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In some chargeback scenarios, merchants may have to deal with yet another step in the process: arbitration.
This occurs when one or more of the parties—usually the issuing bank—is unhappy with the outcome of the dispute and wants further action taken. It can also occur when new information is introduced, the reason code changes, or something was inaccurate or incomplete in a merchant’s initial response to the chargeback.
On the merchant end, arbitration is a chance to produce evidence and prove the charge was a valid, legitimate one. On the issuing bank’s end, it’s an opportunity to review the dispute further and dig more into the transaction itself.
Here’s what the process looks like:
What is Pre-Arbitration?
During the chargeback process, a cardholder initiates a dispute
that can be implemented by an issuing bank. The merchant, once this dispute is put into the system as a chargeback, can dispute the chargeback during representment. At this point, if the merchant wins, then the chargeback is usually reversed.
However, if the cardholder disputes the transaction a second time based on new evidence, the issuing bank can pursue that as a second chargeback. At this point, the process enters pre-arbitration, or pre-arb, as a second round of disputes.
The first step toward arbitration is called pre-arbitration. During this process, the evidence and counter-dispute from merchants can happen once again before the entire process goes into arbitration.
Pre-arbitration is usually requested by the customer’s issuing bank, though the acquiring bank can also request it should the merchant be unhappy the results of the initial dispute.
When pre-arbitration is initiated, merchants have two options. First, they can accept liability for the chargeback, and the customer gets refunded their money in full. If they are not willing to accept liability, they can request full on arbitration. This means they will need to provide more evidence, and ultimately, the card network will make the final decision regarding the transaction.
What is Arbitration?
If the merchant doesn’t accept liability, the chargeback moves into arbitration.
At this stage, the goal is to put the dispute decision in the hands of a third party—in this case, the card network.
Since the issuing and acquiring banks have been unable to settle on an outcome on their own, arbitration gives the card network the power to weigh in and have the final say.
Though arbitration can be beneficial to merchants if they come out triumphant, it’s important to note that it comes with significant fees as well. Fees vary by network, but for arbitration on a MasterCard chargeback, for example, merchants would need to pay a $150 filing fee, $250 admin fee, $150 withdrawal fee and $100 in technical fees. Because of these high costs, merchants often only benefit on very high-cost chargebacks. In most cases, arbitration means a net loss for the merchant, even in cases they win
Prevention is Always Best
Arbitration comes with high costs, so for merchants, fighting and preventing chargebacks is always the best measure. Understanding your reason codes, delivering stellar customer service and responding to retrieval requests promptly and thoroughly can all help you prevent a transaction from becoming a chargeback—and subsequently leading to arbitration.
FAQ
What is a pre-arbitration chargeback?
When a chargeback is returned for a second dispute, a pre-arbitration phase of the chargeback occurs before finally moving into arbitration if no resolution is forthcoming.
How long does it take for a chargeback to be reversed?
Once the cardholder disputes the transaction, it can take up to 1-3 days. They have significantly longer than that period to do it, however, as they can often have up to 30-45 days to dispute a charge.
Why do merchants avoid arbitration
By the time you get to arbitration, the credit card network takes over and their final decision is binding. This means that there are no more disputes or back-and-forth claims, and often card networks are not incentivized to work with merchants over consumers.
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