What is a Pre-Arbitration Chargeback & Why It’s Awful

I’ve wanted to dive deep into learning how pre-arbitration works in chargebacks and now I have an opportunity to do so. And I believe it’s critical for you to know this information.

I’ll cover the key differences between pre-arbitration and arbitration and explain why pre-arbitration is significant for merchants.

Let’s begin with what pre-arbs are.

Key Takeaways

• Pre-arbitration offers a chance to resolve disputes without proceeding to costly arbitration.
• These can take several weeks or months to win.
• It’s rare for a merchant to win these; though there are no published numbers.
• The pre-arbitration process will vary by card network.
• Mastercard charges a $15 fee to file a pre-arbitration.
• Merchants and cardholders can file one.
• These usually happen because of insufficient evidence.

Once pre-arbitration happens, there’s nothing you can do to prevent it. But you can prevent future chargebacks using chargeback alerts from Ethoca, CDRN, and RDR. We offer easy access to these alerts.

Learn how we can help.

What is a Pre-Arbitration Chargeback?

• How Long It Takes: Several weeks or months

A pre-arbitration chargeback (or pre-arb) is a dispute process before formal arbitration. It allows cardholders to contest charges and merchants to respond. This step aims to resolve issues without third-party intervention. If unresolved, the dispute may proceed to arbitration.

Basically, the customer is saying, 'I don't agree with the reason you gave for taking my money back. I want to fight it and change the rules of the game before we even get to the official decision-making process.

Acquirers can file these on behalf of merchants and issuers can file these on behalf of cardholders.

Some card networks might require fees to file pre-arbs. We’ll get into that in a bit.

Wait:

This is a “pre-”arbitration. What’s an “arbitration, then?

In short, it’s when a third party gets involved. But I’ll discuss the differences more in a bit.

How do we end up in pre-arbitration?

Summary: Step before arbitration that gives all parties another chance to solve the dispute.

Steps That Lead to a Pre-Arbitration Chargeback

The steps that lead to pre-arbitration chargebacks are:

1. Pre-Dispute: The cardholder disputes a transaction with their bank.
2. Chargeback Filing: The issuing bank reviews the case and files a chargeback.
3. Representment: The merchant disputes the chargeback by submitting evidence.

There’s too much nuance to the above steps to shove in this guide. You’ll need to read our guide on the chargeback process for more context.

You should know that not all chargebacks will have retrieval requests. Typically most American Express and Discover card chargebacks will have these. Visa, Mastercard, and other brands usually give you an immediate chargeback.

During representment, the issuer will decide who the winner is. If either party is dissatisfied and has additional evidence, they can escalate to a pre-arb.

Why does this happen, though?

Why Do Pre-Arbitration Chargebacks Happen?

Pre-arbitration chargebacks usually happen because of reasons like:

• New evidence: Cardholder or merchant submits new evidence that was unavailable during the first chargeback.
• Reason code change: Original chargeback reason changes, triggering a need to review the dispute again.
• Insufficient evidence: Evidence submitted earlier isn’t strong enough to resolve the dispute.

The reasons for pre-arbitration chargebacks will differ from regular chargebacks.

We discuss those in a different piece.

Most issuers won’t accept pre-arbitration requests from customers unless they can provide concrete evidence for their claims.

The evidence they’ll need to provide must poke holes in the seller’s evidence. If the merchant is filing the pre-arb, then vice-versa.

Let’s see what this would look like:

What Is a Pre-Arbitration Chargeback Example?

Here’s an example scenario of a pre-arbitration chargeback:

Sarah files a chargeback for $500 against an electronics store, claiming she never received the laptop she ordered. She provides screenshots showing the order confirmation and tracking number, which indicate a delivery attempt was made, but she never got the package.

The bank initially sides with Sarah. Issuing a chargeback to the merchant.

In response, the electronics store provides proof that the package was delivered to the address on file. Including a delivery confirmation from the shipping carrier with Sarah’s signature. The store also submits its policies, which show that responsibility shifts to the buyer after delivery.

After reviewing the merchant’s evidence, Sarah notices that the delivery signature on the proof doesn’t match hers.

She also provides evidence showing she was out of town on the delivery date. Sarah disputes the representment, filing a pre-arbitration chargeback, claiming the signature is fraudulent.

The bank accepts her new evidence, rejecting the merchant's representment and continuing the dispute process.

What Happens During Pre-Arbitration?

