Understanding Credit Card Disputes

Created by Allison Cloyd, Modified on Mon, 14 Nov 2022 at 01:12 AM by Allison Cloyd

It is possible for a client to challenge a credit card payment once it has been made, requesting that their credit card provider reverse a payment on their card. There are various stages to a dispute and you as the person who received the payment may be asked for details of what the payment is for and you have the option to contest a challenge.

In this article, we explain credit card disputes. You may also want to read our articles on Dispute Reasons and Understanding What to Provide in your Response to Disputes and Submitting a Dispute Response through the Payments Portal.

What is a dispute?
Disputes Cycle
Retrieval
First Chargeback
Pre-Arbitration/Second Chargeback

NOTE

Actionstep Payments is currently in Beta testing. If you would like to be part of our Beta testing group, please reach out to Actionstep Support.

What is a dispute?

A dispute generally occurs when a customer is unsatisfied or unfamiliar with a payment charged to their card and contacts their issuing bank for more information or to force-refund the transaction. Disputes affect Merchants of all varieties and can have a major impact on their bottom-line.

When a dispute occurs, the Merchant generally has the opportunity to accept liability - i.e. voluntarily concede to the dispute - or respond to the issuing bank with compelling evidence validating the transaction (representment). The cardholder’s issuing bank will make the final determination based on the evidence provided by both sides, and Merchants should use this guide to understand the dispute process and how they can respond.

Regardless of the outcome, as a Merchant you will be liable for non-refundable processing fees when a dispute is initiated against you.

KEY TERMS

Cardholder: The client that is disputing a transaction

Merchant: You, the law firm who provided the services being disputed

Issuing Bank: The bank that issued the card to the client (i.e. the cardholder’s bank)

Card Brand: The card brand the client’s card is associated with (Visa, Mastercard, Amex etc.)

Representment: The response a Merchant sends to the issuing bank when a transaction is disputed

Disputes Cycle

Disputes are categorized into three different and distinct cycles:

Retrieval
First Chargeback
Pre-Arbitration/Second Chargeback

Although the official terminology varies slightly depending on the Card Brand, this is how each of these unique dispute cycles are referred to within Actionstep Payments & Portal. Depending on the dispute cycle, there are different actions available for the Merchant to take, and different potential outcomes of the dispute.

Retrieval

A retrieval is when the cardholder contacted their issuing bank requesting more information about a transaction, but did not request a forced-refund of the transaction. Meaning, the cardholder simply does not recognize the Merchant’s name or the transaction as it appears on their statement and would like clarification. Therefore, the issuing bank initiates a retrieval and requests that the Merchant provide documentation verifying the transaction details.

Because a retrieval is not an actual chargeback of the payment, no funds are deducted from the Merchant’s Actionstep Payments balance during this dispute cycle. However, Merchants still have the opportunity - and are recommended to - send a representment with relevant documentation clarifying the transaction details.

If a Merchant fails to respond to a retrieval it may escalate to a chargeback. If escalated to a chargeback, the Merchant will notice a new dispute in Actionstep Payments portal, with Cycle status of First Chargeback.

Although a retrieval may escalate to a chargeback, it is not a pre-requisite step for the cardholder. In simple terms, a cardholder may skip the retrieval cycle altogether and initiate a chargeback from the onset.

Dispute Cycle	Merchant Actions	Possible Outcomes	Card Brands
Retrieval	Representment - The Merchant responds with documentation validating the payment Inaction - the Merchant fails to respond to the retrieval. This can result in escalation to a chargeback	Closed and not escalated - The cardholder is satisfied with the documentation provided by the Merchant and will not pursue a chargeback Closed and escalated - The cardholder still does not recognize this payment as valid after reviewing the Merchant’s documentation or because the Merchant failed to respond. Therefore, the cardholder escalates the retrieval & pursues a First Chargeback to recover the funds from the Merchant	Visa Mastercard American Express Discover

Retrieval processing flow

This diagram illustrates the processing flow for a retrieval dispute.

First Chargeback

When a First Chargeback is initiated against a Merchant the funds are immediately deducted from their Payrix balance and held until the issuing bank makes a final determination. If the Merchant does not have sufficient offsetting transactions or funds in their Available Balance, their bank account may be debited to cover the disputed amount.

If the Merchant ultimately wins the dispute, the funds will be returned to their Payrix balance (less any non-refundable fees associated with disputes).

