Chargeback Arbitration: The Last Step in the Dispute Process
Chargeback arbitration is a pretty useful process, but is it always worth the costs associated with it?
Explore what arbitration is and when to use it in this article.
Disputes that resolve in chargebacks are a particularly dangerous thing for any merchant, which is why chargeback prevention is so important. Yet, to reliably protect your businesses from dispute, you need to understand its process. Thus, today, we will talk about chargeback arbitration, how it works, and how to prevent it.
What Is Chargeback Arbitration?
First of all, let us figure out what chargeback arbitration actually is. So, basically, chargeback arbitration is the final step in the payment dispute. It is a formal hearing where a third party (card networks like Mastercard, Visa, American Express, etc.) reviews the evidence from both parties and makes the final decision. In fact, just like chargebacks are helpful for customers, the arbitration process is a rather useful feature for merchants since it helps resolve complex disputes, prevent fraud, and ensure fairness of the final dispute resolution. At the same time, unfortunately, chargeback arbitration does not relieve merchants of their obligations to pay dispute fees even if they win one. On the bright side, the arbitration fees are levied against the losing party. All in all, it’s still best to prevent chargebacks and avoid chargeback arbitration if possible.
What Purposes Does Chargeback Arbitration Have?
Obviously, chargeback arbitration exists out of necessity, so what purposes does it have then? Well, here are the main reasons why the chargeback arbitration process was implemented into the dispute procedure:
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Complex disputes resolution
Some disputes cannot be resolved due to conflicting evidence or intricate details. In such cases, an unbiased third party is the one way to come to a fair solution.
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Fraud prevention
The arbitration process helps protect both merchants and customers from credit card fraud since it provides an unbiased dispute resolution. -
Ensuring fairness
Arbitration is done by a third party that does not benefit from any type of dispute resolution, meaning the decision will be fair and just.
As you can see, the chargeback arbitration process is a much-required procedure that aims at preventing fraud from both parties and making fair dispute outcomes, and it’s definitely worth its fee.
Why Do Arbitration Chargebacks Happen?
Arbitration is not a regular step in each and every dispute. As a matter of fact, chargeback arbitration only occurs when a transaction dispute between a merchant and a customer cannot be resolved through the regular chargeback process. This happens for a variety of reasons, including the following:
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Conflicting claims
In many cases, the customer and the merchant have conflicting claims regarding the transaction. This usually happens because of various misunderstandings and issues or disputes over the quality of the product or service. -
Fraud
A pretty large amount of disputes happen due to fraud from one of the parties, for example, when a customer falsely claims they did not receive the goods or when a merchant charges customers for services they never provide. In this case, the chargeback arbitration process will help determine fraudulent activity and resolve the dispute fairly.
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Insufficient evidence
Sometimes, merchants fail to provide enough evidence to prove the legitimacy of the transaction, which often occurs due to unclear communication, missing documentation, or other factors. -
Merchant error
Apart from all of the above, chargeback attribution also happens due to merchant errors. For instance, when a merchant shipped the wrong item or charged the wrong amount of money. In this case, the attribution process helps fairly resolve the dispute. -
Complex transactions
Certain transactions, like subscription services fees or international payments, are more complex than they seem at first sight, especially when it comes to disputes. So, the chargeback attribution process is required to deal with disputes on such charges.
The reasons why the chargeback attribution process exists might be different, but it serves one particularly important cause, which is protecting merchants and customers from fraud and resolving disputes fairly.
The Chargeback Arbitration Process
Now we know what the chargeback attribution process is and why both merchants and customers need it, but how exactly does it happen, and what steps does it include? Let’s take a look at the breakdown of the chargeback attribution process.
Step 1: Dispute initiation. The customer contacts their card issuing bank and initiates a transaction dispute, claiming they did not make a transaction, did not receive goods, were charged the wrong amount, etc.
Step 2: Merchant investigation. The card issuing bank contacts the merchant, the merchant investigates the claim and provides the evidence to the issuing bank.
Step 3: The issuing bank’s decision. The card issuing bank decides whether the transaction is valid (whether to reverse the transaction or return the funds to the merchant).
Step 4: Arbitration request. In case the credit card dispute remains unresolved, either party can initiate the chargeback arbitration process.
Step 5: Evidence submission. The third party (Visa, Mastercard, American Express) steps in, and both merchant and customer submit their evidence.
Step 6: Hearing. The credit card chargeback arbitration hearing takes place, and the arbitrator reviews the evidence.
Step 7: Resolution. The arbitrator makes the final, unbiased decision and resolves the dispute.
Either Mastercard, American Express, or Visa chargeback arbitration procedures are pretty similar and have the same goals. Yet, we still want to emphasize that, in any case, it is still better to prevent chargebacks, even if you end up winning after the arbitration chargeback.
