Understanding the Implications of Mastercard’s Dispute Administration Fee
Numerous fees are involved in processing payment card transactions, with funds going to various entities including issuers, card networks, and acquirers.
In most situations, the merchant is debited for these reimbursements. That’s why if fees aren’t monitored closely, merchants could ultimately pay much more than they anticipated.
Introducing Mastercard’s Dispute Administration Fee
Mastercard charges a Dispute Administration Fee (or DAF) for intra-European and inter-European transactions. Mastercard automatically assesses the DAF for each cycle of the dispute process, which is paid to the sender and charged to the receiver.
|First Chargeback||The issuer is paid 15 EUR and the acquirer is charged 15 EUR.|
|Second Presentment||The acquirer is paid 30 EUR (15 EUR net) and the issuer is charged 30 EUR (15 EUR net).|
|Arbitration Chargeback||The issuer is paid 45 EUR (30 EUR net) and the acquirer is charged 45 EUR (30 EUR net).|
All reason codes are subject to the DAF, however certain MCCs are exempt.
Mastercard’s Justification for DAF
In Mastercard’s official DAF announcement, the company justified the new fee with the following explanations:
- Issuers were supposedly forfeiting their chargeback rights in numerous situations because the transaction amount was less than the issuer’s cost of processing the chargeback. According to Mastercard, this imbalance increased issuers’ costs substantially.
- Mastercard also claimed that the DAF served as a needed incentive for merchants to implement fraud detection and chargeback prevention tools. This motivation had apparently been lacking, despite the fact that studies conducted prior to DAF’s implementation show the average eCommerce merchant utilized 5.5 fraud detection tools, costing at least $115,000 annually.
Implications for Merchants
Prior to Mastercard’s DAF, chargebacks were already a major financial burden for merchants. Not only are they losing revenue, merchants bear the brunt of nearly all monetary penalties doled out by other entities involved with these disputes.
A traditional wholesale model marks-up the cost of an item as it passes from one entity to another, normally passing through just a few mark-up channels. Chargeback fees also follow a wholesale mark-up pattern, but the broker layers are much more significant. Chargeback fees can go through five or more re-pricing structures before they are dealt to the merchant. What starts out as a $5 fee could end up being a $45 cost for the merchant (a mark-up that is almost 10 times the original price on a single item).
Because of the wholesale model, chargebacks can actually become a significant profit source for ISOs, acquirers, networks, and issuers.
This was the situation before the DAF. After the Dispute Administration Fee, the problem is even more pronounced for merchants. Now, merchants are essentially forced to dispute every possible chargeback—and they still won’t break even.
Even if a merchant is lucky enough to recover the DAF, the mere 15 EUR won’t come close to compensating for the resources lost in creating and submitting the representment.
Of course, that is only if the merchant is fortunate enough to win the representment and avoid an arbitration chargeback (also referred to as a second chargeback)—and those conditions are hopeful at best.
The Merchant Won’t Win
Chargebacks911®’s proprietary research has found just 2 in 10 merchants actively engage in representment activity. The rest simply accept chargebacks as a cost of doing business, assuming the odds are not in their favor and the consumed resources would be wasted.
Moreover, card networks report merchants win just 21% of representments.
Representment rules and procedures are complex, yet training is not a prerequisite to obtaining a merchant processing account. With the new DAF, merchants are incentivized to dispute chargebacks because increased expenses threaten their profits. However, they still lack the know-how to compile compliant cases.
Assuming that a process can be developed to help merchants submit compliant representments, there are no standards for basic record keeping. Without sufficient supporting data to substantiate the evolving requirement of compelling evidence, creating a fair consequence for friendly fraud will be impossible.
Second Chargebacks Will Happen
Per Mastercard’s regulations, issuers have the right to issue an arbitration chargeback. Basically, the financial institution disputes the validity of the original transaction a second time. This might happen because:
- The issuer changed the original chargeback reason code.
- The issuer obtained new information from the cardholder.
- The documentation provided by the merchant was incomplete, the evidence wasn’t compelling, or the supporting evidence wasn’t appropriate for the reason code.
Unfortunately, for many merchants, these arbitration chargebacks happen quite frequently. For example, as part of a Chargebacks911 case study, the prospective client won 48% of its initial representment efforts, but experienced second chargebacks in more than 50% of those cases. As a result, the merchant’s net win rate was only 23.8%.
Now, with the Dispute Administration Fee, second chargebacks double the merchant’s expenses and losses. The merchandise and revenue is forfeited, the resources used to dispute the chargeback are wasted, and the DAF is doubled to 30 EUR.
Can Merchants Find Success Despite DAF?
It is absolutely imperative for European merchants to create a proactive chargeback management plan. This involves two crucial steps:
- Preventing transaction disputes. Merchants need to use complimentary tools in a multilayer fraud detection strategy to minimize liability.
- Creating compliant representment cases. Not only do chargebacks need to be disputed, they need a compliant case that ensures success.
Time is of the essence. The longer merchants allow fees to accumulate, the more challenging it will be to mitigate risk and maintain stability.
Contact Chargebacks911 today to learn more about the risks associated with the Dispute Administration Fee. Our chargeback experts are leaders in the global payments industry and can help create a customized mitigation plan for your individual business.