Arbitration FeesHow the Cost of Arbitration Stacks Up Against Chargebacks
Think Chargeback Costs Can’t Get Worse? Meet the Arbitration Fee.
Okay. Let’s say you received a chargeback, and in response, you compiled your evidence and submitted your representment package to the bank. The bank makes a final ruling, taking the new evidence into account.
If the issuer or the cardholder still have serious doubts, even after you present the evidence, they have the option to reject it. This is what’s known as either a pre-arbitration (for Visa transactions) or an arbitration chargeback (for Mastercard).
If this happens, you have two options. One is to simply cut your losses and stop pursuing the matter. The other option, if you’re confident that you’re in the right, is to escalate the dispute to the card network.
You have to be careful, though: arbitration fees can be significantly higher than typical chargeback fees. Here, I’ll explain the critical differences between a chargeback fee and an arbitration fee, and what it means when your dispute escalates to the final stage.
Chargeback Fees
Why do processors apply chargeback fees? How much do chargeback fees cost? And crucially, how can you avoid them? In this guide, we take a closer look at how these dispute fees work and what you can do to insulate your business from unnecessary losses.
Chargeback Fees vs. Arbitration Fees
We’ll tackle the most common area of confusion first: chargeback fees aren’t the same as arbitration fees.
While you incur chargeback fees at the beginning of the chargeback life cycle — right when you are first notified of the dispute — arbitration fees show up at the end of the chargeback life cycle, usually after several rounds of back-and-forth between you and the cardholder’s issuing bank.
Specifically, arbitration fees are assessed by card networks whenever they have to step in to make a final, binding decision about a dispute. Because of the time and effort involved, arbitration fees are often significantly higher than standard chargeback fees.
To help illustrate, say you pay to park on the side of the street for two hours. You lose track of time and come back half an hour late. Unfortunately, there’s a parking ticket on your windshield. A chargeback fee is like this parking ticket; pay it, and the ticket goes away.
But, let’s say you decide to argue your case in traffic court. Here’s where things escalate. If you prevail in court, you’re off the hook. But if you go to court, your parking ticket can potentially balloon from a two-figure fine to a three- or four-figure penalty when accounting for court fees and other costs.
Although arbitration fees are so high, participating in arbitration doesn’t guarantee that you’ll get the outcome you want. Because the stakes are so high, you’ll want to think clearly before you proceed to arbitration. Although winning a chargeback is ideal, not all disputes are worth fighting until the bitter end.
How Much Are Chargeback Arbitration Fees?
Arbitration can mean incurring fees that average about $500 per dispute.
It’s also important to note that arbitration fees are levied against the party which lost the dispute, instead of falling entirely on the merchant. If a cardholder’s claim loses in arbitration, the issuer may be on the hook for that fee. That’s still a big risk, though, which is why only about 2% of dispute progress to this stage.
If a dispute goes to arbitration, there’s no recourse if you disagree with the card network’s ruling. All decisions regarding the original chargeback from this stage will be final, because arbitration is a “hard stop” in the chargeback process. The only exception might be if you can provide new, additional evidence. It would have to be extremely convincing, though, and you’ll have to pay an additional fee ($1,000 USD) to the card network in question to reconsider the ruling.
