Mastercard Chargeback & Dispute Merchant Guide

As someone who previously owned an e-commerce store, I’ve had to prepare myself for probable chargebacks (aka disputes) from Mastercard. I also want to arm you with the knowledge to prepare your store.

I’ll primarily talk about how Mastercard’s chargeback process differs from other providers. Such information will include reason codes, time limits, the process itself, and prevention tools.

Let’s learn about Mastercard’s chargebacks.

Key Takeaways

• Chargebacks for Mastercard are similar to other networks aside from timeframes, terminology, reason code structures, and fees.
• Customers have 90 – 120 days to file a chargeback.
• Mastercard's tools, like Mastercom, streamline dispute resolution for faster outcomes.
• Mastercard’s chargeback thresholds are 1.5% (excessive) and 3.0% (high excessive).
• Clear communication, accurate records, and fraud prevention help merchants avoid chargebacks.

How Are Mastercard Chargebacks Different?

Here are some of the differences we’ll notice with Mastercard chargebacks and disputes:

• Pre-Arbitration: This stage allows both parties to review the evidence and potentially resolve the dispute without escalating to arbitration.
• Automation: Processes like the Ethoca Alerts with their automated reversals streamline the dispute process and reduce manual intervention.
• Compliance Cases: Has a separate compliance case process to address rule violations that may not fall under traditional chargeback reason codes.
• Timeframes: Timeframes for different parts of the chargeback process are designed to expedite the resolution process and ensure timely responses from both parties.
• Terminology: Different card networks and payment processors may use different terminology for the same concepts. For example, Mastercard uses the term "second presentment" while Visa uses "representment."
• Reason Code Structure: The specific reason codes and their categories differ between card networks.
• Fees: Chargeback fees can differ between card networks and payment processors.
• Retrieval Requests: Mastercard still utilizes retrieval requests in certain situations, primarily for Maestro debit card transactions, while other networks like Visa have phased them out.

Similarities, meanwhile, include:

• Reason Codes: Most card networks and payment processors use reason codes to categorize the specific reasons for chargebacks.
• Evidence-Based Resolution: Chargeback disputes are typically resolved based on the evidence provided by both the cardholder (through the issuer) and the merchant (through the acquirer).
• Dispute Resolution Process: While the specific steps and terminology may vary, most card networks have a multi-step dispute resolution process that includes chargebacks, representments, and arbitration.

Let’s jump into the various timeframes every party will need to adhere to.

Summary: Mastercard chargebacks and disputes have specific timelines, terminology, reason codes, and processes.

Time Limits for Parties Involved

Here are the different time limits regarding Mastercard chargebacks:

Notes:

• All reason codes for these categories give customers up to 120 days to file a chargeback:some text
  • Cardholder Disputes
  • Fraud-related
• Reason codes under Authorization-related allow customers up to 90 days.
• Point-of-interaction errors for ATM Disputes and Duplication / Paid by Other means give customers up to 120 days to file chargebacks.some text
  • The rest give up to 90 days.

Some reason codes give up to a 540-day extension.

The issuer can file a chargeback for specific situations where the standard timeframe of 120 days has passed.

This rule applies to transactions involving the purchase of merchant-branded prepaid gift cards. Where the merchant has gone out of business and the gift card either has no expiration date or the expiration date has passed.

It also applies to cases involving the interruption of ongoing services.

The 540-day timeframe starts from:

1. The transaction settlement date for gift cards without expiration.
2. From the Central Site Business Date of the first presentment for interrupted services.

For gift cards with an expiration date, the timeframe is 120 calendar days from the expiration date.

Stages of the Chargeback Process

Important:

• Mastercard doesn’t have a Request for Information stage in their chargebacks, anymore.

Mastercard's chargeback (or dispute) process is identical to the cycle used for other card networks and payment processors. But with primarily different labeling.

Here’s the cycle assuming the customer already initiated the dispute:

1. First Presentment: The acquirer (the merchant's bank) sends transaction details to the issuer (the cardholder's bank) for posting to the cardholder's account.

This includes:

• Transaction amount
• Date
• Merchant details
• Authorization code.

2. Chargeback: The issuer initiates a chargeback if the transaction meets the criteria for a valid chargeback reason code.

3. Second Presentment: The acquirer and merchant can submit a second presentment if they believe the chargeback is invalid or can provide additional information to resolve the dispute.

They’d provide information to prove that the transaction was legitimate such as:

• Transaction details
• AVS information
• Conversation logs
• Proof of authorization

The evidence provided will depend on the reason code for the chargeback.

4. Pre-Arbitration (Optional): For most reason codes, the issuer can initiate pre-arbitration if the dispute isn't resolved after the second presentment. This is an informal attempt to resolve the issue before escalating to arbitration.

The issuer would submit a pre-arbitration case through Mastercom, providing additional documentation or arguments to support their claim.

5. Arbitration: If the dispute remains unresolved, either party can initiate arbitration. Mastercard acts as the arbitrator, reviewing all evidence and making a final, binding decision on who is financially responsible for the chargeback.

6. Compliance Case (If Applicable): In cases where a chargeback isn't the appropriate mechanism (e.g., rules violations), either party can file a compliance case. This process addresses violations of Mastercard's rules and standards.

Screenshot from Mastercard (PDF file).

If the situation escalates to a compliance case, the process changes.

Compliance Case Process

A compliance case is a dispute resolution process within the Mastercard network that addresses violations of Mastercard's rules and standards.

Unlike chargebacks, which focus on transaction-specific disputes, compliance cases deal with broader issues like incorrect fees, processing errors, or non-compliance with Mastercard regulations.

