What is Chargeback Arbitration?

Chargeback Arbitration

Chargebacks were developed as a consumer protection system that gives cardholders the right to dispute credit card transactions. But if a merchant feels the chargeback has no merit, they can challenge it through representment. Although most merchants hesitate to fight chargebacks, the process presents an opportunity to learn key information that’ll help you prevent future chargebacks and get back your money. Unfortunately, the process isn’t as easy. In some instances, you might win the chargeback only to receive a second chargeback that throws you into pre-arbitration and maybe arbitration. 

Let’s review these chargeback phases to help you understand what you can do to win.

Understanding the chargeback process

Chargeback processes vary between card networks, but there are three primary phases:

  • Representment
  • Pre-arbitration
  • Arbitration

The chargeback progresses into a new phase when neither the issuing bank nor the merchant accepts liability. A cardholder sets the ball rolling by filing a dispute with their bank. The bank reviews the case and, if it has merit, notifies the merchant of the dispute. The merchant can decide to accept the chargeback or fight it in the representment phase. 

The merchant submits evidence that proves the chargeback has no basis in this phase. On receipt of the evidence, the issuing bank decides whether to reverse or uphold the chargeback. If the chargeback is reversed, the cardholder can dispute the charge a second time by presenting new evidence. The issuing bank accepts the new dispute as a secondary chargeback and goes into the pre-arbitration stage.  

Pre-arbitration explained

Pre-arbitration (pre-arb) is the final opportunity for a merchant and issuing bank to settle the chargeback before proceeding to arbitration, where the card network acts as the judge and makes a final ruling on the chargeback. 

Often pre-arbitration is started by the issuing bank, although the acquiring bank can start it on behalf of the merchant. In this phase, a merchant can;

  • Accept the chargeback, and the cardholder is refunded in full 
  • Request arbitration 

What is chargeback arbitration?

An Arbitration chargeback is like a trial. If the party that requested arbitration is the plaintiff, the other the defendant and the card network plays the judge. The winner keeps the transaction amount, and the loser covers the fees. Visa charges $500 for filing and review, while Mastercard charges $400 in total. Because of the high fees, requesting arbitration only makes sense when the chargeback amount is high. 

It’s difficult for merchants to win arbitration cases since they usually have already submitted all their evidence on the case in the representment stage. 

Arbitration time limits

Both acquirers and issuers must stick to stringent time limits when filing and responding to arbitration chargebacks. Because of this, merchants have to work with even shorter deadlines. For instance, Mastercard and Visa give acquirers and issuers 45 days and 10 days, respectively, to file for arbitration. 

To keep the deadlines, the merchant should submit the documents earlier, preferably before 22 or 5 days elapse. This gives issuers and acquirers sufficient time to review, submit and request for extra documents if needed. 

Can a merchant appeal a chargeback?

The rules of arbitration appeals vary between card networks. Below is an overview of Mastercards and Visa’s arbitration appeal requirements. 

Mastercard arbitration appeal

A merchant can file an arbitration appeal if they requested the arbitration. The appeal costs $500 for administration and re-filing and should be filed within 45 days of Mastercard’s ruling. The relevant documents should be sent to Mastercard by courier or postal mail. 

Along with the documents the merchant sends, they must explain to the Chief Franchise Integrity Officer why they should reconsider the ruling. The merchant’s appeal will be rejected if any documentation is improperly filed. The decision made during the appeal is final, and there’s no higher recourse. 

Visa’s arbitration appeal

The loser in the arbitration phase has 60 days from the ruling to file for an appeal. To qualify for an appeal, you should be the arbitration chargeback loser and:

  • The disputed amount is $5,000 or higher
  • New evidence that wasn’t used in the original case has emerged

No subsequent appeals are possible.

Prevention is the best safeguard.

Prevention is the best safeguard

An arbitration chargeback prolongs the chargeback process and adds more responsibilities and costs to the merchant. Merchants should only consider arbitration as a last resort and when the numbers make sense. Outside of these parameters, you should avoid arbitration. 

To help you tackle the difficult arbitration process, hire an expert chargeback mitigation service like Justt, which can help you keep what you earn. With their help, the vast majority of your chargebacks will be recovered without going to arbitration and the overwhelming majority of the arbitration cases you fight will end in victory.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.