How Mastercard Dispute Resolution Affects Merchants

If there’s one constant involved in dealing with chargebacks, it’s that the rules are always changing.

The card networks might roll out some minor updates at any time. That said, revisions tend to happen once or twice a year, when the card networks issue the most recent versions of their chargeback guides.

Of course, broader, more sweeping changes might come about from time to time. Back in 2018, for instance, Mastercard began implementing one of the most extensive overhauls the card network had ever tried: the Mastercard Dispute Resolution initiative, or MDR.

This was similar to what Visa did with their Visa Claims Resolution (VCR) initiative earlier that year,. MDR shifted Mastercard to a “rules-based” system for chargeback workflow management. The network’s goal was to make the chargeback process more fair, efficient, and responsive to the demands of contemporary payments.

Did it work? Well, that depends on your perspective.

In this post, we look at what Mastercard Dispute Resolution is, what the card network hoped to achieve, and how the initiative has impacted merchants so far.

What is Mastercard Dispute Resolution Initiative?

Mastercard Dispute Resolution: The Mastercard Dispute Resolution initiative, or MDR, is an updated chargeback process that Mastercard implemented in 2018. The aim of MDR was to better manage the dispute lifecycle and simplify the overall chargeback process.

The Mastercard Dispute Resolution initiative was the network’s way of modernizing and simplifying its chargeback process. For efficiency, the revamped system consolidated the various parts of dispute management into a single, streamlined platform.

MDR dramatically reduced response time frames and limited how long claims could remain open. It also officially retired the arbitration chargeback process, eliminating so-called “second chargebacks.”

The initiative began rolling out the changes in October 2018. The updated program now aligns more closely with Visa’s collaboration chargeback process. While knowing one system may make the other easier to understand, both are still complex.

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Why Change the Chargeback Process?

The consumer’s right to file a chargeback was introduced in the mid-1970s. Chargebacks were created to protect consumers from fraud and dishonest merchants. The mandate worked, helping build consumers’ confidence in payment cards.

The global marketplace has changed significantly over the last half century, though. The rise of the internet and eCommerce has altered the way people shop. However, the chargeback process has failed to evolve alongside it.

This disparity between rules and reality created new vulnerabilities that could be exploited by fraudsters. It also made it easier for cardholders to abuse the chargeback process, both deliberately and by accident.

Mastercard Dispute Resolution is Mastercard’s attempt to close these gaps and eliminate redundancies. In essence, it's a move to clean up outdated processes that weren’t designed for a digital marketplace.

What Did Mastercard Dispute Resolution Initiative Change?

To encourage compliance and maintain stability, MDR was rolled out in phases. Now that the process has been fully implemented, let’s look at some of the main things that have changed.

Mastercom

One of Mastercard’s first deployment steps was the release of an updated version of its merchant/issuer/acquirer dispute management platform, Mastercom Claims Manager.

Mastercom facilitates communications at each step of the dispute life cycle. It helps determine which party has financial responsibility for the disputed transaction, and expedites money transfers between issuers and acquirers. Merchants won’t use Mastercom directly, but their acquirers can take advantage of the system to resolve disputes more efficiently.

Additional Required Evidence

Even before the initiative, Mastercard had condensed all their convoluted reason codes into a simplified, intuitive list. MDR was designed to take advantage of this reorganization.

Some of the codes now require more cardholder information before an issuer can file a chargeback. Designed to help filter out invalid disputes, this mandate specifically applies to chargebacks with the following reason codes:

4831 – Incorrect Transaction Amount*
4834 – Point of Interaction Error*
4853 – Cardholder Dispute/Recurring Billing & Digital Goods**

* Requires cardholder’s final bill or receipt.
** Requires letter or email from cardholder, or Expedited Dispute Form.

Elimination of Code 4863 and 4840

MDR removed some reason codes completely, including code 4863 – Cardholder Does Not Recognize. Chargebacks with code 4836 were easy to file and hard to contest, meaning the code was commonly misused by cardholders and issuers.

MDR also retired reason code 4840 – Fraudulent Processing of Transactions. The network hasn't wholly disallowed some old codes. But, merchants should be aware that, eventually, everyone will be required to use the new designations. For more information on these and other updates, check out our complete chargeback reason code guide.

