Pre-Arbitration Process Explained

Pre-arbitration is a step in the representment process of challenging a consumer’s chargeback claim.  For those of us outside the world of consumer credit and its challenges, many of the words in the first sentence of this article will feel foreign.  However, anyone who has been a consumer that challenged a charge on a credit card has likely participated in the chargeback process.  Understanding the pre-arbitration and representment process will help consumers and merchants understand and participate fully in the action.  This article will examine the steps of this process and help explain how pre-arbitration works, when it is used, and how it fits within the larger picture of the chargeback procedure.

Understanding Chargebacks:

The chargeback process is a mechanism that protects consumers from unauthorized charges on their credit cards.  When a consumer disagrees with a charge from a merchant on a credit card, they file a dispute, which is known as the first “chargeback.”  There are five or so steps in the process:

  1. Transaction: Here, the initial transaction is placed on the card.  This is called presenting a charge.
  2. Chargeback: This step is when the cardholder or issuer disputes the charge from the merchant. A merchant may accept liability and the chargeback process may end here.
  3. Representment: The merchant “re-presents” the charge to the card and provides evidence that the charge is valid.  The issuing bank decides on the evidence.
  4. Pre-Arbitration: Here, the card issuer does not accept the merchant’s evidence or the cardholder’s evidence, and the losing party presents more evidence to be considered.
  5. Arbitration: This the last step that only happens when the parties cannot agree at any point in the process.  Here, the card network issues a decision on whether the transaction was legitimate or not.

An Example:

This process involves a variety of steps, so this article will rely on an example to illustrate how the process works.  Assume that Cindy has a credit card from an issuer named Go Card.  Cindy regularly uses her card at a flower shop on her block owned by Mary.  Cindy is a doctor in the pediatrics wing of a local hospital, and she often buys multiple arrangements from Cindy to send to her patients and their families. One day, Cindy is checking her statement and notices that there is a $450 charge from Mary’s flower shop on a day that Cindy was out of town.  Cindy believes this charge is incorrect, so she contacts Go Card and tells them that she would like to dispute the charge.  Using this example, this article will look at each step.

The Transaction:

The underlying transaction results in a charge on the card.  The large question in the chargeback process is whether this transaction was legitimate or not.  When the charge is added to the card, it is called presenting the charge to the card.  In our example above, the transaction would be the $450 charge from Mary’s flower shop that Cindy found on a day she was out of town.

Chargeback:

The chargeback occurs when a cardholder files a dispute with the issuing bank.  Depending on the bank, a cardholder may have anywhere from one and a half months to six months to file a dispute after a transaction.  The bank will then review the report to determine where the dispute is valid or not.  After the bank review the dispute, if they determine that the dispute is valid, they will send the claim to the merchant’s bank who will send a notice to the merchant.  This notice will include details about the dispute and state that the cardholder’s bank has received funds from the merchant’s bank to refund the transaction and fees to cover the investigation.  It will usually include forms that a merchant can fill out to challenge the chargeback.

In the example above, a chargeback would occur when Cindy contacts Go Card and disputes the charge.  Go Card will then review the dispute for validity.  Because Cindy regularly buys flowers from Mary, she has to provide evidence that she was out of town that day.  She submits a receipt from the hotel that she was at and the gas she bought from a station in the next state.  Go Card believes that Cindy was not in town that day and sends the claim to Mary’s bank, Merchant Cards.  Merchant Cards reviews the documents and places a debit on Mary’s account for the $450 charge and the fees incurred during the investigation.  Merchant Cards also sends Mary information about how to challenge the dispute and gives her 10 days to do so.

Representment:

Once a merchant has received notice, they can either accept liability and the credit, or they can challenge the disputed charge in an attempt to get the original issuer to represent the charge to the consumer’s account.  The merchant needs to submit detailed evidence that the charge was for a legitimate transaction and that the transaction was fulfilled.  This evidence can be documentation of shipping, receipts, proof of delivery, or proof of conversations.  Once the merchant’s bank receives this documentation, it is forwarded to the cardholder’s bank.  The merchant’s bank will then give the merchant a temporary credit for the amount. The issuing bank will review the evidence to see if the transaction was fulfilled.  If the issuing bank decides that the merchant has not provided adequate evidence, they decide in favor of the cardholder and let the credit to the cardholder stand.  If the issuing bank finds that the merchant has provided enough evidence to refute the chargeback, they will decide for the merchant and let the credit on the merchant’s account stand.

