MasterCard Dispute Resolution Initiative

MasterCard has entered phase two of its Dispute Resolution Initiative (MDRI) and so we felt that now was a good time to shoot out some information about what has changed in the world of chargebacks and what changes are still on the horizon. But first some history…

While credit itself has been around about as long as the world’s oldest profession, it wasn’t until the 1950’s when Diners Club released the first credit card, for our modern system of credit issuing and acceptance to take form. In the mid 1970’s, chargebacks were introduced to help build consumer confidence in a time when many people were still wary about revolving credit accounts. Since then times have changed and the credit card along with them.

The credit card industry is in a constant state of change, but it requires deliberate effort to make those changes. The chargeback system is a part of the industry that has been largely neglected for the past 50 years, but a year ago that started to change.

In April 2018 Visa released its Visa Claims Resolution (VCR) initiative which was a major overhaul of its chargeback system. VCR was designed to stop fake or fraudulent chargebacks as well as streamline the entire chargeback process. Before VCR, the average chargeback resolution time-frame for Visa was a whopping 46 days, with some disputes continuing for more than 3 months. Visa’s new chargeback initiative has just turned one, and it’s still too soon to tell how it will mature, so far there have been mixed reviews at best.

Unlike Visa, MasterCard is rolling out its new system relatively slowly in 4 phases over 18+ months. Phase one started in Oct 2018 requiring issuers to collect more information from cardholders before allowing a chargeback for a number of reason codes. This additional information should help MasterCard weed out invalid disputes before they start attempting to limit outright fraud on the part of cardholders who issue deliberately false chargebacks, typically known as friendly fraud.

Phase 1 – Affected Reason Codes:

• 4831 – Incorrect Transaction Amount
• 4834 – Point of Interaction Error
• 4853 – Cardholder Dispute
• 4863 – Cardholder Does Not Recognize

Phase 2 is where we catch up to present day and effects how merchants handle chargebacks and refunds. Basically, if a business receives a chargeback under these new rules the business should not refund the original transaction. Instead the merchant should continue to work through the chargeback process and let that process handle the funds.

If a business receives a chargeback and later decides to refund the card holder, even after winning that chargeback, the issuer can still issue a second chargeback resulting in the business being out the money twice. While there is a way to contest the double debit it would be easier to just not have to deal with that in the first place.

This phase also shortens the filing time frame on reason code 4834 (Point of Interaction Error) from 120 day to 90. It also removes two reason codes all together.

Phase 2- Affected Reason Codes:

• 4834 – Point of Interaction Error – Chargeback time-frame lower form 120 to 90 days.
• 4840 – Fraudulent Processing of Transactions – Removed as a chargeback reason code.
• 4863 – Cardholder Does Not Recognize – Removed as a chargeback reason code.

Phase 3 is an unknown at this time. We know its scheduled to start in October 2019, however MasterCard has yet to state what exactly this phase is. We will post an update as we get more information about this phase and what to expect.

Jumping to April 2020 and beyond, phase 4 will stop allowing subsequent chargeback reason codes. Instead, issuers will be able to continue a dispute with pre-arbitration which is very similar to Visa’s new setup.

Phase 4 – Affected Reason Codes:

• 4837 – Fraud (excludes 4870 – Chip Liability Shift & 4871 – Chip/Pin Liability shift)
• 4853 – Cardholder Dispute
• 4834 – Point of Interaction Error

Only time will tell how effective these changes are at improving the chargeback system and minimizing bogus chargebacks. So far, just based on Visa’s VCR initiative, we wouldn’t expect too much, at least initially. It is promising to see both Visa and MasterCard taking steps in the right direction. However, it may take many years before we see any real improvement at the merchant level. Until then, we will move forward cautiously optimistic that associations are attempting to level the playing field and making the chargeback process more fair to merchants.