Visa Chargeback Pre-arbitration

Table of Contents

1. What Is a Chargeback?
2. What Is Chargeback Arbitration?
3. What Is Pre-arbitration?
4. Why Pre-Arbitration Can Be Difficult for Merchants
5. Assessing the Evidence in a Chargeback Case
6. Chargeback Fees and Financial Implications for Merchants
7. Breaking Down Visa's Pre-arbitration Process
8. Are There Alternatives to Pre-arbitration?
9. When in Doubt, Turn to the Chargeback Experts

In payments and risk operations, winning a chargeback reversal is typically viewed as a successful outcome—an indication that the evidence was strong, the transaction was legitimate, and the representment process worked as intended. Yet a reversal doesn’t always conclude the dispute. In some cases, the issuer or cardholder may challenge the outcome, introducing new information or reevaluating the circumstances of the transaction. When this happens, the dispute can advance into pre-arbitration, a stage that often requires a more nuanced and strategic response than the initial representment.

Pre-arbitration is a complex juncture in the chargeback lifecycle because the conditions under which a dispute is reopened can vary significantly. The issuer may present recently obtained details, reinterpret the original reason code, or question aspects of the documentation that previously seemed sufficient. Card network rules also influence how and when pre-arbitration is triggered, and these rules are not always uniform. As a result, merchants must be prepared to reassess the case from multiple angles rather than relying solely on the rationale that supported the initial reversal.

What makes pre-arbitration particularly challenging is its impact beyond any single dispute. It introduces additional costs, operational considerations, and potential financial risk. Decisions made during this stage—whether to accept liability or escalate—can affect dispute ratios, internal workloads, and the likelihood of entering arbitration, where the stakes and fees increase substantially. Clear processes, accurate data, and well-defined thresholds for escalation become essential for managing exposure and maintaining consistent dispute performance.

Understanding how pre-arbitration works, when it occurs, and how to respond can make the difference between containing a dispute and watching it spiral into costly arbitration. In this guide, we’ll break down the mechanics of Visa’s pre-arbitration process, explain why these cases are uniquely challenging, and offer insights that help merchants make informed, financially sound decisions when disputes escalate beyond the initial chargeback stage.

What Is a Chargeback?

A chargeback is the reversal of a transaction by the issuing bank at the request of a cardholder. Chargebacks were created by the Fair Credit Billing Act of 1974, which was passed in the U.S. to give customers greater confidence in credit cards.

The law ensured that if an unscrupulous merchant wanted to cheat customers out of their money by charging their credit card more than the agreed transaction amount or charging further transactions that weren't authorized, customers had a way to get their money back. It was also designed to protect customers whose cards were lost or stolen, ensuring that they wouldn't be liable for potentially thousands of dollars of purchases charged to their card by a thief.

While the Fair Credit Billing Act established the existence of chargebacks, working out how the process should work was left to banks and card networks, which is why the chargeback process tends to vary from one network to the next. Pre-arbitration is one example of this.

Sometimes, however, the final decision in a chargeback case may not sit well with the losing party. In that case, they may choose to file for arbitration.

Arbitration is typically considered the last resort for both parties, since the losing party will have to pay hundreds of dollars in fees. Most transactions simply aren't large enough to be worth the risk. Before a Visa chargeback reaches arbitration, however, there is pre-arbitration: One last chance for the parties involved to come to an agreement.

The idea behind pre-arbitration is that the cardholder may have new or unknown information regarding the transaction that proves their case of fraud. This information is outside the scope of the original chargeback, and even though the cardholder lost the initial chargeback, this new evidence gives the cardholder the opportunity to push for a second round of the process.

Although the ruling fell in favor of the merchant the first time, the merchant rarely wins on a second reversal.

The first thing you should do when facing pre-arbitration is review the evidence presented in the original chargeback case. What kind of documentation do you have supporting the claim that the charge in question was legitimate? Establish this baseline information and then check your records to see if you have any other information. Any new information should be submitted to the dispute.

Assessing the Evidence in a Chargeback Case

It’s important to note that not just any evidence will do if you plan to get a second chargeback resolved in your favor. Evidence stems from a clear documentation process on the part of the merchant, and this includes both informal and formal documentation.

So while every merchant knows that they need to keep all receipts and most keep at least recent email exchanges on file, additional forms of documentation can be of value.

For example, have you spoken to the customer on the phone? Make note of any and all of these exchanges with dates, times, and discussion content. Alone, this may not constitute compelling evidence, but as an additional component, it can bolster your claim.

More convincing evidence might include delivery tracking information, including confirmation of receipt by the delivery company. If you did not include this information in your original chargeback claim, now is the time to add it to the mix. Be careful, though. Make sure to match this delivery information, particularly the address, with the billing information linked to the client.

If you have delivery confirmation that includes a signature or a photo, this will often be your most compelling evidence against claims of non-delivery. It's not foolproof, of course. The package may have been signed for by another member of the household or the signature may be illegible. A photo might not show enough to prove the package was delivered to the correct address. In most cases, however, banks will view this additional confirmation of delivery as extremely compelling evidence.

