Chargeback Pre-Arbitration and Arbitration

A chargeback has a complex and murky process. But it can lead to what is called pre-arbitration. Think of it as the ghost of a second chargeback—it emerges after the original chargeback and makes another attempt to steal your revenue. Its outcome depends on the dispute and the outcome of the original chargeback.

If the cardholder or issuer loses, they can file for arbitration chargeback—a whole other story for another time.

Pre-arbitration is fairly vague. So it will require some interpretation to figure out how it functions.

The life and afterlife of chargebacks

Each card network has its own approach for handling disputes. The terms may be different, but the process remains fairly unchanged. These are the phases:

Level 1/Phase 1: Retrieval request or first presentment

Level 2/Phase 2: Chargeback

Level 3/Phase 3: Second presentment, second chargeback, or pre-arbitration

Level 4/Phase 4: Arbitration

Pre-arbitration gives the acquirer and issuer another chance to resolve the customer dispute. This phase doesn't involve the card networks to make a final decision. First Data says pre-arbitration allows the chargeback case to be reviewed on the ‘merit of reasonableness’. So, was the original chargeback reasonable?

What are the causes of pre-arbitration?

An issuer may issue pre-arbitration for several reasons, including:

• A reason code change
• The cardholder offers new information
• The issuer believes the acquirer's evidence does not disprove the dispute
• Terms and Conditions, and maybe Return Policies, that weren't properly disclosed during the transaction

There are several dispute reason codes that are associated with pre-arbitration:

Responses to pre-arbitration

The merchant and acquirer can respond to the issuer’s pre-arbitration, but only if it's based on the following grounds:

• Invalid reason code change
• Both parties have valid evidence to remedy the new reason code
• Evidence was provided for the initial chargeback and it adequately remedied the dispute
• New information was not provided by the issuer

Avoiding pre-arbitration

It's crucial to confront pre-arbitration, but it's just as crucial to avoid it in the first place. There are practices for chargeback prevention that can be easily used to avoid this nightmare. Some include:

• AVS, CVV, and other fundamental fraud prevention solutions integrated into your checkout process
• Accurate and robust product descriptions
• Highly trained customer service advocates/employees
• Transparency in provision of return policies and procedures

Basically, pre-arbitration is a second chance for merchants to prove their innocence. It's always best to keep your records straight and transparent. That'll give you a head start to protect your business. You'll be able to prevent chargebacks along the way. Now, let’s talk about the arbitration process.

What is arbitration chargeback?

Arbitration chargeback is like a court trial. If the cardholder filed for this motion, that makes him or her the plaintiff and you the defendant. The card network is the judge, and they will review all the documents presented beforehand in order to know how both parties could not reach a consensus to dispute resolution.

In its basic definition, arbitration chargeback allows merchants and cardholders to take a final stand and claim the resolution, whether it is a chargeback or a chargeback reversal, should be overturned. Arbitration chargeback is the phase after pre-arbitration, and that was when it only consisted of the cardholder, issuing bank and the merchant. Arbitration chargeback brings in the card network to make a decision. The losing party will have a chance to challenge the decision, but that will be an expensive process (as we will explain below).

The process of arbitration chargeback is relatively similar across all card networks. But each card network will have its own unique spin (and terminology) in its own process. We will explain the arbitration chargeback process within two prominent card networks: Visa and MasterCard.

Time limits to file for arbitration chargeback

There are explicit time limits issuers and acquirers must meet in order to file for and respond to arbitration chargeback. And there are implicit time limits for merchants to take either action. For example, MasterCard gives issuers and acquirers 45 days to file for this action. But they need to have your documents submitted well-before that in order to thoroughly review and submit it via MasterCom.

It is advised to give you and your acquirer a ‘buffer’ in order to make sure your filing (or response) meets the 45-day time limit. You should expect your time limit to be a maximum of 22 days. That will give your acquirer or processor more than enough time to ask for additional documents from you, if needed.

Visa is another (and much shorter) story when it comes to time limits. Issuers and acquirers will have a 10-day time limit to either file for or respond to arbitration chargeback. You can expect your time limit to be shorter as your acquirer reviews your information. You can use the following table as a reference. With the time limits in mind, we will explain what is involved in arbitration chargeback. We will first start with MasterCard.