Once Mary receives the notice, she checks her records and finds a receipt for the transaction which shows a variety of arrangements to be shipped to the hospital’s pediatric wing and a confirmation that the hospital that Cindy works at received them. She looks for more, but because the deadline is so fast, she decides to only send this.  Mary takes this receipt and sends it back to Merchant Cards.  Merchant Cards sends the information to Go Card, who evaluates it.  Go Card looks at the receipt from Mary and the delivery confirmation and decides that Mary completed the transaction.  They give Mary the money and send Cathy an explanation of the decision.

Pre-Arbitration:

Once the issuing bank decides, the cardholder or merchant may challenge the charge for a second time, provided there is new evidence that would support a closer examination of the charge.  When this happens, the issuing bank alerts the merchant’s bank, who notifies the merchant, and the merchant has a second chance to accept the chargeback or dispute it. To contest it, the merchant must provide more compelling evidence that the transaction was completed. Once the merchant sends the evidence to their bank, the merchant’s bank sends it to the issuing bank, which reviews it again.  The same options are available to the issuing bank.  If the issuing bank decides the merchant has provided sufficient evidence to refute the cardholder’s new evidence, they keep the charge on the cardholder’s account.  If the evidence does not refute the chargeback evidence, the charge remains on the merchant’s account.

Cathy still believes that the charge on her account is improper.  She sends her bank evidence that she only orders arrangements in person because she likes to see the arrangements that she is ordering and match them to the patients she is sending them.  She also submits proof that was not the physician covering the patient on one-third of the patients that received flowers. Finally, she provides a series of receipts from Mary’s Flower Shop to prove that she usually spends $250-$300, so $450 is an abnormally high amount. Go Bank reviews this evidence and decides that it is enough to refute Mary’s evidence.

Once Mary receives this new evidence and the new chargeback notice, Mary checks her records again.  Mary would like to challenge the second callback, so she is hoping to find new evidence that this order was valid.  While looking at her orders from the days surrounding the order in question, Mary finds a receipt for Cindy’s previous purchase.  Along with the order for that day, Mary’s notes on the order included an underlined note that said, “Repeat similar order next week.  Dr. Hans will pick up.  Charge anything he would like on my card to thank him.” Mary sends proof of this to Merchant Cards.  Merchant Cards sends the evidence to Go Card, who again decides that this evidence seems to refute Cindy’s evidence.  When Cindy sees the note, she remembers that she had arranged the order, and accepts the charge.

Arbitration:

If either party or the merchant’s bank is unhappy with the final decision in pre-arbitration, they can ask the card network to arbitrate the dispute.  This usually adds quite a bit more money and time to the dispute, so many banks and parties choose to avoid arbitration unless the dispute is over thousands of dollars.  Each bank has a different arbitration process, but it usually includes the card network’s review of the evidence and issues a final decision.

If Cindy decided that she still thought the charge was not authorized, she could ask the card network to arbitrate.  However, because the charge was only $450, the arbitration fee would be more expensive than the charge, and Cindy probably would not have a good case.  If she lost, she would have to pay the arbitration fees and the charge on her account would stand, so she would probably not arbitrate, even if she felt like the decision was wrong.

Conclusion:

Pre-Arbitration is a vital process to examine and dispute charges for transactions on cards.  The process can be drawn out, but it can be incredibly helpful for consumers who have an unauthorized charge on their card or can help merchants confirm that they charged a consumer correctly.  Moving through the process brings clarity and helps the parties see the full picture.  It also allows these disputes to stay out of court and avoid the costs associated with litigation.  Understanding the process will help a participant know how to best respond when a chargeback occurs and how to best defend their view.  Hopefully, this article will help readers prepare for and understand the chargeback process as they move through such cases.

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