Chargeback Fees and Financial Implications for Merchants

The Costs of Chargebacks

1. Chargeback Fees: Each chargeback incurs a fee, typically ranging from $20 to $100, depending on the payment processor and the type of transaction involved. For Visa pre-arbitration disputes, there is an additional $15 chargeback fee, regardless of the outcome.
2. Transaction Amount: The merchant loses the transaction amount, which is refunded to the cardholder. This can be particularly detrimental for high-value transactions.
3. Operational Costs: Handling chargebacks requires time and resources. Merchants need to gather evidence, respond to disputes, and potentially engage in pre-arbitration or arbitration processes. This involves labor costs and can divert attention from other business operations.
4. Increased Processing Fees: High chargeback ratios can lead to increased processing fees from payment processors. Merchants with excessive chargebacks may be classified as high-risk, resulting in higher transaction fees or even termination of their merchant account.
5. Penalties and Fines: Card networks like Visa and Mastercard impose penalties on merchants with high chargeback rates. These penalties can escalate quickly, adding substantial financial burdens.

The Impact of Pre-arbitration and Arbitration Fees

1. Pre-arbitration Costs: While pre-arbitration offers one last chance to resolve disputes before arbitration, it can still be costly. Merchants might need to pay for additional evidence collection or legal advice to strengthen their case.
2. Arbitration Fees: If a dispute proceeds to arbitration, the costs can be substantial. Losing an arbitration case can result in fees ranging from several hundred to thousands of dollars, depending on the complexity of the case and the card network involved.

Mitigating Financial Risks

1. Proactive Dispute Management: Develop a robust system for monitoring and responding to chargebacks promptly. Ensure all transaction documentation is accurate and readily accessible.
   
2. Fraud Prevention Tools: Utilize advanced fraud detection and prevention tools. This includes Address Verification Service (AVS), Card Verification Value (CVV) matching, and employing machine learning algorithms to identify suspicious transactions.
3. Clear Communication: Ensure clear and transparent communication with customers regarding transaction terms, return policies, and customer service contact information. This can reduce misunderstandings that lead to chargebacks.
4. Professional Assistance: Consider hiring chargeback management professionals who can provide expert guidance and support. They can help in establishing effective dispute resolution processes and offer insights into reducing chargeback occurrences.
5. Regular Analysis: Conduct regular analysis of chargeback data to identify patterns and causes. Use this data to refine business practices, improve customer service, and enhance fraud prevention measures.

Breaking Down Visa's Pre-arbitration Process

Under the rules of Visa Claims Resolution, disputes proceed through an “allocation” workflow for disputes related to fraud and authorization issues, while merchant and processing error disputes go through a “collaboration” workflow. Pre-arbitration works slightly differently in each of these two workflows.

The allocation workflow is rules-based, which means that Visa will automatically render a decision on the dispute and merchants have only 30 days and certain conditions under which they can challenge the decision.

This is considered the pre-arbitration phase under allocation, even though it’s the merchant’s first opportunity to represent the charge.

Under the collaboration workflow, the merchant can submit evidence in representment once they receive notification of the dispute. If the issuer declines the representment, pre-arbitration is the next phase in the process, in which the acquirer can choose either to give up on fighting the dispute or request arbitration from the card network. The collaboration workflow closely resembles Mastercard’s process for all chargebacks.

• Don’t use misleading or exaggerated marketing copy in your ads or product listings
• Employ fraud prevention tools and AVS/CVV matching to prevent fraud
• Provide excellent, attentive, and knowledgeable customer service
• Make sure your terms, conditions, and return policies are clearly communicated

When you get to the point of having to decide whether to keep fighting through pre-arbitration, it’s worth making a realistic assessment of your chances of winning. For second chargebacks tied to Mastercard transactions, you will not be debited a processing fee. With Visa, you will pay a chargeback fee of $15 on pre-arbitration disputes whether you win or lose.

You should also keep in mind that arbitration fees are costly. It's often best for merchants to accept a second reversal rather than going through the arbitration process. The losing side in arbitration must pay a fee of several hundred dollars. For the sake of your business and your bottom line, try to only take on second reversals you are confident you can win.

When in Doubt, Turn to the Chargeback Experts

Dealing with pre-arbitration can be a complicated and difficult process, and it can be hard to know which chargebacks to challenge and which to accept. This is where hiring professionals can be a helpful solution.

In addition to creating custom dispute packages that give you a better chance of winning disputes in the first place, the best chargeback management companies will provide you with in-depth data about the chargebacks that went to pre-arbitration and what the result was.

This data can be used to analyze the ROI of these cases and determine whether the merchant is contesting too many pre-arbitrations or too few. In one recent case, Chargeback Gurus analyzed dispute data from a company that felt they were handling pre-arbitration cases very effectively, winning the majority of disputes in arbitration. However, a closer look at the data showed that the company was actually losing revenue on these cases overall, since the fees from a single loss wiped out the gains from many wins.

That's why Chargeback Gurus uses purpose-build AI models to analyze the winnability of each case, only contesting pre-arbitration chargebacks that are likely to generate a positive ROI. Through a combination of expertise and technology, CBG helps merchants win more disputes and reduce revenue losses.