Visa's Chargeback Pre-Arbitration Process
Table of Contents
- What Does a Chargeback Mean?
- What is Visa Chargeback Arbitration?
- What is Pre-Arbitration for Visa Merchants?
- Why is Pre-Arbitration Tough on Merchants?
- Assessing the Evidence (Formal and Informal)
- Breaking Visa's Pre-Arbitration Process Down
- Are There Alternatives to Pre-Arbitration?
- Frequently Asked Questions
Pre-arbitration is a newer phase of the chargeback process for many networks. In it, card networks can avoid entering a chargeback dispute through arbitration by providing cardholders and merchants an additional chance to work through their dispute.
Arbitration is typically seen as the path of last resort, so merchants are well-advised to ensure that they can settle a chargeback dispute in first or second representment.
Pre-arbitration is not a standard part of dealing with chargebacks, but rather a distinct procedure typically only applicable to Visa cards. Centered on a second chargeback or second reversal of a disputed transaction, pre-arbitration is a formal procedure to clarify whose claim has standing.
Pre-arbitration can be one of the most confusing steps in the chargeback process, not least because Visa is the only card network that uses this particular terminology.
What Does a Chargeback Mean?
Pre-arbitration refers to the part of the process when the issuer, or their customer, disputes the merchant’s representment and sends the case to the card network for a final decision in arbitration. Only Visa calls this “pre-arbitration” in their official documentation, but it’s common shorthand in the payments industry for the formal procedure to clarify whose claim has standing on the second reversal of a disputed transaction.
What do merchants need to know about navigating pre-arbitration, second chargebacks, or whatever you want to call them?
What is Visa Chargeback Arbitration?
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.
Their are instances, however, where both the merchant and the issuing bank have reached a stalemate where neither part feels they can resolve the problem. At this point, they can turn to the credit card network to help them by making an impartial decision.
Arbitration is typically considered the last resort for both parties because card networks will typically favor what works best for the card network, which usually means making the customer happy.
Before it gets to this point, however, there is a phase called pre-arbitration where the cardholder can try to push through a dispute once again.
What is Pre-Arbitration for Visa Merchants?
Although the ruling fell in favor of the merchant the first time, the merchant almost never wins on a second reversal. While new and compelling evidence can potentially aid a merchant, it can be difficult to muster new information for an old case.
There are various reasons why issuers might bring a claim to pre-arbitration (or its analogous processes). 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. They might find the representment evidence unconvincing. They might find that the merchant did not disclose pertinent terms and conditions when the transaction took place.
Both card networks have reason codes that turn into second chargebacks more frequently than others:
- 4837 No Cardholder Authorization
- 4853 Not as Described or Defective Merchandise
- 4855 Non-Receipt of Merchandise
- 4859 Services Not Rendered
- 4860 Credit Not Processed
- 4 Other Fraud—Card Absent Environment
- 1 Services Not Provided or Merchandise Not Received
- 2 Cancelled Recurring Transaction
- 3 Not as Described or Defective Merchandise
- 6 Credit Not Processed
Merchants and their acquirers can challenge second chargebacks if they have valid cause, such as an invalid reason code change or new evidence.
Why is Pre-Arbitration Tough on Merchants?
The idea here 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. While new and compelling evidence can potentially aid a merchant, it can be difficult to muster new information for an old case. Issuers, on the other hand, often enter into pre-arbitration because they have found new evidence that favors their customer’s claim.
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 (Formal and Informal)
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 while 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. Also take a look at the signature. While packages are often signed for by someone else, and while a signature may be forged or illegible, a signature that matches the buyer information can support your claim as a merchant.
Breaking Visa's Pre-Arbitration Process Down
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 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 representment, with evidence, 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—just keep in mind that Mastercard doesn’t use the term “pre-arbitration.”
Are There Alternatives to Pre-Arbitration?
Pre-arbitration is the only way to continue fighting back against a chargeback that has already occurred and has been upheld by the issuer. The alternative to pre-arbitration is the same methodology you’d use to avoid any chargeback:
- 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. Beware of Mastercard’s filing fees—it is often best for merchants to accept a second reversal rather than going through a second arbitration process. The losing side in any Mastercard arbitration is debited a $400 filing fee. For the sake of your business and your bottom line, try to only take on second reversals you are confident you can win.
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.
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