Arbitration chargeback: MasterCard

First of all, all arbitration cases are submitted and managed through the Case Filing application within MasterCom. Here, MasterCard uses two terms to distinguish the ‘plaintiff’ and the ‘defendant’ during arbitration chargeback. The party that files for this action is referred to as the “Filing Customer,” and the party receiving this action is referred to as the “Filed-Against Customer.” Here is a direct quote from MasterCard’s Chargeback Guide that sets the tone for the Filing Customer:

“The Filing Customer is responsible for ensuring that legible copies of all relevant* documentation is linked to the case filing. This means entering the chargeback reference number and confirming that all previously provided Supporting Documentation (as described in the individual reason codes) links to the case.”

– MasterCard Chargeback Guide (2018, p. 229)

If the Filing Customer does not have an existing chargeback reference number (or if there isn’t one to link the Supporting Documentation), he or she can provide a thorough description of the case’s circumstance. Make sure the description is written in chronological order. You will still need to attach all “previously provided” documentation into the MasterCom Case Filing application. This application can be accessed once you create a Master Connect account. The Filing Customer can withdraw from arbitration chargeback at any time before MasterCard makes a decision.

What if the merchant is the filed-against customer?

Let us say that the cardholder filed for arbitration chargeback. There are three actions you can take:

Action #1

You can reject the cardholder and/or issuer’s case by submitting a rebuttal with relevant documentation. You need to use the Case Filing application within MasterCom, and you must submit it within 10 days of the date when the arbitration chargeback was filed.

Action #2

You are free to accept the case, which makes you liable for arbitration chargeback.

Action #3

You can take no action. MasterCom will automatically change your status as “Rejected.” MasterCard will still review the cardholder and/or issuer’s case and determine whether it should move forward.

The group that actually reviews the case is MasterCard’s Dispute Resolution Management team. The Filing Customer’s case for arbitration chargeback may be reject on the following grounds:

• There was insufficient documentation to allow MasterCard to rule on the case and assign responsibility for the disputed amount
• The case was filed beyond the appropriate filing period (i.e., over 45 days)
• The documentation was either not in English or it did not include an English translation

The Filing Customer will be able to correct any deficiencies that lead to their case being rejected. But they will need to pay another filing fee (more details below).

Supporting documentation when merchants are filed-against customers

The supporting documentation needed to challenge arbitration chargeback is similar to a chargeback response. In fact, you are basically resubmitting all documents that were previously involved in the dispute’s chargeback lifecycle(s). That means all documentation submitted from the last three phases (i.e., Phases 1 through Phase 3 from above) should be provided in your response.

The more relevant documentation you provide, the better your chances are to win against arbitration chargeback.

Review process under MasterCard

MasterCard will make a decision when one of the following events had occurred:

• 10 calendar days has passed from the filing submission date, and the Filed-Against Customer did not take action
• The Filed-Against Customer rejected the case for arbitration chargeback via MasterCom.

Fees: pre-review

As mentioned earlier, the Filing Customer may withdraw their application at any time before MasterCard makes a decision. But there is a withdrawal fee involved. Additionally, the Filed-Against Customer can accept the case for arbitration chargeback. But that customer will be liable for processing fees prior to review. Basically, the customer withdrawing or accepting the case will end up paying a total fee of EUR 300 for cases in the EU or USD 300 for all other cases. Here is a breakdown of this total fee:

Fees: declined review

This will only affect the Filing Customer. A decline to rule on a case will force this customer to pay EUR 150 for cases from the EU or USD 150 for all other cases. Here is where this fee comes from:

Fees: post-review

These fees arise when MasterCard’s Dispute Resolution Management team rules on the case. The customer that is found responsible for arbitration chargeback will end up paying EUR 400 for cases from the EU or USD 400 for all other cases. Additionally, the customer at fault may end up paying another EUR 100 or USD 100 for every additional violation of the dispute processing rules:

The customer that is not responsible for arbitration chargeback may have to pay the Technical Violation fee if they, too, were in violation of the dispute processing rules.

