Visa Chargeback Pre-arbitration

Table of Contents

1. What Is a Chargeback?
2. What Is Chargeback Arbitration?
3. What Is Pre-arbitration?
4. Why Is Pre-arbitration Tough on 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

While fighting chargebacks through the representment process is a difficult task at the best of times, merchants who manage it are well-rewarded with recovered revenue and information that can be used to improve customer satisfaction and retention in the future. Seeing those lost funds appear in your merchant account once again can be incredibly satisfying. Unfortunately, that's not always the end of the story.

Just as you weren't satisfied with the transaction being reversed and fought to get your money back, sometimes the cardholder isn't satisfied with their chargeback being reversed, and fights to swing things back in their direction. If they can present new information or evidence that convinces the bank the chargeback was legitimate despite the documentation you provided, the bank might escalate the case to pre-arbitration.

Pre-arbitration can be one of the most confusing parts of the chargeback process. Here, the rules and terminology used by the different card networks can vary even more widely than usual. While most chargebacks will be considered resolved one way or the other after representment, it's important to know what to do when you find yourself in uncharted territory. Let's take an in-depth look at the Visa pre-arbitration process and discuss what merchants need to know to navigate it intelligently and effectively.

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.

During the chargeback process, there are several phases of back-and-forth between the merchant and the issuing bank. The exchange of information between the two parties usually doesn't involve the other parties unless, for example, the cardholder has been asked to provide additional information.

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.

There is one exception to this. In chargeback cases related to authorization errors or fraud, Visa will automatically analyze the transaction data and assign liability for the chargeback to either the issuing bank or the merchant, essentially automating the part of the process where the issuing bank would normally review evidence submitted by the merchant. Because of this, any further dispute of these chargebacks is considered to be initiating pre-arbitration.

There are various reasons why issuers might bring a claim to pre-arbitration (or an analogous process with another card network). They might learn new information from the cardholder that causes them to change the reason code or interpret the transaction details in a new light or discover that the merchant did not disclose pertinent terms and conditions when the transaction took place.

Regardless of the cause, once a chargeback enters pre-arbitration the merchant only has two options: accept liability for the chargeback or escalate the case to arbitration. Unfortunately, it's often correct for merchants to accept liability for these chargebacks even if they're sure the transaction was legitimate.

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 almost never 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.
3. Reputation Damage: Frequent involvement in pre-arbitration and arbitration can damage a merchant’s reputation with banks and card networks. This could lead to more stringent oversight and potentially higher fees or restrictions in the future.

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 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

Whether you’re a new merchant or an experienced hand, dealing with pre-arbitration can be a hassle you don’t need. This is where hiring professionals can be a helpful solution.

Some merchants think that it’s worth the risk to go without professionals. After all, for what it will cost to hire chargeback professionals to manage a pre-arbitration case, couldn’t you just swallow the expenses and move on?

Yes and no. When it comes to chargebacks, avoiding hassle and near-term costs aren't the only issues. This is also about protecting your reputation and improving your processes.

If you bring in chargeback professionals when you’re facing your first transaction reversals, they can help you to establish protocols that will prevent future reversals. You may lose your first few pre-arbitration rulings, but you will save your reputation with both customers and credit companies if you approach these cases with care.

In addition, the best chargeback management companies will provide you with data about the chargebacks that went to pre-arbitration and what the result was. They will also use this data, along with data from other merchants they work with, to improve their processes over time and learn the ins and outs of dealing with each individual issuer.