The Process of Pre-Arbitration Chargeback

Successfully contesting a chargeback through representment requires meticulous record-keeping, strong evidence, and a compelling argument. Ideally, the bank's decision on the representment would bring the dispute to a close. However, if the cardholder or the issuing bank remains unconvinced and presents new evidence, they can challenge the initial decision. This action, known as a “pre-arbitration,” effectively reopens the dispute, temporarily reversing the funds to the cardholder.

Pre-arbitration cases can be more complex and costly than the initial chargeback. However, understanding their nature, how they arise, and effective mitigation strategies can help merchants navigate this challenging phase of the dispute process.

Pre-arbitration is not a type of chargeback. It's a separate stage within the dispute resolution process that occurs after an initial chargeback has been resolved. The issuing or acquiring bank initiates pre-arbitrations upon receiving new evidence or arguments from the cardholder. They effectively reopen a previously resolved dispute, potentially leading to additional costs and delays for the merchant. Understanding pre-arbitration is crucial for merchants to manage chargeback risks and minimize financial losses effectively.

Pre-arbitrations: Why Do They Occur?

Pre-arbitration chargebacks arise when the cardholder or the issuing bank presents new evidence that challenges the merchant's initial response to the chargeback. This new evidence may demonstrate that the merchant omitted crucial information, submitted false or misleading evidence, or made significant errors in their original representment package.

Once a dispute reaches the pre-arbitration stage, merchants face a critical decision: accept the chargeback or escalate the matter to arbitration. Escalating to arbitration carries significant risks. Firstly, the decision rendered by the card network during arbitration is generally considered final, with limited recourse for the merchant. Secondly, arbitration fees can be substantial, including a $1,000 fee for appealing a decision.

Given the potential costs and limited avenues for appeal, proactive chargeback prevention strategies are highly recommended. By implementing robust fraud prevention measures, enhancing customer service, and ensuring clear and transparent transaction processes, merchants can significantly reduce their exposure to chargebacks and minimize the likelihood of encountering pre-arbitration disputes.

Pre-Arbitration, Arbitration, Second Chargebacks: Key Peculiarities

Although technically distinct, the term “second chargeback” is often used interchangeably with “pre-arbitration.” While most card networks now follow Visa's terminology, “second chargeback” remains prevalent in some circles.

• Pre-arbitration occurs when an issuing bank or the acquirer challenges an initial chargeback decision. It essentially reopens the dispute, allowing for further investigation and submission of evidence.
• Arbitration: When pre-arbitration efforts fail to resolve the dispute, arbitration is escalated. In this stage, a representative from the card network acts as an impartial judge, reviewing the evidence and rendering a final decision.

Essentially, pre-arbitration is a secondary challenge to the initial chargeback decision. At the same time, arbitration is the final stage in the dispute resolution process, where the card network intervenes to resolve the matter.

Pre-Arbitration Claims, Explained

The pre-arbitration phase within the Visa dispute resolution process varies depending on the nature of the dispute:

• Fraud and Authorization Disputes:
  In cases involving fraud or authorization errors, pre-arbitration follows immediately after the initial dispute is filed.
• Consumer and Processing Error Disputes:
  For disputes related to consumer issues or processing errors, pre-arbitration occurs after the merchant submits a response to the initial dispute.

Regardless of the dispute type, pre-arbitration always follows the representment stage. This means that all other phases of the dispute process must be completed before a pre-arbitration can be initiated. Visa utilizes two distinct workflows for dispute resolution:

• Allocation Track:
  This track handles disputes related to fraud and authorization issues.
• Collaboration Track:
  This track addresses consumer and processing error disputes.

Understanding these two workflows is crucial for effectively navigating the pre-arbitration process and developing appropriate strategies for each type of dispute. By recognizing the specific workflow applicable to a particular dispute, merchants can better anticipate the timing and potential outcomes of the pre-arbitration phase.

