Mastercard Pre-Arbitration: All Your Questions Answered

  • Max Jones
  • March 26, 2019
  • 4 minutes

Mastercard is introducing pre-arbitration into the dispute resolution workflow. What is involved in this cycle and how will the industry be impacted?

QUESTION #1

What is pre-arbitration?

The chargeback process can be difficult to understand. It’s filled with confusing terms and regulations, most of which vary from card network to card network.

In an effort to simplify things, let’s use an analogy to loosely explain the dispute resolution workflow. Let’s think of it like a tennis match.

A tennis ball—or in our case, a payment card transaction—is volleyed back and forth between opponents. Sometimes the match is short. One solid hit and the game is over. Other times, a lot of back and forth is needed before a winner is declared.

Think of pre-arbitration as the second-to-last hit in a long, drawn-out match. The dispute has gone back and forth, over the net, several times and no resolution has been reached. If the cardholder’s bank can’t serve up the game-winning point with pre-arbitration and finally close the case, the dispute may be turned over to Mastercard for mediation.

QUESTION #2

Is pre-arbitration a new process?

Is pre-arbitration new? Yes and no.

Technically, pre-arbitration isn’t a new addition to the dispute resolution workflow. Mastercard has always allowed acquirers (merchant’s bank) and issuers (cardholder’s bank) to use the pre-arbitration cycle, but there were no rules or enforcement efforts.

What is new are the regulations and compliance expectations for pre-arbitration. Mastercard has launched a new initiative to modernize the dispute resolution process. Part of that update is a formal inclusion of the pre-arbitration cycle into the workflow.

QUESTION #3

How are rules changing?

Before we talk about how rules are changing, let’s first understand the legacy workflow. This is how a dispute volleys back and forth between the merchant’s bank and the cardholder’s bank.

First Presentment
The order is processed and the merchant submits transaction data to the cardholder’s bank. The bank charges the cardholder’s account.

Chargeback

The cardholder’s bank disputes the transaction. Funds are withdrawn from the merchant’s bank account.

Second Presentment

The merchant challenges the chargeback by providing evidence that validates the original purchase or disproves the chargeback.

Arbitration Chargeback

The cardholder’s bank disputes the transaction a second time because the bank has obtained new information or finds the second presentment invalid.

Arbitration Case Filing

The chargeback process has ended, yet the merchant doesn’t want to accept liability. The merchant requests that Mastercard review the case, issue a verdict, and assign responsibility.

Mastercard’s rule changes will remove one cycle from the dispute resolution workflow and introduce another. The initiative will remove the arbitration chargeback cycle and add pre-arbitration.

These two cycles are similar, yet different. Think of it like this: your opponent broke a string on his tennis racket and grabbed a new one to finish the game.

Just as both rackets can effectively serve the ball back over the net, both an arbitration chargeback and a pre-arbitration case filing allow the cardholder’s bank to respond to the merchant’s second presentment. However, like the new and improved racket, pre-arbitration serves up the dispute a little differently.

When the dispute resolution workflow included arbitration chargebacks, a response to the second presentment shifted financial responsibility to the merchant’s bank. And, if the case needed arbitration, the merchant’s bank was the one to reach out to Mastercard.

With pre-arbitration, both those responsibilities switch from the merchant’s bank to the cardholder’s.

Here’s how the workflow will progress under Mastercard’s new rules:

First Presentment
The order is processed and the merchant submits transaction data to the cardholder’s bank. The bank charges the cardholder’s account.

Chargeback

The cardholder’s bank disputes the transaction. Funds are withdrawn from the merchant’s bank account.

Second Presentment

The merchant challenges the chargeback by providing evidence that validates the original purchase or disproves the chargeback.

Pre-Arbitration Case Filing

The chargeback process has ended, yet the cardholder’s bank doesn’t want to accept liability because the bank has obtained new information or finds the second presentment invalid.

Pre-Arbitration Response

The merchant’s bank reviews the pre-arbitration case and either accepts liability or denies liability by rebutting the case.

Arbitration Case Filing

If the merchant’s bank rebuts the pre-arbitration case filing, the cardholder’s bank can ask Mastercard to arbitrate.

The dispute resolution workflow technically consists of two different processes: the chargeback process (the chargeback and second presentment) and arbitration (pre-arbitration and arbitration). Each process has its own rules and regulations, but they work in tandem to solve the transaction dispute.

QUESTION #4

Is it possible to respond to pre-arbitration?

After the issuer serves up a pre-arbitration case, there are two potential response:

  • Accept liability: Liability is accepted, and the case is closed.
  • Deny liability and rebut the case: In certain situations, additional information may be provided to rebut the case. This would more than likely advance the case to arbitration.
QUESTION #5

When do these rules go into effect?

The Mastercard Dispute Resolution Initiative includes several rule changes implemented in six-month intervals over a two-year period.

This particular update—removing the arbitration chargeback cycle and introducing pre-arbitration—is scheduled to take effect in April 2020.

While there is still quite a bit of time until these rules go live, it is important to make an effort to understand them now. The Mastercard Dispute Resolution Initiative has several different pieces. You need to recognize how they each impact the other if you want to be fully compliant and maintain the greatest profitability during the transition.

Have More Questions About Mastercard’s
Pre-Arbitration Process?

We believe the challenge of running a business should be delivering great products or services, not managing payment risk. That’s why Midigator aims to remove the complexity of payment disputes: so businesses can get back to business.

If you have questions about the new Mastercard pre-arbitration process—or anything else chargeback related—don’t hesitate to contact our team of payment experts.

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