Credit Card Processing

Mastercard Dispute Resolution Initiative (MDRI)

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September 09, 2019

In October 2018, Mastercard began a phased revamp to its chargeback process, calling it the Mastercard Dispute Resolution Initiative (MDRI).

Mastercard plans to phase in MDRI over a 2 year period that began in 2018 and will be fully completed in 2020. Specific dates and what will be involved in each phase of the rollout may change over time, and we’ll add details as Mastercard makes them available.


Understanding Disputes

Before we get into the new 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 new process is called the Mastercard Dispute Resolution Initiative, or MDRI.

MDRI seeks to streamline the chargeback process for businesses and cut down on “invalid” disputes that can cost you time and money. Additionally, it will make greater use of the MasterCom electronic response system for managing and responding to disputes.

MDRI consists of four phases over a two-year period.

Phase 1 – Additional Information

In the first phase of MDRI, started in October 2018, Mastercard will require card issuers to collect more information from cardholders about the reason for the chargeback. The goal is to prevent disputes that don’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 plans to eliminate #4863 (cardholder doesn’t recognize the charge) in phase 2 of the MDRI. It’s not clear yet if they will replace it or roll those disputes into another reason code, such as a fraud code.

Phase 2 – Don’t Refund After a Dispute

The second phrase of MDRI, expected around mid-April 2019, is an important one to be aware of. It involves 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. 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.

Also in this phase, Mastercard will eliminate two reason codes: #4840 (fraudulent transaction processed) and #4863 (cardholder doesn’t recognize charge.)

Phase 3 – Unknown

Mastercard plans a third phase of MDRI for mid-October 2019, but has not yet announced what changes or additions will be part of it.

Phase 4 – Second Chargeback Changes

In mid-April of 2020, Mastercard will eliminate “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 will 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?

If it works as intended, 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.

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Ellen Cunningham

BY Ellen Cunningham

Ellen has a degree in English, which she puts to work every day researching and writing articles, processor reviews, and social media posts. She enjoys the challenge of explaining complex topics - making her a perfect fit for credit card processing - and strongly believes in CardFellow's mission of empowering business owners through education. When she's not busy following the latest industry news, Ellen can be found cycling the beautiful trails of southern New England, narrowly losing at pub quizzes, or practicing her trapeze skills in aerial circus class.

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