Pre-arbitration is a phase where banks try to resolve disputes without card networks. The acquirer and issuer review the case's merits. This step aims to avoid escalation to arbitration, offering a final chance for resolution.

Your payment processor (acquirer) will notify you of a pre-arbitration chargeback. They’ll generally do this through chargeback management dashboard and/or email.

During pre-arbitration, both parties will submit additional arguments and evidence that support their position.

The party initiating the pre-arbitratin must submit a pre-arbitration request. This will include all arguments and evidence. Ensure the evidence you submit will clearly prove your case. Otherwise, you’re wasting your time and a lot of money.

Pre-arbs are very serious.

Merchants will usually have within 30 days to respond to the pre-arbitration. It doesn’t matter whether you’re fighting the chargeback or accepting liability.

If you’re a cardholder, your issuer will tell you how long you have to submit a dispute.

Pay attention to your acquirer’s time requirements. Failure to respond within their time limit will result in an automatic loss of the chargeback process.

From there, the opposing party reviews the evidence and submits counterarguments.

After reviewing the evidence, both parties can decide whether to accept the other’s arguements.

For example, if a customer provided enough evidence to truly prove an order was legitimate, a merchant could refund them.

If neither party concedes, this’ll escalate to an arbitration.

You won’t see the same process when going through Visa chargebacks, though.

Summary: Both parties submit more evidence and see if they can come to an agreement.

Pre-Arbitration Chargebacks With Visa

Visa has 2 workflows in their chargeback process:

• Allocation: Deals with fraud and authorization issues.
• Collaboration: Handles processing and consumer problems.

These workflows were introduced during Visa Claims Resolution. Learn more about them here. For Visa’s general chargeback process, refer to this guide.

I digress:

1. Allocation:

The Allocation workflow typically automates dispute resolution for fraud and authorization issues. It uses data points to determine if a dispute is valid.

Here’s how the process would go:

1. Complaint/Validation: The cardholder files a complaint with their issuing bank, claiming the transaction was unauthorized or fraudulent.
2. Dispute: The issuing bank forwards the dispute to the acquirer (merchant's bank).
3. Pre-arbitration: The acquirer has up to 30 days to submit evidence to reverse the chargeback.
4. Pre-arbitration Response: If the issuing bank rejects the evidence, the dispute becomes a pre-arbitration response.
5. Arbitration: If pre-arbitration fails, the dispute escalates to arbitration, where Visa makes a final decision.

2. Collaboration:

Collaboration focuses on processing errors and customer disputes.

This workflow follows these steps:

1. Dispute: The cardholder or issuer disputes the transaction.
2. Dispute response: The merchant presents evidence supporting their claim.
3. Pre-arbitration attempt: If the issuer rejects the evidence, the case enters pre-arbitration.
4. Pre-arbitration response: The acquirer either accepts or declines the pre-arbitration attempt.
5. Arbitration: If unresolved, the issuer can request Visa to make a final decision.

The Collaboration workflow gives sellers more chances to defend themselves. The Allocation workflow tries to automatically assign responsibility based on predefined rules.

I’ve mentioned "arbitration," but let’s clarify how it differs from "pre-arbitration."

Pre-Arbitration vs. Arbitration vs. Second Chargebacks

Pre-arbitration is when issuers contest an initial chargeback. Arbitration occurs if pre-arbitration doesn't resolve the issue. A card network representative then makes a final judgment. Second chargeback is another term for pre-arbitration.

Key differences:

• Pre-arbitration: Disputes the initial chargeback.
• Arbitration: Final decision by the card network.
• Second chargeback: Another term for pre-arbitration.

You won’t hear issuers use "second chargeback," but many refer to it as pre-arbitration. They’re the same thing.

Pre-arbitration contests the result of the first chargeback. If neither party resolves it, the case goes to arbitration.

Arbitration has higher fees and takes longer to resolve.

I’ll explain this in the next section.

What Is an Arbitration Chargeback?

• Chargeback arbitration fees: $500 – 900 (or more)
• Time it adds to chargeback: 1 – 6 months

An arbitration chargeback is the final stage in resolving payment disputes. The card network reviews evidence and makes a binding, unappealable decision. This process involves the cardholder, issuing bank, merchant, and card network as the impartial arbiter.

Only 2% of chargebacks reach this stage. This stage is for high-ticket items that merchants believe are worth defending.

Would you really want to pay maybe more than $900 to fight a chargeback on a bag of cat food?