A First Chargeback occurs when a cardholder seeks a forced-refund from their issuing bank for a transaction that they are disputing. There are numerous reasons that can cause a cardholder to initiate a chargeback, and during the First Chargeback cycle the Merchant’s response options are:

accept liability - i.e. voluntarily concede to the dispute & the held funds are credited to the cardholder
representment - i.e. send compelling evidence to the issuing bank representing their side of the dispute and validating the payment

Ultimately, the cardholder’s issuing bank will determine the outcome of a First Chargeback based on the evidence provided by both sides.

Dispute Cycle	Merchant Actions	Possible Outcomes	Card Brands
Retrieval	Representment - The Merchant responds with compelling evidence validating the payment Accept Liability - The Merchant chooses to voluntarily concede to the dispute in place of submitting a representment. The funds are credited back to the cardholder Inaction - The Merchant fails to respond to the chargeback resulting in an automatic loss (ruling in favor of the cardholder)	Won - The issuing bank ruled in favor of the Merchant & the disputed funds are returned to their Payrix balance Lost - The issuing bank ruled in favor of the cardholder & the funds are credited to the cardholder	Visa Mastercard American Express Discover

First Dispute processing flow

This diagram illustrates the process flow for the most common dispute scenario, a First Chargeback.

Pre-Arbitration/Second Chargeback

When a payment is disputed and the issuing bank rules in favor of the Merchant during the First Chargeback cycle (won), the cardholder still has the opportunity to present new evidence to the issuing bank that could result in a second chargeback of the same transaction. This is commonly referred to as Pre-Arbitration. When this occurs, the issuing bank and the Merchant - should they choose to accept arbitration - send their respective new evidence to the Card Brand to arbitrate the dispute.

After the Merchant won the First Chargeback, the relevant funds were credited back to their Actionstep Payments balance (less any non-refundable dispute fees). If a subsequent Pre-Arbitration occurs, the funds will, once again, be immediately deducted from the Merchant’s Actionstep Payments balance and held pending the Card Brand’s Pre-Arbitration decision.

If they do not have sufficient offsetting transactions or funds in their Available Balance, their bank account may be debited to cover the disputed amount. If the Merchant ultimately wins the Pre- Arbitration dispute, the funds will be returned to their Actionstep Payments balance (less any non-refundable fees associated with pre-arbitration disputes).

Although the official terminology for a second chargeback varies depending on the Card Brand, this dispute cycle is universally referred to as Pre-Arbitration within the Actionstep Payments Platform.

Some Card Brands (e.g. Visa) follow the Pre-Arbitration cycle process for all fraud & authorization related disputes, even if it is the first time that payment was disputed.

During this cycle, if the Merchant accepts arbitration they will work directly with the relevant Card Brand to reach a resolution. Therefore, Pre-Arbitration responses cannot be submitted in the Actionstep Payments Portal. Instead, our Support team will assist you with the relevant Card Brand specific process should the need arise for you to respond to a Pre-Arbitration dispute.

If you need assistance responding to a Pre-Arbitration dispute please contact support@actionstep.com.

If a Merchant chooses to accept arbitration (i.e. submit a representment) they will be subject to additional arbitration fees that vary depending on the Card Brand. Arbitration fees can be very costly, and often exceed the amount of the original transaction.

Therefore, we suggest Merchants only pursue arbitration representment if they have extremely compelling evidence in their favor and they’ve confirmed with the Card Brand they are working with what the fees associated with the arbitration process will be.

Dispute Cycle	Merchant Actions	Possible Outcomes	Card Brands
Pre-Arb/Second Dispute	Accept Arbitration (representment) -The Merchant submits new compelling evidence directly to the Card Brand, and incurs the additional fees associated with Arbitration Decline Arbitration - The Merchant chooses not to contest the second chargeback, and instead, voluntarily concedes to the second chargeback. The funds are then credited back to the cardholder Inaction - The Merchant fails to respond to the pre-arbitration resulting in an automatic loss (ruling in favor of the cardholder)	Won - The Card Brand ruled in favor of the Merchant & the disputed funds are returned to their Actionstep Payments balance (less non-refundable fees) Lost - The Card Brand ruled in favor of the cardholder & the funds that were deducted from the Merchant’s Actionstep Payments balance are credited to the cardholder (plus any additional Arbitration loss related fees are paid by the Merchant to the Card Brand)	Visa Mastercard Discover