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July 21, 2022
by David Goodale

What is Visa and MasterCard Chargeback Arbitration?

(Slightly edited from video transcript for greater readability)

Key Takeaways

1
Chargebacks may feel unfair to the Merchant
The card issuer has all the decision-making power and the cardholder is their customer, not the merchant.
2
Chargeback process
A merchant disputes a chargeback decision made by a cardholder's issuing bank. The merchant may either win the dispute and keep the funds or lose the dispute and be liable for the chargeback amount.
3
Is arbitration worth it?
If it's a large chargeback and a lot of money is on the line, and if you have a strong case with good supporting evidence, it may be worth taking the case to arbitration.
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Hello, David here at Merchant-Aaccounts.ca. Today I'm tackling a topic that is not very well understood. That topic is: What is Visa and MasterCard arbitration. Stay tuned because we'll dig in in one second.

unfair

Chargebacks can feel unfair

One complaint from merchants is that when they lose a chargebacks it can feel unfair to them. They often believe they should have won the chargeback. The reason why this happens is the card issuer (the bank that issued the card to your customer) has all the decision-making power. When a chargeback happens you build your case and you give it to your payment processor. The payment processor can't do anything with it other than give it to the card issuer. The card issuer then decides who wins the chargeback. The problem is that the card issuer cares about the cardholder because the cardholder is their customer, not the merchant. It's supposed to be impartial and it is impartial, but sometimes merchants seem to feel that the process doesn't go their way even when they think it should have. It's an uphill battle to win the chargeback. To the point that some merchants don't even fight chargebacks, which I feel is a real mistake.

Chargeback Process

What are the steps in the chargeback process? Well, the first thing is the cardholder contacts their issuing bank and they dispute a transaction. Now, in some circumstances, the issuer might send a request for information to the payment processor to obtain more information about the charge. The request may be passed along to the merchant so that you can respond. If that additional information isn't sufficient to resolve the dispute in the cardholder's mind, the issuer will proceed to the next step and file a chargeback. When that happens, the funds are immediately returned to a dispute reserve. This comes out of your bank account as the merchant. The payment processor then informs you about the chargeback. You can either accept it and not do anything about it, which would end the process, or you can send your argument back to the payment processor.

process

Once the processor has your argument, they will send it to the issuer. The issuer receives your transaction response and they review the evidence. If the evidence is sufficiently compelling, they're going to accept the chargeback. Now, if the issuer isn't happy or they aren't convinced, or if the cardholder provides additional evidence to further bolster their case, what's going to happen is you're going to get a second chargeback or a pre-arbitration chargeback. You're going to lose a second time and that's when it's done.

You're out of luck. We're going to dig in a little bit further. What happens when you unfairly lose a chargeback? Well, you can take it to arbitration. Arbitration is where you fought the chargeback, you've lost, but you have a small window where you can say to your payment processor, we're sending this to the card brands, whether it's Visa or MasterCard for formal binding arbitration.

Arbitration

The advantages of arbitration, number one, you can win and you can get your money back and it's arguably a little bit more impartial. It's another swing of the bat, another chance to win. The downsides are that it's quite expensive and the loser pays the arbitration cost. This is not worth doing if you have a low-dollar value item. The cost of arbitration at the time of recording this video is $500USD. If you sold a $50 product or service, are you going to gamble? You've already paid the chargeback fees, a fee to your payment processor of approximately $25 per chargeback or there about. You've already lost approximately $75 (item + chargeback fee). Now are you going to gamble $500 to get back that $50 (plus the chargeback fee)?

strong case

Well, maybe if you have a really strong case, but I feel arbitration is much more reasonable when you have a very strong case and it's a lot of money and it's worth it to you to fight it. Now I want to be clear about this. Who, whoever loses the arbitration pays the $500 fee. Is it worth it? Yes, if you win, and not at all, if you lose. A big part of if it's worth doing or taking a dispute to arbitration is how much money is on the line and how compelling is your case and whether is there anything new that you can provide that wasn't provided the first time around. This is very important as well because the card brands and the card networks want you to feel that there's a reason for this arbitration. In other words, you need to provide more information than was originally provided or greater clarity.

Conclusion

In summary, arbitration should be considered when you have an incredibly compelling case with extremely strong evidence. My advice is to pursue arbitration only when the dispute is for a fairly large amount of money. It wouldn't normally make sense to do if you are selling a $15 or $20 product. If you have any questions reach out to us at Merchant-Accounts.ca. We do free consulting for businesses that are running into chargeback problems to help you reduce the number of chargebacks you receive, and improve your chances of winning when you do get a chargeback. Thanks for watching. Have a nice day there. Bye now.

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David Goodale About the Author

My name is David Goodale, CEO at Merchant Accounts.ca. I launched our business in 2001 and have over 20 years of expertise in the field of online payments. If you have a payments related question or project, and especially if it relates to multi-currency or international e-commerce don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses.

Toll free: 888-414-7111 ext. 5
Direct: (905) 901-2254
david.goodale@merchant-accounts.ca