Arbitration chargebacks, sometimes known as “second chargebacks” or pre-arbitration filings, occur when a chargeback dispute enters its penultimate stage, after the initial representment has been won or lost. At this point, the cardholder (via their issuer) or acquirer may provide new evidence to challenge the representment ruling, elevating the dispute to a higher stakes arbitration phase. While Mastercard uses the term "arbitration chargeback," Visa refers to this stage as "pre-arbitration," though the process is similar across networks.
After the initial chargeback decision, either the merchant's acquiring bank or the cardholder's issuing bank can file for arbitration if they have new evidence to support their case. For example, if a merchant loses the initial dispute but discovers new proof of delivery, they might pursue arbitration. Similarly, if a cardholder loses the initial dispute but finds new evidence of fraud, their issuing bank might file an arbitration chargeback.
At this “pre-arbitration” stage, the merchant or issuer presented with the arbitration chargeback has an opportunity to accept it before the arbitration process is initiated. In this case, they will lose the chargeback amount, but avoid the potentially hefty fines incurred by a loss at the arbitration stage.Â
If the merchant or issuer chooses to contest the arbitration chargeback, they will typically provide fresh compelling evidence in an effort to counter the new arguments provided by the opposing party. The card scheme then weighs up all available evidence and makes a judgment. This arbitration decision is final, and neither party can contest it without – in very rare cases – extraditing the matter to a court of law.Â
As with all stages of the dispute process, the timeline for arbitration chargebacks is strict. For Mastercard transactions, banks must file within 45 calendar days of the initial decision. However, merchants typically have much shorter windows - often just 10 days - to submit their response through their acquiring bank. Missing these deadlines results in an automatic loss, regardless of the case’s merit.
Arbitration chargebacks typically arise from one of three main scenarios. First, cardholders might discover new evidence that contradicts the merchant's successful representment. Second, issuing banks might identify discrepancies or omissions in the merchant's original evidence. Finally, complex disputes involving multiple parties or cross-border transactions occasionally require additional scrutiny to resolve definitively.
Arbitration chargebacks represent a significant financial risk for merchants. Beyond the original transaction amount and standard chargeback fees, losing at the arbitration stage incurs additional penalties of up to $500 per case. This heightened financial exposure makes the decision to pursue arbitration particularly consequential, especially for higher-value transactions – if the lost product cost $500 and the fine is $500, you have already lost $1000 before any additional fees are incurred.Â
Furthermore, most merchants have already presented their strongest evidence during the initial representment, leaving them with limited new material to counter the cardholder's fresh evidence. While some merchants are tempted to submit the same evidence again in hopes that the network will view things differently than the issuer, many merchants choose to accept the chargeback rather than risk additional losses through arbitration.
For those operating in high-risk merchant categories or managing significant transaction volumes, the challenge becomes even more acute. The combination of frequent disputes and high-stakes arbitration decisions can create substantial operational and financial burdens.
Merchants must carefully weigh several factors when deciding whether to pursue arbitration. First, the transaction value needs to be high enough to justify the potential arbitration fee, typically making it worthwhile only for highly expensive transactions. The strength of any new evidence available is also crucial, as merely presenting the same evidence used in representment rarely succeeds at this stage.
The merchant's overall dispute history and relationship with their processor should also factor into the decision. Those already dealing with high rates of lost chargebacks might need to be more selective about which cases they pursue to arbitration, focusing their resources on the strongest cases with the highest potential return.
The best defense against arbitration chargebacks is preventing disputes from reaching this stage. This involves building stronger cases during initial representment through comprehensive evidence collection and clear documentation. Maintaining detailed transaction records, implementing robust fraud prevention measures, and ensuring clear communication with cardholders can all help to produce compelling evidence that reduces the likelihood of disputes escalating to arbitration.
However, thorough evidence collection processes are typically time-intensive, and difficult to maintain during busy periods. Unfortunately, it is precisely when things are busy that you can least afford to handle chargebacks, especially those that go to arbitration. In-house teams often struggle to maintain quality as volumes surge, leading to incomplete evidence collection and missed opportunities to prevent escalation to arbitration. Template-driven outsourcing solutions fare little better, as their rigid approach cannot adapt to the nuanced requirements of complex disputes or effectively incorporate new evidence types.
Only a fully automated, AI-driven solution like Justt’s can consistently gather, analyze, and present evidence at scale, while maintaining win rates and preventing winnable cases from reaching the arbitration stage. In fact, Justt’s machine learning-based system uses extensive A/B testing to improve with each new case, as much as doubling win-rates within weeks – and halving the risk of arbitration chargebacks. Justt will also help you decide which cases are worth proceeding with to arbitration, and ensure that you have the best evidence in place in case you need to do so.
By automating evidence collection from +500 data points across third party sources, acquirers, and merchant records, Justt’s system ensures that no compelling evidence is omitted from the initial representment. Justt’s AI-driven Dynamic Arguments feature then crafts this evidence into nuanced, detailed, and powerfully-reasoned representment documents, precision-tailored to meet the smallest preferences of the issuers and card schemes who will review it.Â
Arbitration is a challenging final stage in the dispute process, and the key is to know when it’s worth the time and potential costs - and to maximize your chances of success. With Justt's zero-touch, AI-powered solution, you can rest easy in the knowledge that superhuman evidence collection, and analysis capabilities are always protecting your revenue, so your team can focus on what matters most to your business.