Pre-Arbitration in the Allocation Workflow

The Allocation Workflow is designed for fraud-related or authorization-related claims. In these cases, Visa employs a set of established rules to assess the validity of the dispute and assign responsibility automatically. This streamlined process, often called the Allocation Track, utilizes automated decision-making systems.

Step 1: Initial Transaction
The initial transaction occurs between the merchant and the cardholder.

Step 2: Dispute Filing
The cardholder files a dispute with the issuing bank, alleging fraud or an unauthorized transaction.

Step 3: Visa Assessment
Visa analyzes the dispute based on its established rules. Invalid claims are immediately dismissed.

Step 4: Dispute Forwarded to Merchant
Valid disputes are forwarded to the merchant.

Step 5: Pre-Arbitration
The merchant's bank can submit evidence to challenge the cardholder's claim.

Step 6: Visa Decision
Visa reviews the evidence and renders a decision.

If the bank's challenge is unsuccessful, the merchant has a limited window to appeal the decision. This appeal window is typically short, often restricted to 30 days or less, and the timeframe may vary depending on the specific acquirer's policies.

Pre-Arbitration in the Collaboration Workflow

The Collaboration Workflow is designed for consumer disputes or processing errors. This approach emphasizes collaboration and communication among all parties involved.

Step 1: Initial Transaction
The initial transaction occurs between the merchant and the cardholder.

Step 2: Dispute Filing
The cardholder or the issuing bank initiates a dispute regarding the transaction.

Step 3: Merchant Response
The merchant submits a "representment" to the issuing bank, including evidence to support the transaction's legitimacy.

Step 4: Pre-Arbitration Attempt
The issuing bank reviews the merchant's representment. If the issuer rejects the representment, a "pre-arbitration attempt" is initiated.

Step 5: Acquirer's Pre-Arbitration Decision
The merchant's acquiring bank can either accept the issuer's decision or challenge it.

Step 6: Arbitration
If the acquirer challenges the issuer's decision, the dispute escalates to Visa arbitration for a final decision.

The Collaboration track prioritizes a collaborative approach, encouraging open communication and proactive problem-solving among all parties. This approach aims to expedite the resolution process while minimizing the need for direct Visa intervention and preserving valuable customer relationships.

Is It Possible To Win Pre-Arbs?

While it's certainly possible for merchants to win pre-arbitration disputes, the odds of success are not always favorable. Pre-arbitration often arises when the issuing bank or cardholder presents new evidence, potentially challenging the merchant's initial defense. Merchants may have already presented their most substantial evidence during the initial representment phase, making it difficult to provide compelling new arguments. Card networks often prioritize consumer protection and may favor the cardholder, even in cases where the merchant believes they are in the right.

Furthermore, pursuing pre-arbitration and potential subsequent arbitration can be expensive. Merchants may incur significant costs in terms of legal fees, expert witness testimony, and the time and resources dedicated to preparing and presenting their case. Given the potential costs and the uncertainty of the outcome, the success rate for merchants in pre-arbitration disputes can be relatively low.

Considering the potential costs and the uncertainty of the outcome, merchants should carefully evaluate the potential benefits of pursuing pre-arbitration. The costs and risks may often outweigh the possible rewards, especially for smaller chargeback amounts.

Avoiding Pre-Arbitration: The Key to Success

Navigating the chargeback dispute process, particularly when it involves representment and pre-arbitration, can significantly burden merchants. These stages are often time-consuming and expensive, with limited prospects for success. The complex nature of the process, involving multiple parties and constantly evolving regulations, can be overwhelming for businesses to manage independently. Instead of expending resources on potentially unsuccessful representments and pre-arbitrations, merchants should prioritize proactive strategies to prevent chargebacks from occurring in the first place.

Germius offers customized chargeback management solutions to help businesses navigate the entire chargeback lifecycle. By effectively managing chargebacks, merchants can minimize financial losses, improve operational efficiency, and refocus their attention on core business activities, driving growth and sustainability.