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Double Refunds

Unjust enrichment (or “double refund”) scenarios happen when the issuer files a chargeback, and a merchant issues a refund for the same transaction. Prior to MDR, these problems were typically resolved between the issuer and acquirer. In many cases, merchants ended up eating the costs.

Under the new initiative, however, this is no longer the case. Issuers are now responsible for ensuring there are no existing refunds/reversals before initiating a chargeback. By the same token, merchants should check for an active chargeback before issuing a refund. Essentially, whoever acts last in these situations ends up shouldering the liability.

Reduced Response Time Frame

Mastercard Dispute Resolution also reduced time limits involved in the chargeback process. In general, issuers and cardholders have 120 days from the original transaction processing date to initiate a chargeback. That said, some Mastercard chargeback codes have special time requirements. For example:

Authorization-related chargebacks have a time limit of 90 days.
Installment billing disputes have a time limit of 60 days (120 in some cases).
Cardholder disputes in the US must be filed within 60 days (120 in some cases) IF they don’t fall under an existing reason code.
Banks and merchants typically have 45 days or less to respond to each phase of the process.
Issuers’ chargeback filing window was reduced from 120 to 90 days for chargebacks with reason code 4834 - Point of Interaction Error.

The deadline for US merchants to respond in a Mastercard chargeback situation is 45 days. Keep in mind, however, that the time windows presented here don’t only apply to merchants. Other parties, such as acquirers and processors, may also have actions to perform in the same window, functionally leaving merchants with less time.

Elimination of Arbitration Cycle

Another significant change brought on by the Mastercard Dispute Resolution Initiative was the elimination of the arbitration chargeback cycle, also known as a second chargeback.

Under the MDR, issuers cannot file a second chargeback to contest a merchant’s representment. Instead, they can continue a dispute with a pre-arbitration response.

If this does not resolve the issue, the case can be escalated to arbitration. This means Mastercard itself will make the final decision for the claim. Also, this rule does not apply to the following reason codes:

4870 – Chip Liability Shift
4871 – Chip/Pin Liability Shift
4808 – Authorization-Related Chargeback

What About the Chargeback Guide?

Mastercard issued the most recent version of their Chargeback Guide in December of 2021. The most significant changes listed in the 600+ page document pertain to the network’s chargeback process, specifically pre-arbitration and the handling of authorization-related chargebacks.

The former ensures that a merchant is given time to either accept a chargeback or proceed through arbitration. The latter refers to chargebacks issued under reason code 4808 - Authorization Not Obtained. In this ruling, issuers must attempt to honor the transaction before filing a chargeback.

Finally, the guide reiterates that the following reason codes may be used for now, but will soon be completely retired:

4807 – Warning Bulletin
4812 – Account Number Not on File

This covers some of the major updates stemming from the implementation of Mastercard Dispute Resolution, but it omits many complex details. Always check the most current Mastercard Chargeback Guide for the latest regulations.

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How Has MDR Impacted Merchants?

Like Visa Claims Resolution before it, the Mastercard Dispute Resolution initiative was designed to streamline and improve the chargeback process for everyone. Has it worked for merchants?

Well, results have been mixed. One study conducted a year after Visa Claims Resolution adoption found that most merchants felt VCR either produced no difference, or actually made things more difficult. The policy simplified certain processes, but reduced timeframes and new workflows complicated others.

This could have been the result of temporary growing pains as merchants adjusted to the new system. Either way, though, it highlights just how complex and uncertain these massive changes can be for merchants who are accustomed to specific rulesets. While merchants have had less time to acclimate to the Mastercard Dispute Resolution Initiative, the overall response may be very similar.

Both MDR and VCR introduced steps to help streamline the chargeback process. That’s a good thing. But unfortunately, neither was ultimately sufficient to combat the serious threat of post-transaction (“friendly”) fraud. Unless new mandates include steps to address illegitimate chargebacks, even comprehensive changes to the system will be little more than band-aids with no long-term impact.

Have Additional Questions?

If you’re struggling to decipher and respond to Mastercard’s new chargeback rules, we can help.

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