Pre-Compliance Chargebacks

Table of Contents

1. What Does Visa Mean by Compliance?
2. What Are Some Examples of Compliance Violations?
3. How Do Pre-Compliance Chargebacks Impact Me?
4. Conclusion
5. Frequently Asked Questions

The chargeback process is heavily rule-based, and it can be tempting to believe that if you memorize the rules and follow them carefully, you can avoid any serious chargeback problems. As any eCommerce merchant can tell you, it’s not really that simple. In fact, there exists a special type of “pre-compliance” chargeback that banks can initiate to seek reimbursement from other banks when rule violations cause them financial harm. What should merchants know about these behind-the-scenes chargebacks—and more importantly, do they need to worry about trying to prevent them?

Pre-compliance chargebacks happen under the Visa card network as a way to resolve chargeback-related disputes between participants in the Visa network. When one party believed that another party had violated a Visa rule in the course of handling a dispute, they could file a chargeback under reason code 98 (“other”) to seek redress.

With the introduction of the Visa Dispute Resolution system and the Visa Resolve Online (VROL) platform, reason code 98 became obsolete—Visa no longer wanted chargebacks filed under a generic catch-all reason code, and made the pre-compliance chargeback process a function of VROL.

These chargebacks can be initiated by either the issuing bank or the acquiring bank. The cardholder is not involved in deciding whether to file a pre-compliance chargeback. They can be initiated by the issuing bank immediately following the completion of a transaction, before any retrieval requests or cardholder-initiated chargebacks have taken place.

What Does Visa Mean by Compliance?

In this context, “compliance” refers to Visa’s process for mediating a dispute between its members. To enter into this process, several conditions must be met:

• At least one party has violated the Visa Core Rules and Visa Product and Services Rules.
• None of Visa's predefined dispute conditions cover the violation that occurred.
• One party suffered a financial loss as a direct result of the rule violation.
• If the rules had been followed, the financial loss would not have occurred.

Under the compliance process, Visa will review the facts of the situation and decide which party bears the financial responsibility to cover the loss. Visa's decision is final, and while there is an appeal process, it is expensive an time-consuming enough that an appeal typically isn't worth it.

There is one more condition that must be met before Visa will get involved: the initiating party must give the other party a chance to resolve the issue first. This is the “pre-compliance” step.

Previously, the aggrieved party could sufficiently demonstrate that they gave the other party a chance to resolve the issue by filing a chargeback under reason code 98—the pre-compliance chargeback—and the other party would either accept it, resolving the dispute in the initiator’s favor, or they could contest it, forcing the dispute into the compliance process and letting Visa adjudicate.

Now, Visa requires that banks communicate with each other through VROL and attempt to come to a resolution on their own before Visa is willing to step in. The idea is for Visa network members to talk to each other and work things out themselves, reducing the number of chargebacks that get pushed through the system.

Essentially, Visa would prefer not to get involved in these types of disputes at all. This is both because making decisions in these cases requires time and effort that Visa would prefer not to invest, and also because Visa wants its role to be one of a neutral facilitator, not a judge. Thus, Visa makes every effort to encourage banks to resolve any disputes themselves through negotiation.

What Are Some Examples of Compliance Violations?

While the complex Visa rules and the innumerable potential issues that can cause transactions to go sideways allow for an endless variety of possible violations, there are some especially common violation scenarios that Visa lists as examples:

• The merchant billed the cardholder to collect on a delinquent account or a bounced check.
• The merchant makes the cardholder sign a blank sales draft before the final price is known.
• The merchant doesn’t have a Visa account through their acquirer, but processes a transaction through another Visa merchant.
• The merchant or acquirer ignored a retrieval request related to law enforcement or legal proceedings.
• The merchant re-posted a charge after the issuer initiated a dispute.

There are also a wide variety of possible merchant errors that can lead to these disputes, such as billing duplicate key-entered transactions without the cardholder's permission. While it would be impossible to list all the errors a merchant could make that would lead to a compliance issue, following best practices for payment processing and security will prevent most potential problems.

You may have noticed that this list is heavily weighted toward the merchant/acquirer side. Visa knows that cardholders and issuers make mistakes and break the rules sometimes too, but rule-breaking on the customer side often just means fraud, and the normal chargeback process is designed to handle those issues.

The compliance process, on the other hand, is designed to handle issues not related to customer actions or fraud, but to address problems that Visa doesn't have a specific procedure for.

How Do Pre-Compliance Chargebacks Impact Me?

First, the good news: pre-compliance chargebacks, when they occur, do not affect a merchant’s chargeback ratio, and therefore don't put a merchant at additional risk of exceeding chargeback thresholds.

While it’s often the case that a pre-compliance chargeback will follow from a dispute scenario in which a regular chargeback is filed, the only hit the merchant takes is from that initial cardholder-initiated chargeback. The pre-compliance chargeback is strictly a matter between the two banks involved.

That said, the fact that all of the “common compliance violations” listed above begin with some inappropriate action on the merchant’s part should tell you one thing:

If your acquirer keeps getting tangled up in compliance disputes on your behalf, it will certainly affect your relationship with them.

At the very least, you can expect that some of the costs of these dispute will be passed down to you. Preserving a healthy relationship with your acquirer is crucial to the success of any business. They’re the ones who have to deal directly with issuers, card networks, and all of their complex and ever-changing rules. If you want them to fight for you, don’t make their job harder by trying to skirt the rules.

Conclusion

With the advent of VROL, pre-compliance chargebacks are on their way out. Without reason code 98 there to accommodate conflicts without specific dispute rights, banks don’t have much choice but to try to talk things out with each other. This is probably a good outcome for everyone involved—it’s less of a burden on Visa, it encourages more collaborative relations between member banks, and merchants are always better off when there are fewer chargebacks flying around. However, this is no reason to become complacent. The merchant errors that led to reason code 98 chargebacks in the past can still cause problems that may come back to bite you.

If there’s one thing merchants should take away from a discussion of pre-compliance chargebacks, it’s that cutting corners and going outside the rules to try to make a few more sales isn’t something you can say you’ve safely gotten away with once you see “transaction approved." When cardholders and banks catch on, the repercussions may take some time to work their way back through the dispute system, but they will come back to you eventually. Following the rules won’t save you from all chargebacks, but it will steer you clear of many avoidable ones.

FAQ