MasterCard arbitration appeals

You, as the merchant, can file for an appeal if they were the customer responsible for arbitration chargeback. But it will cost you EUR 500 for cases from the EU or USD 500 for all other cases. You will need to file the appeal within 45 days of the MasterCard ruling decision. But instead of submitting an application through MasterCard, you will need to send all documents by postal mail or by courier to the addresses below. The Chief Franchise Integrity Officer will be reviewing the appeal, along with the Dispute Resolution Management team. Here is what you need to do to file for an appeal:

• Only the Customer involved in the case can file for an appeal
• You will need a detailed explanation of why you believe the MasterCard decision should be reconsidered. You may include supporting documents that will justify an overturn. But no new facts unless it is requested by the Chief Franchise Integrity Officer.
• You need a printed document signed by the Customer’s Principal contract as detailed in Member Info—MasterCard or Membership Information—on Master Connect
• The documents must be sent (at the same time) by mail or courier to the Chief Franchise Integrity Officer and the Dispute Resolution Management team. In addition to the rigorous procedure above, you must send copies of the appeal and related documents to the cardholder and/or issuing bank. This includes:
• A copy of the delivery method
• Proof of date that the appeal was received by mail or the courier
• Your contact name and address

The review process of the appeal is much more direct. The appeal will be rejected if you improperly filed any documentation. There will be no other chance for resubmission. You must be prompt and fully comply if the Chief Franchise Integrity Officer has asked for more documents or any other action. The decision is final when it is made. There will be no chance for another appeal or any relatable action.

Arbitration chargeback: Visa

Visa simply refers to arbitration chargeback as arbitration. But arbitration can only be filed when the dispute has gone through pre-arbitration.

And that is just a prerequisite. You can then file for arbitration when one of the three scenarios occur:

• The opposing party has not followed the required steps of a chargeback or representment
• The chargeback and representment cycle is complete but no resolution has occurred
• The opposing party does not accept financial responsibility within 30 days after pre-arbitration has been filed

Supporting documentation for Visa

Here is the documentation needed for arbitration to (potentially) take effect:

• All documentation must be in English
• The filing party must provide all the information as listed in the Visa Resolve Online Questionnaire
• All relevant documentation that justifies arbitration

Now, heed our warning (as stated in Visa Core Rules):

“A Member [the party filing for arbitration] must not* submit documentation or information to Visa that was not previously submitted to the opposing Member.”

– Visa Core Rules (2018, p. 750)

Visa’s overall objective is to streamline and reduce the dispute process. That includes implementing additional tactics (i.e., new Visa reason codes) to prevent invalid disputes from being filed. In short, Visa is trying not to have disputes being dragged through the chargeback process, let alone arbitration. They want to have all parties reach consensus quickly and efficiently. And that means having everyone present their ‘cards’ to one another. The consequences may be drastic if you submitted documentation that was not made available to the cardholder or the issuer.

Fees for Visa arbitration

The exact dollar amount (and even the Euro amount) is not explicitly stated in Visa Core Rule. And it does not say whether the fees must be paid by the losing party or both parties. You can least expect the losing party (or parties) to pay fees that involve the following factors:

• Transaction amount
• Review fee
• Filing fee

Visa chargeback arbitration appeal

The losing party in arbitration has 60 days to file for an appeal. The time limit starts on date when the arbitration decision was made by the Arbitration and Compliance Committee. There are only two conditions that allow an appeal to be filedYou are able to apply for an appeal if the arbitration chargeback was not found in your favor. However, there are at least three things to consider if you decide to challenge the decision:

• The dispute amount is at least USD 5,000 (or local currency equivalent)
• The filing party can provide new provide new evidence not was not previously available when the original arbitration case was filed

Arbitration chargeback: the bottom line

In the end, the best solution to arbitration chargeback is to prevent disputes from being filed in the first place. That involves no excessive fees, no time wasted on an ‘ultra-chargeback’ phase, and no worry about lost revenue. That is why automated dispute management is more viable than ever for all merchants. Feel free to contact us to see how you can prevent your business from ever facing this hardship.