Chargeback Arbitration Fees
Despite the fact that a successful arbitration does not oblige merchants to pay a dispute fee, chargeback arbitration still costs money. As a matter of fact, a chargeback arbitration fee may vary from $100 to $250 per action, which is quite a lot of money, and it’s often more than the original transaction (which makes it pointless to proceed with the arbitration process in many cases).
In general, an arbitration fee consists of the following smaller fees that include:
- Merchant fees: filing, administrative, and hearing fees.
- Consumer fees: filling and reimbursement fees.
Of course, the specific chargeback arbitration fees and their amounts vary depending on the payment processors (Visa, Mastercard, etc.) and the arrangements they have with banks and merchants. However, as we have already mentioned above, on average, a chargeback arbitration fee is about $100-$250, which makes certain transactions not worth the entire process. For instance, we all know that Visa is one of the most expensive payment processors in the world, and Visa arbitration fee is $500 for any cases ruled in favor of the cardholder. In other words, in the majority of cases, it is better to refund a customer without proceeding with a dispute and consequent arbitration.
When You Should & Shouldn’t Use Arbitration
As we have mentioned above, there are some cases when proceeding with the chargeback arbitration process is pointless, but when exactly should you and should you not apply for a chargeback arbitration? Let’s talk about that in more detail.
Cases Worth Chargeback Arbitration
Let’s start with the situations when it is absolutely worth proceeding with the dispute and starting a chargeback arbitration process, and those include:
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Complex disputes
Some disputes just cannot be resolved without a third party, and this is when chargeback arbitration becomes handy. -
Disputes on large transactions
When a customer disputes a large charge, for example, a transaction over $1K, it is definitely more reasonable to proceed with the chargeback arbitration process, even if it will cost you $200 in fees. -
International disputes
Apart from that, chargeback arbitration will be useful in international disputes since it avoids the complexities of international litigation. -
Specialized arbitrators
Finally, the chargeback arbitration process helps industries with specific expertise where arbitration can be a way to resolve disputes by individuals who have a deep understanding of the subject matter. -
Suspected fraud
If you are sure that a customer issued a fraudulent chargeback, arbitration will save you from losing revenue.
These are the main cases when chargeback arbitration is worth all the struggles and fees associated with it. In all the other cases, it is safe to say that arbitration is not a must.
Cases Aren’t Worth Chargeback Arbitration
There are a lot of cases when the arbitration process is worth its fees, but what about the situations when you can do without it? Well, below are some examples:
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Small claims
Chargeback arbitration is pretty expensive, so proceeding with this process is pointless for small transactions. -
Class action lawsuits
Such lawsuits often involve a large number of plaintiffs and complex legal issues, making them more suitable for litigation. -
Public interest cases
Cases that involve important public policy issues are usually more suitable for litigation since that helps ensure public scrutiny and accountability. -
Criminal cases
Arbitration will not work for criminal cases, which must be resolved through the court system.
Certainly, in the majority of cases, the most important reason not to proceed with chargeback arbitration is the amount of transaction, meaning it’s more reasonable to refund a $10, $50, or even $100 transaction than pay $200 in arbitration fees.
Preventing Arbitration Chargebacks
We have already come to the conclusion that arbitration is not always a solution for merchants, but what is then? How are merchants supposed to protect their revenue without arbitration? Well, the easiest way is by means of a merchant chargeback prevention system.
Modern chargeback protection systems use AI technologies that prevent disputes from resolving in chargebacks and therefore eliminate the need for initiating an arbitration process. These systems are pretty affordable and easy to install; moreover, some chargeback prevention alerts, like Ethoca and Vefifi, are available within Germius CRM, meaning integrating them into your business website is easier than ever.
Certainly, chargeback prevention alerts are not the only solution. In fact, it’s best to solve the problem comprehensively and use the following tips as well:
- Clear communication with your customers regarding your services and policies
- Available customer support service that will ensure that in case of any issue, a customer will reach out to you first instead of issuing a chargeback
- Using secure payments and up-to-date payment verifications
- Providing order confirmations and order updates for your customers
- Making sure the delivery of your services is timely
- Verifying customer information
Using reliable chargeback prevention alerts, as well as the abovementioned tips, will significantly reduce the number of disputes and the necessity for arbitration, which will eventually result in revenue growth.
Conclusion
Chargeback arbitration is indeed a useful feature that can protect you from losing revenue. At the same time, arbitration is pretty expensive, and it’s not always worth all the fees associated with it, which is why preventing chargebacks and consequent arbitration is often more reasonable. In any case, we hope that this article was useful for you and you learned more about such a useful process as arbitration.