The process uncovers all evidence before arbitration. The card network, acting as an arbiter, reviews the evidence and makes a decision.

From there, they’ll make a decision, which can take them 1 to 3 months if it’s a Visa card. Or 3 to 6 months if it’s a Mastercard order.

This time frame is in addition to the entire chargeback process.

After a decision, the case closes, and the losing bank pays an arbitration fee. No matter who wins, the merchant also pays this fee.

That means you’ll now lose the following during a chargeback:

• Item’s value
• Chargeback fee
• Payment processing fee
• Cost of fighting the chargeback
• Arbitration fee

If you lose, your chargeback rate increases. This leads to a nightmarish hellscape which I covered in a different section.

This topic deserves a separate guide, which we may provide later.

For now, let’s see how a chargeback differs from a pre-arbitration chargeback.

Summary: A third party reviews the evidence and decides a winner.

Pre-Arbitration Chargeback vs. Chargeback

A chargeback is the initial reversal of a disputed transaction, moving funds from merchant to cardholder. Pre-arbitration is a step in the chargeback process that occurs after the original chargeback.

Key differences:

• Timing: Chargeback happens first; pre-arbitration follows.
• Initiator: The cardholder triggers the chargeback; the issuing bank starts pre-arbitration.
• Purpose: Chargeback disputes a transaction; pre-arbitration seeks final resolution.
• Outcome: Chargeback may resolve the issue; pre-arbitration leads to arbitration if unresolved.

A “chargeback” (AKA dispute) is the state before a pre-arbitration chargeback. But technically it’s when an acquirer forcefully pulls money from a merchants account.

The merchant must then submit a representment package with a rebuttal letter and evidence.

Want to write a better rebuttal letter? Check out our template here. Need help gathering evidence? Consider the chargeback’s reason code.

Anyway:

Once the issuer reviews the evidence, they decide if the chargeback stands. Either party can contest the outcome.

If a merchant is using a platform like Square, they cannot submit a pre-arbitration request. Why? It’s just how it is.

Now you know the differences. You know how these work and why they happen. How do you deal with them?

How to Deal With Pre-Arbitration Chargebacks

When a merchant gets a pre-arbitration chargeback, they can:

• Accept liability: Refund the customer and end the process. This impacts your chargeback rate.
• Challenge the charge: Submit more evidence to prove the transaction was legitimate.
• Request arbitration: Hand the dispute to the card network for a final decision.

Certain Mastercard reason codes skip pre-arbitration and go straight to arbitration. I’ll discuss those later.

Accepting liability ends the process but adds to your chargeback rate, which I’ll cover shortly.

Challenging the charge results in you submitting additional evidence to your acquirer. But don’t bother if you lack solid evidence.

Requesting arbitration is a “nuclear” option. Use it only for high-value transactions.

Does anything happen that’s different from a regular chargeback?

What Are the Consequences of Pre-Arbitration Chargebacks?

Pre-arbitration chargebacks can result in:

• Financial losses, including transaction reversals and fees.
• Reputation damage, leading to fewer sales and customer distrust.
• Increased operational costs due to dispute management.
• Higher chargeback rates, risking acquiring restrictions.
• Unresolved disputes, possibly resulting in legal action.

If you're handling a Mastercard chargeback, you'll need to pay a $15 pre-arbitration fee.

Other card networks don't have published pre-arbitration fees.

Aside from this, the consequences are similar to regular chargebacks. But, you'll spend more time and money dealing with the issue.

If you accept liability or lose the pre-arbitration, it will increase your chargeback rate. A high chargeback rate could place you in a dispute monitoring program.

We cover rates in more detail elsewhere.

In short, these programs come with penalties, including fees and possible bans from certain cards. You may also end up on a MATCH list. This blacklist prevents you from signing up with payment processors for a while.

It sucks.

That’s why avoiding chargebacks in the first place is so important.

How Do I Avoid Pre-Arbitration Chargebacks?

To avoid pre-arbitration chargebacks, you’ll need to prevent chargebacks altogether by:

• Using chargeback alerts: Get notifications for pre-disputes.
• Providing a better customer experience: Offer clear descriptions, quality images, and multiple payment options.
• Improving communication: Maintain clear refund, return, and cancellation policies.
• Using fraud prevention tools: Implement AVS, CVV, and 3D Secure.
• Keeping accurate records: Maintain thorough transaction logs.
• Partnering with chargeback management services: Get help with dispute resolution.

