding Pre-Arbitration Chargebacks

April 25, 2017/ Jessica Velasco /

How Does Pre-Arbitration Differ from Other Steps in the Chargeback Life Cycle?

Most eCommerce merchants have some level of familiarity with chargebacks. However, pre-arbitration chargebacks are a bit more obscure than the average dispute.

Arbitration Versus Pre-Arbitration

Arbitration is an option available to merchants, consumers, and banks to resolve a dispute. Any involved party can turn to the card network as an independent arbitrator to settle transaction disputes when the standard chargeback process does not produce a conclusive result. The card network reviews the facts of the case based on their merchant guidelines and decides the outcome of the dispute.

The arbitration process is intended as a last resort for disputes between merchants and issuers, and the decision issued by the card network serves as the final word on the matter.

A chargeback must satisfy certain conditions to reach this point. Specifically, the dispute should go through the pre-arbitration phase before the card network will agree to review the case.

In most instances, the issuer will likely lose if the pre-arbitration phase is skipped. The most common exceptions to this rule include:

• Failure of the opposing member (the merchant) to follow the prescribed stages of the chargeback process.
• The opposing member refuses to accept responsibility within 30 days of an attempted pre-arbitration.

Comparing Processes Across Card Brands

Visa is the only card network to use the term “pre-arbitration.”

Mastercard offers a very similar process, though they use the term arbitration chargeback to refer to this stage. Arbitration is the final step under this scheme, preceded by these four phases:

1. First Presentment: The merchant processes the initial transaction
2. First Chargeback: The cardholder or the issuing bank disputes the transaction
3. Second Presentment: The merchant re-presents the transaction with evidence supporting its validity
4. Arbitration Chargeback: The issuer disputes the merchant’s second presentment

The Purpose of a Pre-Arbitration Chargeback

From the merchant’s perspective, this process is essentially a second opportunity to argue their case to the issuer why the transaction should be valid. As for the issuer, pre-arbitration can be useful in the event of any of the following situations:

• The issuer changed the original reason code based on further consideration.
• The cardholder provided new information that changes the facts of the case.
• The documentation provided by the merchant was incomplete.
• The merchant’s supporting evidence was inappropriate for the reason code.
• The merchant’s evidence was not compelling enough to overturn the first chargeback.

How the Process Works

The entire transaction dispute process generally plays out in the following order:

Step #1: Initial Chargeback

First, either the cardholder or their issuing bank initiates the chargeback process to dispute a transaction.

The issuer reviews the transaction to determine whether the cardholder has a case convincing enough to file a chargeback.

If the bank doesn’t suspect friendly fraud and believes the customer at least attempted to contact the merchant, funds will be transferred back to the cardholder. The funds are forcibly withdrawn from the merchant’s account, and the business is charged a nonrefundable processing fee even if the chargeback is later overturned.

Step #2: Representment

If the merchant believes that the chargeback is a case of friendly fraud, the issuer’s initial decision can be disputed through representment.

The merchant collects a body of compelling evidence to support the claim and submits this evidence to the acquirer within an allotted time frame. The acquirer forwards this evidence to the issuer for review in hopes that they will find it convincing enough to reinstate the initial transaction.

This doesn’t sound difficult at first, but it is actually a complicated and time-consuming process demanding considerable attention to detail. Merchants need to create an airtight case or else they risk the dispute progressing to a pre-arbitration chargeback.

Step #3: Pre-Arbitration

If the issuer believes that the circumstance of the case change, they can deny the representment through pre-arbitration. The issuer has the option to enter pre-arbitration at any point during the chargeback or representment process.

For example, if new information comes to light that could impact the final decision in the dispute, pre-arbitration will essentially reset the chargeback process. The merchant will then need to create a new representment case based on the new information or evidence.

The timing of the case depends on when the issuer has access to new information, presented by either the merchant or the consumer.

Step #4: Requesting Arbitration

If either party involved disagrees with the decision reached by the issuer following the second presentment, they can move on to the last phase in the process—arbitration.

Arbitration turns the dispute over to the card network, asking them to function as an independent third-party in the case. However, each network has different processes and regulations, and each handles the arbitration process differently. It’s recommended that merchants check network-specific information regarding deadlines, document submission, and fines. Otherwise, they may unknowingly prepare a weak or invalid case.

Successfully Disputing Pre-Arbitration Chargebacks

The representment and pre-arbitration chargeback processes are very complex. Both are based on extensive bodies of industry regulation and legal framework built up over the last half-century, often requiring an extensive knowledge of the payments industry to navigate.

There is a great deal of communication between different parties. Customers and merchants can find themselves going back and forth with one another and with issuers, while issuers and merchants may need to go through the card schemes before settling a dispute.

Because this process is so complex and time-consuming, it’s typically not worth it for merchants to go all the way through arbitration.

The longer a dispute case goes on, the less likely it is that the result will be positive for the business. The demands on merchants’ resources mean that they rarely achieve an ROI, even if they ultimately win the arbitration. Thus, it’s important that merchants handle initial representments with the utmost care and attention to detail so as to avoid lengthy, back-and-forth cases.

Need Assistance with Your Case?

The stakes are very high for merchants fighting chargebacks; most sellers would benefit from professional assistance.

Contact us today if you have additional questions about pre-arbitration chargebacks, or would like to know more about how to successfully fight these cases.

Last Update: April 25, 2017