Explaining Pre-Compliance Chargebacks and Reason Code 98

The chargeback system is governed by rules that can help avoid chargeback issues when followed. Following these rules is easier said than done. In addition to the disputes cardholders file, there are pre-compliance chargebacks that a bank can file against another bank when rule breaking causes them financial loss. What should merchants know about pre-compliance, and should they worry about preventing them?

These chargebacks occur to resolve chargeback-related disputes between network members. At Visa they used to receive reason code 98. If one member believed the other violated a Visa rule when handling a chargeback, they filed a pre-compliance chargeback for compensation. Either the acquiring or issuing bank could initiate the chargeback.

In the chargeback context, compliance alludes to credit card networks’ efforts to mediate disputes between network members when one member breaks internal network rules. Generally, compliance kicks in after a chargeback is settled and one of the parties disagrees with the decision but doesn’t have chargeback rights. 

Specific conditions that trigger the Visa compliance process include:

• Violation of the Visa Product and Service Rules and Visa Core rules
• The rule broken isn’t under predefined reason codes
• A Visa member suffered a financial loss directly because of the violation
• The financial loss could have been prevented by following the rules
• An attempt at pre-compliance to resolve the problem failed

Under compliance, Visa reviews case facts and decides the party responsible for the financial loss. Although Visa’s decision can be appealed, the appeal process is time-consuming and expensive, so most members don’t pursue it.

Previously, Visa expected the disputing member to start the dispute by filing a pre-compliance chargeback under reason code 98 (now obsolete). The other member could accept the chargeback or contest it, escalating the dispute to compliance where Visa adjudicates.

Today, Visa expects members to communicate through VROL and try to resolve their problems before Visa comes in. This reduces the number of compliance chargebacks, and Visa acts as a neutral facilitator instead of a judge.

Although Visa’s complex rules and numerous potential problems that can wreak havoc in transactions allow for a long list of possible violations, the credit card company has outlined some common situations for rule breaking:

• A merchant billed a cardholder to collect on a bounced check or delinquent account
• A merchant made a cardholder sign a blank sales draft before agreeing to the final price
• A merchant doesn’t have a Visa account through their acquiring bank but processes Visa transactions through a different Visa merchant
• The acquiring bank or merchant ignores a retrieval request related to a legal proceeding or law enforcement
• A merchant reposted a transaction after the issuing bank started a dispute

Other possible merchant errors leading to compliance disputes include unauthorized billing of a duplicate key-entered transaction.

A merchant should follow security and payment processing best policies to prevent potential problems leading to compliance issues.

You’ve noticed the problems listed above emanate from the acquiring bank or merchant’s side. Issuing banks and cardholders break the rules and make mistakes too; however, cardholder mistakes are counted as fraud, and the normal chargeback process has those covered.

Compliance is specifically designed to address issues for which Visa doesn’t have laid out procedures.

Pre-compliance chargebacks are between two banks and do not directly involve a merchant; hence they don’t affect a merchant’s chargeback ratio. Consequently, there’s no risk of surpassing chargeback thresholds.

However, the fact that many compliance violations are on the merchant’s end means that too many compliance violations could strain an acquirer-merchant relationship. In some situations, the acquirer passes down the chargeback costs to the merchant affecting the merchant’s bottom line.

Since acquiring banks deal with card networks and issuing banks directly on behalf of merchants, it’s crucial that you don’t make their job harder by circumventing the rules.

Skirting the rules to try and make a few extra bucks has serious repercussions on merchants and acquirers when caught. Although following Visa regulations won’t stop every compliance chargeback, it’ll help prevent most of them. 

Chargeback prevention is the best solution for compliance chargebacks stemming from cardholder disputes. This is why building a multi-layered chargeback prevention strategy is crucial. 

Justt can build a custom end-to-end chargeback prevention strategy for your company leveraging industry experts and AI technology to help your bottom line.