Will the Mastercard Refund Authorization Mandate Prevent Chargeback Fraud?
We've been discussing the new Mastercard Dispute Resolution Initiative (MDRI) and Mastercard negative option billing rules over the last few weeks. Those aren’t the only recent changes to the Mastercard network, though. In this post, we'll look at the new Mastercard Refund Authorization Mandate and see how it will impact banks and merchants.
What is the Refund Authorization Mandate?
The Mastercard Refund Authorization Mandate is a new ruleset adopted by Mastercard in late 2018. In simple terms, the rules shorten the timeframe allowed for merchants to refund transactions.
Let’s assume a customer submits a return for a transaction involving a Mastercard-branded card. As a merchant, you’d first provide the buyer a return transaction receipt or other official notification that you will process a refund. Previously, you had up to 15 calendar days to submit that return transaction to your acquiring bank for clearing. Under the new regulations, you need to initiate authorization requests for product returns within 24 hours.
Of course, issuing banks don’t always support refunds for certain card types, such as non-reloadable prepaid cards. Unfortunately, you'll still need to have set policies and practices in place to handle these scenarios.
The new rules directly impact merchants and the acquirers who represent them. However, issuing banks can also play a role in the process. For example, issuers can include the unique identification code when submitting a request message. This will help speed up the process of matching refund requests to original transactions, enabling faster returns for cardholders.
When Does the Refund Authorization Mandate Take Effect?
There are two key dates to watch for regarding the Refund Authorization Mandate rollout:
|June 11, 2019||Both issuing and acquiring banks must support refund transaction authorizations.|
|April 17, 2020||Issuers need to list all pending refunds in cardholder-facing online banking apps.
Merchants are required to initiate an online authorization request for every refund. Airlines are excluded from this requirement.
After the deadline on April 17, 2020, a transaction will need to meet one the following conditions before an issuer may submit an authorization-related chargeback:
- The merchant did not obtain authorization.
- The primary account number associated with the transaction doesn’t exist.
- The authorization chargeback protection timeframe (7 calendar days from the date of the refund transaction authorization) is expired, and one of the following is true:
- The account is permanently closed before chargeback processing (for European merchants)
- The issuer must identify the account as “not in good standing” (if outside Europe)
Why is Mastercard Doing This?
The Refund Authorization Mandate is part of a broader attempt to modernize the Mastercard chargeback process.
Chargebacks first appeared in the market more than 45 years ago. The rulesets governing the chargeback process haven’t kept pace with market innovations, like the development of eCommerce. Along with the MDRI, the mandate represents a small step toward bringing this process into the 21st Century.
Existing rules often left gaps and loopholes that bad actors could exploit. Let’s assume, for example, you agree to accept a return or cancel a service paid for using recurring billing. Under preexisting rules, issuing banks had the right to file a “Credit Not Processed” chargeback up to 15 days after the return or cancellation date.
This left buyers with the opportunity to contact a merchant and request a refund through proper channels, then turn to their issuing bank and request a chargeback. The bank, unaware the merchant already initiated a return, allows the chargeback to go through. The buyer is, in effect, “double-dipping.” The cardholder gets a return from the merchant, and a chargeback from the bank, costing the merchant even more revenue than a chargeback on its own.
This could be an accident; the product of a cardholder simply not understanding the chargeback vs. refund process. However, that loophole also created opportunities for cardholder to engage in cyber-shoplifting.
The Refund Authorization Mandate seeks to make the process fast and fair for all parties involved. Yes, you’re expected to file return transactions within 24 hours after approving a return. This will be difficult in some situations. In exchange, though, you reduce the chance of cardholders “double-dipping” by requesting a return and a chargeback.
Mastercard Changes: Navigating the Chargeback Rule Changes in 2019 and Beyond
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Will the Mandate Work?
Sure, the Refund Authorization Mandate is meant to prevent bad actors from double-dipping. That sounds great, but will it really have a major impact on chargeback abuse? Not really.
We know that anywhere between 60-80% of all chargebacks are friendly fraud. In these cases, a buyer files a claim that doesn’t hold up to scrutiny. For example, let’s assume a buyer completes a purchase. The customer later experiences buyer’s remorse, but unfortunately, the timeframe allowed by the merchant to return the item passed. The customer might file a chargeback, claiming the purchase was unauthorized, or the item didn’t live up to expectations.
This is why we call the practice “friendly fraud.” Although the customer never intended to file a chargeback at the time of purchase, the result for the merchant is the same as any other fraud attack: lost revenue, lost merchandise, and higher fees.
Still other bad actors can engage in deliberate chargeback abuse. “Cyber-shoplifting” describes the pre-meditated practice of completing a purchase with the intent to file a chargeback.
The Mastercard Refund Authorization Mandate can’t address either of these scenarios. So, while Mastercard acknowledges the need for chargeback reform is a step forward...this particular step won’t ultimately change much.
Have additional questions about the Refund Authorization Mandate? Want to learn more about the Mastercard chargeback process? Click below to get in touch with one of our certified chargeback experts today.