There’s no way to stop pre-arbitration since the chargeback has already occurred. The best approach is to learn and prevent future chargebacks.

We discuss more strategies you can use to prevent chargebacks in a separate piece.

But we can use these sections to help you get started.

1. Chargeback Alerts

Chargeback alerts notify you when a customer disputes a transaction. They let businesses resolve issues before they escalate into formal chargebacks. Merchants can offer refunds or address concerns early.

Learn more about how these alerts work and help here.

Some providers like RDR automate refunds based on rules. Others, like CDRN and Ethoca, require manual steps.

Find the differences in this guide.

I’ve seen these alerts reduce chargeback rates by up to 40% when using individual alerts for some merchants. Other sellers have avoided up to 91% of chargebacks using Ethoca, CDRN, and RDR together.

But using all 3 requires you to approach different vendors. Going with a certified reseller (like us) gives you easier access to these alerts.

Learn how we can help.

2. Provide A Stellar Customer Experience

A positive customer experience reduces the risk of disputes and chargebacks. Merchants should offer fast support, clear product descriptions, and easy-to-use processes.

When problems arise, quick resolution shows customers you value them. Satisfied customers are less likely to request refunds from their bank.

By focusing on communication and support, you can reduce chargebacks and increase repeat business.

3. Improve Communication

Clearly communicate your refund, return, and cancellation policies to prevent misunderstandings.

Display this information on checkout pages, receipts, and emails. Use simple language to explain how returns and refunds work.

Providing easy access to this information helps customers know their options.

4. Using Fraud Prevention Tools

Fraud prevention tools help reduce chargebacks by verifying customer identities and preventing unauthorized purchases.

Tools like the Address Verification System (AVS) compare billing addresses with cardholder details.

Card Verification Value (CVV) ensures that customers have the card in hand. It also guarantees fraud prevention if the customer’s EMV card has been compromised.

Because iCVV numbers (in EMV cards) differ from CVVs on magnetic stripe cards.

3D Secure adds another layer of protection by requiring additional verification before completing the transaction.

Two-factor authentication adds an extra barrier for potential fraudsters. Opt for authenticator apps, physical security keys, and/or biometrics.

These are much more secure than SMS- and email-based authentication. Such 2-factor authentication methods are vulnerable because of compromised email accounts, phishing, and SIM swapping.

These tools make fraud harder, reducing fraudulent chargebacks.

5. Keep Better Records

Accurate records help merchants defend against chargebacks, though they don't prevent them.

However:

Winning a chargeback doesn’t increase your chargeback rate.

Keeping detailed transaction logs, communication history, and proof of delivery strengthens your case. Banks often side with the party with stronger documentation.

6. Consider Chargeback Management Services

Chargeback management services help businesses manage and prevent chargebacks. They combine many of the tools I provided (e.g., fraud protection and alerts).

Some offer advice on dispute handling, fraud prevention, and chargeback response strategies. Or they’ll deal with the chargeback on your behalf. Many services use AI to create chargeback representment packages, boasting 80% win rates.

They also provide tools for monitoring and addressing chargeback trends. Partnering with these services helps businesses focus on other operations while specialists handle chargebacks.

With industry knowledge, chargeback management services can reduce losses and improve win rates.

This comes at a cost.

These services often cost over $1,000 per month, making them more suitable for larger merchants.

We provide more information about these services here.

Smaller sellers might benefit from chargeback analysts. Analysts help reduce chargebacks by reviewing your data and fighting disputes on your behalf.

See this guide to determine whether they’re worth the cost.

That’s about it for prevention.

Let’s finish this guide off with FAQs.

FAQs

Will Issuers Ever Skip Pre-Arbitration?

Yes, issuers can skip pre-arbitration in some cases. For example, Mastercard allows direct arbitration for reason codes 4808, 4870, 4871, and 4834. The decision depends on the situation and the risks involved.

How Often Do Merchants Win Pre-Arbitrations?

Sellers rarely win pre-arbitration disputes, but there aren’t any published win rates. For reference, they win about 30% of initial chargebacks.

Wrapping Up

Pre-arbitration chargebacks occur after first chargebacks and before arbitration. They give cardholders and merchants one more chance to resolve disputes before involving card networks. The process can take months.

That’s why it’s better to prevent chargebacks from happening.

Chargeback alerts can help, but you’ll need a provider. We can help you get started.