What is Pre-arbitration Chargeback? A Merchant’s Guide to Prevent Revenue Loss

Amara's law. Have you heard about it? If you haven't, this will be a great introduction to the concept. It'll help you grasp our topic of pre-arbitration chargeback better.

Amara's law (named after WW2 Navy electronics technician turned MIT researcher and scientist Roy Amara) states that people "overestimate the effect of a technology in the short run and underestimate the effect in the long run."

Said another way, people generally overestimate short-term effects but underestimate long-term impacts. For instance, when the chargeback law was introduced in 1974, everyone estimated it was the magic wand to improve transaction disputes. After all, if cardholders falsely chargeback transactions, you can represent with evidence and win.

Fast forward more than 50 years later. It has become a significant roadblock to effective payment dispute remediation for merchants. It has opened a backdoor to various kinds of payment fraud. Even when you win a chargeback, the cardholder can request pre-arbitration. So, what is pre-arbitration in chargebacks, and how can you navigate pre-arbs effectively? Stay with me. Let's unpack all that!

Understanding Pre-Arbitration Chargeback?

Pre-arbitration in chargebacks is a dispute filed by the card issuer or the merchant acquirer when either party is dissatisfied with the outcome of the original chargeback dispute. Pre-arbitration, or pre-arbs, is loosely known as a second chargeback because it reverses the initial chargeback decision.

In most cases, the cardholder's bank initiates pre-arbitration. This typically happens when the customer is unwilling to accept the result of the case. They will unearth additional evidence to counter the bank's decision.

Merchants dread chargebacks that enter pre-arbitration. And for a good reason. They are significantly expensive and quite tricky to resolve.

Pre-Arbitration on Chargebacks: Why They Happen & How They Work

The logic behind pre-arbitration is clear.

Chargeback dispute outcomes are subject to bias. Humans see what's before them, not necessarily the hidden patterns. Consequently, banks' chargeback rulings depend on evidence presented by both parties.

Pre-arbitration allows cardholders or issuers to contest the dispute outcome and challenge the bank's decision, provided they have substantial evidence. The payment amount will again be withdrawn from your account momentarily. You'll also add supporting evidence to pursue the case further.

In other words, pre-arbitration in chargebacks is not necessarily a terrible thing ... at least in principle. It's meant to ensure the issuer and the merchant (through their acquiring bank) have every opportunity to resolve the dispute satisfactorily before the case begins to cost more money if escalated to arbitration. In practice, though, pre-arbs are a nightmare as merchants rarely win.

The Pre-Arbitration Process Unveiled

Consider a typical chargeback process. A cardholder disputes a bill to their card issuer or bank. The bank investigates (hopefully) and issues a chargeback with a conditional payment reversal.

The merchant disputes by presenting compelling evidence. The bank weighs the documentation against the case and issues a ruling.

Let's assume the decision, in this case, is for the merchant. At this point, the cardholder can instruct their bank or card issuer to file another pre-arbitration.

For Visa disputes involving fraud or payment authorization mistakes, pre-arbitrations come after the chargeback dispute. If the chargeback is about payment processing mistakes or consumer disputes, cardholders can request pre-arbitration after the merchant has submitted their chargeback response.

This methodology aligns with Visa's Claims Resolution (VCR) rules. VCR categorizes cardholder disputes into one of two distinct workflows:

1. Allocation Track: Used for fraud and authorization-related disputes
2. Collaboration Track: Applied to disputes involving consumer disagreements and processing missteps.

That said, let's examine how pre-arbitration differs from arbitration in chargebacks.

Pre-Arbitration vs. Arbitration: Key Stages in the Long Chargeback Process

Pre-arbitration and arbitration are two distinct stages in an ideal chargeback lifecycle. While some use these terms interchangeably, they do not mean the same.

As noted earlier, pre-arbitration (or second chargeback) is the next step after the initial chargeback decision. It allows card issuers and merchant acquirers to contest the case outcome if they choose to do so.

Conversely, arbitration is the final stage of the chargeback dispute if either party wishes to pursue the case further. Arbitration comes after the pre-arbitration stage, and the card network, not the customer's bank, is the "Umpire" providing the ultimate decision to resolve the case. In chargeback arbitration, the merchant is represented by their acquirer, while the customer is represented by their bank.

Arbitration chargeback rulings are irreversible. In the rare occasion that you, the merchant, manage to find the most compelling evidence to reopen the case, you must pay Visa's arbitration appeal fee of $1,000.

It bears re-emphasizing: The outcome of chargebacks that enter the pre-arbitration or arbitration stage rarely favors merchants. Payment providers like Stripe discourage merchants from pursuing pre-arbitration cases. But that's not the complete truth.

You Can Stop Pre-Arbitration Chargeback Losses

The sad reality is that winning a chargeback does not mean a case is closed, with no more chances of chargeback claims. As you can see from the previous passages, the cardholder and their bank can file a second chargeback.

