by Ben Dwyer In October 2018, Mastercard began a phased revamp to its chargeback process, calling it the Mastercard Dispute Resolution Initiative (MDRI).
Mastercard planned to phase in MDRI over a 2 year period that began in 2018 and was completed in 2020. Now that we’re several years past 2020, we have more information on what the changes entail and what it means for your business. Keep in mind that more changes are likely in the future, and we’ll continue to update this article to capture changes.
- Understanding Disputes
- Mastercard Dispute Resolution Initiative
- MasterCom
- What does MDRI mean for my business?
- Chargeback Management Companies
Understanding Disputes
Before we get into the MDRI processes, here’s a quick refresher on disputes.
Chargebacks, or ‘disputes’ as Mastercard typically refers to them, occur when a customer doesn’t recognize a charge or feels the charge is invalid. Common scenarios in which you could receive a chargeback include:
- A cardholder claiming they didn’t make the purchase.
- The customer says they didn’t receive the goods/services ordered.
- The customer says that the goods/services received are different than described.
Any of these can be legitimate complaints or they can be examples of “friendly fraud,” where a customer claims they didn’t receive an item or didn’t make that purchase in order to fraudulently obtain the items without paying.
Mastercard aims to cut down on “friendly fraud” disputes by detecting them early through requiring additional information. That’s similar to Visa’s improved Claims Resolution process, which also intends to fight invalid chargebacks.
Mastercard Dispute Resolution Initiative
As noted in the introduction, Mastercard’s process is called the Mastercard Dispute Resolution Initiative, or MDRI.
MDRI sought to streamline the chargeback process for businesses and cut down on “invalid” disputes that can cost you time and money. Additionally, it made greater use of the MasterCom electronic response system for managing and responding to disputes.
MDRI consisted of four phases over a two-year period.
Phase 1 – Additional Information
In the first phase of MDRI, started in October 2018, Mastercard required card issuers to collect more information from cardholders about the reason for the chargeback. The goal was to prevent disputes that didn’t have substantiating information.
In its chargeback guide, Mastercard explains that issuers must have a letter or email as supporting documentation for chargeback “reason codes” related to the cardholder not recognizing a charge or disputing the charge.
Mastercard specifies four chargeback reason codes for which the issuer will need to get more information. Those reason codes are:
- #4831 (incorrect transaction amount)
- #4834 (point of interaction error)
- #4863 (cardholder doesn’t recognize the charge)
- #4853 (cardholder disputes this charge – for recurring billing and digital goods purchases)
However, Mastercard planned to eliminate #4863 (cardholder doesn’t recognize the charge) in phase 2 of the MDRI, as it was too vague and easy to abuse.
Phase 2 – Don’t Refund After a Dispute
The second phrase of MDRI, back in mid-April 2019, involved chargebacks when you refund a customer. The bottom line: if you receive a chargeback, don’t issue a refund.
After April 2019, if you initiate a refund after you win the first chargeback, the issuer can file a second chargeback, which can result in a double loss for you: the refund and then the transaction amount pulled again because of the second chargeback.
It’s still good practice to provide refunds where possible before it turns in to a chargeback. Be sure to check for active chargebacks prior to issuing a refund. If you provide a refund and still receive a chargeback afterwards, proof of the refund serves as defense against that chargeback.
Be sure to post clear refund / return policies, and work with customers whenever possible to avoid chargebacks in the first place.
As planned for this phase, Mastercard eliminated two reason codes for chargebacks: #4840 (fraudulent transaction processed) and #4863 (cardholder doesn’t recognize charge.)
Phase 3 – Reduced Timeframes
As part of the third phase, in 2019, Mastercard reduced some of the timeframes in disputes, just as Visa did in their chargeback updates. Mastercard imposed time limits that vary by type of chargeback: 90 days for authorization-related chargebacks and 60 days for installment billing chargebacks. Businesses must respond to chargebacks within 45 days.
Phase 4 – Second Chargeback Changes
In mid-April of 2020, Mastercard eliminated “second chargebacks” for certain reason codes, including:
- #4837 (Fraud*)
- #4853 (Cardholder disputes)
- #4834 (Point of interaction error)
*This does not include eliminating reason codes #4870 or #4871, which relate to the EMV chip card liability shift.
Prior to this shift, issuers could initiate a chargeback a second time for those reason codes. After this phase, they are not be able to do so. Second chargebacks for other reason codes not specified in the list above can still apply.
Pre-Arbitration
Instead of a second chargeback, issuers can submit a pre-arbitration chargeback if the cardholder disagrees with the evidence the business presented to fight the chargeback.
Arbitration means that Mastercard itself will get involved in the chargeback decision. (Prior to arbitration, the bank made decisions regarding the validity of the cardholder’s dispute.)
Card brand arbitration comes with costs – typically hundreds of dollars. Some processors – like Stripe – don’t allow arbitration or appealing a chargeback decision. If chargebacks are a concern and you want the ability to appeal a ruling on a chargeback, be sure to check the processor’s policies before signing up.
MasterCom
Like the Visa Claims Resolution (VCR) system, Mastercard’s Dispute Resolution Initiative aims to reduce invalid disputes and offers new, streamlined systems to help achieve that goal. Mastercard’s system is called MasterCom.
You as the business owner won’t access MasterCom yourself; your processor will use it on your behalf. Both issuers and acquirers use MasterCom to initiate and respond to chargebacks. If you disagree with a chargeback and intend to fight it, your processor will submit supporting documents through MasterCom for you. The system also keeps a record of past chargebacks.
Chargebacks and your responsibilities can be confusing. Be sure to check out our article What Happens When You Get a Chargeback? for a full description of the process and what to expect.
What does MDRI Mean for My Business?
MDRI can help prevent illegitimate chargebacks, such as “friendly fraud” disputes. It also seeks to streamline and shorten the chargeback process, narrowing down the timeframe for some decision.
However, MDRI won’t eliminate all chargebacks. It’s still a good idea to take active measures to prevent fraudulent transactions and to work with legitimate but unhappy customers.
Chargeback Management Solutions
For businesses that want additional assistance managing or fighting disputes, a chargeback management company can help. For a fee, these companies will work with you to implement procedures to limit chargebacks, and will handle the dispute process when you do receive chargebacks.
Many businesses don’t need a dedicated chargeback management solution. However, if you have high dollar value transactions where chargebacks are a significant loss, it can be worthwhile. These companies can also be a good fit for “high risk” industries that already have higher than average chargebacks. Keeping your chargeback ratio down is the best way to keep your merchant account in good standing, especially in industries known for chargebacks.
