How the Mastercard DAF Means Extra Fees for European eCommerce
The Mastercard DAF, or Dispute Administration Fee,, is just one of the numerous fees involved in processing payment card transactions. Specifically, the DAF covers the services of various parties in the during the chargeback process. As such, many retailers see such fees as a normal cost of doing business…but there’s a problem with that line of thought.
While different entities directly pay the funds for these services, the cost eventually trickles down to the merchant. Banks, processors, and card networks cover fees upfront, then pass the charges along to others, usually with a mark-up or administration fee. As the last link in the process chain, the merchant ultimately gets stuck with the bill.
If these fees aren’t understood and closely monitored, merchants may end up paying much more than they anticipated. With that in mind, let’s take a closer look at the Mastercard DAF. We'll see why it matters, and how merchants can cut their costs.
Mastercard’s Dispute Administration Fee, Explained
One of the fees Mastercard charges for intra- and inter-European transactions is called the Dispute Administration Fee. Through its Mastercard Consolidated Billing System, the network automatically generates a DAF for each chargeback, second presentment, and arbitration chargeback. The fee is paid to the sender and charged to the receiver of the respective chargeback cycle. Here’s how it breaks down:
First ChargebackIn the first stage of this cycle, when a chargeback is filed, the issuer is paid 15 EUR and the acquirer is charged 15 EUR.
Second PresentmentIn the second stage of this cycle the acquirer is paid 30 EUR (15 EUR net) and the issuer is charged 30 EUR (15 EUR net).
Arbitration ChargebackIn the final stage the issuer is paid 45 EUR (30 EUR net) and the acquirer is charged 45 EUR (30 EUR net).
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How the DAF Affects Merchants
Chargebacks were a major financial burden for merchants long before Mastercard mandated the Dispute Administration Fee. The situation grew increasingly dire; by 2020, merchants as a group stand to lose well-over $100 billion annually to chargeback costs.
As we mentioned earlier, these businesses also bear the brunt of monetary penalties doled out by other parties in the course of a dispute. This is even worse than it sounds: while chargeback fees follow a wholesale mark-up pattern, the broker layers are much more significant.
Regular chargeback fees can go through five or more re-pricing structures before they are dealt to the merchant. All these extra mark-ups could boost the final bill to nearly 10 times the original price on a single item. In other words, what starts out as a $5 fee could end up being a $45 cost for the merchant. In fact, chargebacks can become a significant profit source for ISOs, acquirers, networks, and issuers.
For retailers in Europe, the Mastercard DAF is just one more such cost added into the mix. Merchants are essentially backed into a corner, forced to dispute every possible chargeback just to survive. Even if a merchant manages to recover the DAF, the mere 15 EUR won’t come close to compensating for the resources lost in creating and submitting the representment.
Plus, that assumes the merchant is fortunate enough to win the representment and avoid an arbitration chargeback (also referred to as a second chargeback). Unfortunately, that’s a long shot at best. Merchants who opt to fight chargebacks are immediately hit with two distressing realities:
Reality 1: The Merchant Won’t Win
The cold, hard truth is that merchants are unlikely to win a reversal. Proprietary research by Chargebacks911® shows that only two in 10 merchants actively engage in representment activity. And card networks report that the small number of merchants who do fight back win just 21% of representments.
The rules and procedures for chargeback disputes are complex and change frequently. Mandates like Mastercard’s Dispute Administration Fee may give retailers more incentive to try representment. That said, most merchants lack the experience and expertise to assemble compliant cases.
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Reality 2: Second Chargebacks Will Happen
Per Mastercard’s regulations, issuers have the right to issue an arbitration (second) chargeback. Basically, the financial institution can dispute 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.
Arbitration chargebacks are common for many retailers. One specific merchant in a Chargebacks911 case study won 48% of its initial representment efforts, but experienced second chargebacks in over half of those cases...dropping the net win rate to 23.8%.
As we stated earlier, most merchants don’t understand the ins and outs of filing a compelling representment case that also adheres to all the complex regulations. Issuers know this, and know to look for the things merchants are most likely to miss. One seemingly-minor error might lead to a second chargeback. This can double the merchant’s expenses and losses after adding the Mastercard DAF.
Can Merchants Find Success Despite DAF?
The financial risks associated with the Mastercard Dispute Administration Fee are real. All merchants need a proactive chargeback management plan in place, but the DAF makes this crucial step even more important for European retailers. An effective chargeback management strategy involves two equally important components:
- Preventing transaction disputes. Merchants need to use complementary tools in a multilayer fraud detection strategy to mitigate risk and minimize liability.
- Creating compliant representment cases. Not only do chargebacks need to be disputed, they need compliant and compelling cases that ensure success.
Creating and implementing a successful plan may seem overwhelming, but Chargebacks911 can help. As leaders in the global payments industry, our chargeback experts can answer any of your DAF-related questions, or even create a customized mitigation strategy. Contact us today to learn more.