Filing a pre-arbitration chargeback means they believe they've got you. So, it's unlikely you'll win. By responding, you open a window for the case to proceed to arbitration, which means more expenses.

But what if I told you there is a battle-tested system you can use to prevent chargebacks, whether pre-arbitration or arbitration? I'm talking about saving you from card network monitoring programs. You also reclaim an unbelievable amount of hours you'd ordinarily expend fighting a losing battle.

So, what's this secret chargeback dispute weapon, you ask? The answer is Chargeflow, the automated chargeback solution for eCommerce!

Recovering Chargebacks on Autopilot: A Hexclad Case Study

Hexclad is a leader in innovative cookware. Under the leadership of eCommerce veteran Michael Ludwig, the team planned for a surge in Black Friday chargeback fraud.

After limited ROI from previous manual efforts, they sought a reliable chargeback management partner to ensure smooth payment processing and unhindered business success during forthcoming peak seasons.

Solution: Automation and Real-Time Insights with Chargeflow

Thanks to Michael's insight into the power of chargeback automation, Chargeflow changed the game for HexClad. By automating the chargeback cycle, Hexclad drastically reduced manual tasks and improved dispute response time.

Chargeflow's automation handled the chargeback process, from notifications to evidence collection. This allowed HexClad to respond quickly and confidently to chargebacks. Not only that, Hexclad also gained real-time insights, empowering the team to make timely, data-backed decisions.

Unmistakable Results: Significant Gains in Dispute Recovery Rates and Operational Efficiency

After partnering with Chargeflow, HexClad experienced massive improvements both financially and operationally. Notable results included:

• Boosted Recovery Rates: HexClad experienced a 59% improvement in recovery rate.
• 199 hours Saved: Implementing Chargeflow's automated chargeback management platform, Hexclad saved 199 hours across 299 disputes, allowing its team to redirect efforts to other critical business issues.
• Actionable Insights: With Chargeflow's real-time dashboard, HexClad had access to data-driven insights, ensuring that disputes were handled effectively and confidently with fully data-backed decisions.

Chargeflow's automated solution is protecting HexClad's revenue. It's also enabling HexClad to focus on core business operations. That's the power of proactive fraud prevention! Read the full case study here.

Final Thoughts on Pre-Arbitration in Chargebacks

Chargeback pre-arbitration is a significant stage in the chargeback process. It allows cardholders to seek remediation for payment disputes when they feel the outcome of the initial ruling is not objective.

Unfortunately, pre-arbitration in chargebacks rarely favors merchants. So many eCommerce merchants prefer to accept cases that have reached pre-arbitration to discontinue the process and not risk further expenses.

As logical as that seems, it's still a losing strategy. You will still lose money even by accepting the chargeback. It will also hurt your business in the long run.

Pre-Arbitration Chargeback FAQs

What is pre-arbitration in a chargeback?

Pre-arbitration is a second chargeback that the card issuer or cardholder files after disputing the outcome of the original chargeback case. It reopens a case the merchant already won, using additional evidence to support the cardholder's claim.

How much does Visa arbitration cost?

Visa charges filing and ruling fees to the losing party in a full arbitration case, and a separate $1,000 fee if a merchant wants to appeal a final arbitration decision. Pre-arbitration is far cheaper to file, typically in the $25 to $50 range, which is one reason issuers use it so often.

Can a merchant win a pre-arbitration case?

Yes, but it's rare. Merchants can win by responding with new, more compelling evidence than what was submitted in the original chargeback. Most payment providers advise against pursuing pre-arbitration because the odds favor the cardholder.

What is the difference between pre-arbitration and arbitration?

Pre-arbitration is a request from the issuer or cardholder to reopen a chargeback the merchant already won. Arbitration is the final stage that follows if either party escalates the case further, with the card network, not the bank, issuing the binding decision.

How long does pre-arbitration take?

Pre-arbitration timelines generally follow the same windows as the original chargeback dispute, resolving within 30 to 45 days depending on the card network and dispute type. Visa's Claims Resolution rules aim to keep most cases within a 30-day window.

Who initiates a pre-arbitration chargeback?

In most cases, the cardholder's bank initiates pre-arbitration on the customer's behalf after the customer refuses to accept the original chargeback ruling.

Can merchants avoid pre-arbitration chargebacks altogether?

Not entirely, but merchants can reduce their exposure with strong evidence practices and automated dispute management. Preventing the underlying disputes from reaching a chargeback in the first place is far more effective than fighting them at the pre-arbitration stage.

But with Chargeflow's automated chargeback solution, you can win false chargebacks at every stage of the dispute cycle, and prevent many of them from reaching pre-arbitration in the first place. Be like Hexclad and join the winning team. See how Chargeflow helps merchants prevent and win chargebacks.