Pre-Arbitration & Arbitration 101

Backspace Tech
4 min readMay 26, 2023
Pre-Arbitration &Arbitration 101

Chargebacks are an integral part of the payment ecosystem. However, it is a convoluted process and sometimes, it might result in “pre-arbitration”, formerly known as a second chargeback. Pre-arbitration emerges after the initial chargeback or when the issuer classifies a dispute as Fraud. In the scenario of chargeback, pre-arbitration is a step that can be willingly taken either by the issuer (cardholder side) or acquirer (merchant side). But when a chargeback is classified as fraud, the acquirer can only respond through pre-arbitration.

If either of the parties is still not satisfied with the pre-arbitration outcome, they can further proceed to arbitration, which is the final leg in the dispute process. Furthermore, in both these stages, it is the card network that is the decision-making authority.

Before we get into specifics of how these two incidents occur, let’s understand the meaning of these terms.

Pre- Arbitration:

A pre-arbitration is a case brought by an issuer or acquirer after a chargeback decision has already been taken or when a transaction is classified as fraud. It gives the issuer/acquirer another opportunity to settle the payment dispute. It is, in essence, a process wherein issuers or acquirers can object or respond to the chargeback raised. In this scenario, both the issuer and the acquirer must meet certain conditions set forth by the respective card network to raise pre-arbitration.


Arbitration is the phase after pre-arbitration, it is when the parties involved- the bank, cardholder, and merchant, are not satisfied with the pre-arbitration decision. Arbitration resembles a court trial in many ways. The card network serves as the judge and will examine all the evidence including the new evidence submitted for arbitration.

When and why a Pre-arbitration occur?

As seen above, a pre-arbitration can be raised by both the issuer and the acquirer. If the issuer initiates it, if further documents/arguments are presented by the cardholder regarding the initial dispute, or when the cardholder refuses to accept that a merchant has won the dispute over a chargeback. The acquirer can appeal for it when the merchant feels that the verdict made was not in his favor.

Let us consider a scenario to perceive more about the filing of pre-arbitration and the process.

When a cardholder isn’t satisfied with the initial chargeback verdict they can decide to contest the decision through pre-arbitration. The process flow will be:

Step 1: The Cardholder must provide additional proof (like communication record with the merchant, proof of return/cancellation, etc) to the issuer.

Step 2: The Issuer sends the additional evidence to the acquirer via the card network post meeting the conditions set forth by the network to raise a pre-arbitration.

Step 3: The Acquirer passes on the evidence received to the merchant for further action of acceptance or rejection.

Step 4: The merchant will challenge by sending additional proof from their side to the network via the acquirer

Step 5: The card network will examine the proof submitted by both parties and reach an appropriate decision.

No matter the decision, the losing side (which can be the issuer or acquirer) must completely bear the administrative costs involved in conducting this pre-arbitration.

Even now, if the losing party is not satisfied with the verdict, they can go for arbitration to challenge the pre-arbitration verdict. In reality, it is very few cases that go to the final leg, as it becomes a costly process for the parties involved.

And here’s the crux of the possible outcomes of the arbitration process:

  • If the card network decides in the cardholder’s favor, the provisional credit that was initially posted to the cardholder’s account will become permanent, and temporary credit from the merchant account will be removed by the acquirer bank to refund it to the issuer bank. The merchant will now be liable for hefty costs from the card network which the acquirer will deduct from the merchant account.
  • If the card network decides in the merchant’s favor, the temporary provisional credit posted to the merchant’s account will become permanent and the issuer bank will redirect the transaction to the cardholder’s account. Now, the issuer bank will be liable for the cost associated with arbitration.

Not only this, but there are also quite a few setbacks in pre-arbitration and arbitration.

  • Prolonged procedure (10–45-day time window)
  • High fee (on an average range between $ 500 to 900 or more depending on the card network)
  • Incertitude outcome
  • Deployment of extensive resource
  • Reputational damage

The crux of Pre-arbitration and Arbitration chargeback:

To sum up, pre-arbitration and arbitration serve a pivotal role in resolving disputes between the cardholder and the merchant by maintaining trust and integrity in the payment ecosystem. These processes serve as a boulevard for both parties to present their cases and proofs to support their claims and ensure transparency in conflict resolution. Nonetheless, the pre-arbitration and arbitration process does take a toll on the involved parties. In the end, preventing pre-arbitration from being filed in the first place is the best way to deal with arbitration chargeback, which eliminates exorbitant costs, time-consuming “chargeback” phases, and concern over missed sales.

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Backspace Tech

Backspace Tech offers Fintech-as-a-Service to automate,simplify, and disrupt the payment industry by handling chargeback requests through a plug-and-play model.