They typically happen when:

• There is no specific chargeback reason code that applies to the dispute.
• A Mastercard rule has been violated, resulting in a financial loss for one of the parties involved.
• The dispute cannot be resolved through the regular chargeback process.

Now, let's delve into the steps involved in the compliance case filing process for Mastercard:

1. Pre-Compliance Filing: The party initiating the dispute (the Filing Customer) submits a pre-compliance case detailing the alleged rule violation and the resulting financial loss.
2. Pre-Compliance Response: The party against whom the case is filed (the Filed-Against Customer) has 30 calendar days to respond.some text
   1. They can accept liability, reject the case with a rebuttal and documentation, or take no action, which results in automatic rejection after 30 days.
3. Compliance Filing: If the pre-compliance case is rejected, the Filing Customer can escalate it to a compliance case within a specific timeframe. They must provide additional documentation or arguments supporting their claim.
4. Compliance Case Response: The Filed-Against Customer has 10 calendar days to respond to the compliance case.some text
   1. They can accept liability, reject the case with a rebuttal, or take no action, leading to automatic rejection after 10 days.
5. Mastercard Review: If the compliance case is rejected, the Dispute Resolution Management team (DRM) reviews the case and makes a final decision on who is financially responsible.
6. Appeals Process: If the issuer or acquirer disagrees with Mastercard's ruling in an arbitration or compliance case, they can file a written appeal within 45 calendar days of the ruling.

Mastercard may decline to rule if the case is not filed correctly or lacks sufficient documentation.

Screenshot from Mastercard.

What’s Mastercard’s Chargeback Threshold?

• Excessive Chargeback Merchant: 1.50% in a calendar month.
• High Excessive Chargeback Merchant: 3.00% in a calendar month.

Mastercard’s Excessive Fraud Merchant Program and Excessive Chargeback Merchant Program place you in monitoring programs when exceeding a certain number of chargebacks and chargeback basis points.

Fraud chargeback basis points are calculated to identify merchants with an excessive amount of fraud-related chargebacks.

Here’s how it’s calculated:

• Mastercard tallies the number of fraud-related chargebacks in a calendar month.
• This number is divided by the number of Mastercard e-commerce transactions processed for the merchant in the preceding month.
• The result is then multiplied by 10,000.

For example, if a merchant had 200 fraud chargebacks in October and 25,000 e-commerce transactions in September, their fraud chargeback basis points would be 80. (200 / 25,000) * 10,000 = 80.

Let’s first talk about the Mastercard Excessive Chargeback Merchant Program.

1. Mastercard Excessive Chargeback Merchant Program

The Mastercard Excessive Chargeback Merchant (ECM) Program is a monitoring and enforcement initiative designed to address high chargeback rates among merchants. 

There are 2 different tiers:

• Excessive Chargeback Merchant (ECM): 100 – 299 chargebacks and 150 – 299 chargeback basis points.
• High Excessive Chargeback Merchant (HECM): 300 or more chargebacks and 300 or more chargeback basis points.

Here’s the situation explained in video form:

https://www.youtube.com/watch?v=NlXbxIEIMoQ

HECM is a more severe classification reserved for merchants with higher chargeback rates. The penalties and monitoring are stricter to incentivize faster resolution of the underlying issues causing the excessive chargebacks.

Once you’re labeled as an ECM or HECM for 2 months, you’ll begin to accrue non-performance assessments (fines):

Screenshot from: JP Morgan (PDF link).

You’ll continue to be labeled as ECM / HECM until you bring your chargeback rate below the threshold for 3 consecutive months. If you remain in either program for more than 19 months, you could lose your ability to process transactions with Mastercard.

Summary: Mastercard's ECM and HECM programs penalize merchants with excessive chargebacks, escalating fines until compliance is achieved.

2. The Mastercard Excessive Fraud Merchant Program Is Is Also Important

The Mastercard Excessive Fraud Merchant Program (EFM) is a program designed to monitor and address merchants with excessive fraud-related chargebacks.

The EFM program monitors fraud-related chargebacks from e-commerce transactions specifically. It identifies merchants as EFM based on 4 criteria:

1. Number of e-commerce transactions: Has at least 1,000 e-commerce transactions from the previous month.
2. Amount of fraud-related chargebacks: $50,000 or higher of fraud-related chargebacks.
3. Number of fraud-related chargeback basis points: At least 50 basis points.
4. Percentage of the merchant's clearing volume processed using EMV 3D Secure (3DS).some text
   1. Located in a non-regulated country (US and Canada): 10% or lower.
   2. In a regulated country (Europe): 50% or lower.

Mastercard does a good job at explaining it in their video:

https://www.youtube.com/watch?v=kNayUo1RcrE

If a merchant is identified as an EFM for 2 months, consecutive or nonconsecutive, they will be subject to non-performance assessments.

These assessments will continue until the merchant's fraud-related chargebacks fall below the program thresholds for 3 consecutive months.

And these assessments will result in the following fees:

Source: JP Morgan (PDF link).

If you remain in the program for more than 19 months, Mastercard COULD revoke your ability to process cards in their network.

Summary: Mastercard's EFM program penalizes merchants with excessive fraud-related chargebacks from e-commerce transactions.

Reason Codes to Expect

Here are many of the reason codes that you’ll typically find during a chargeback when dealing with transactions as a US vendor within a US network.

If you’re dealing with card networks in other countries, for example, Australia and Germany, you’ll deal with interregional codes. We talk about those, along with more information about the other reason codes, in a separate guide.

1. Cardholder Disputes

2. Fraud

3. Point of Interaction

4. Authorization

5. Other Codes

What Is a Mastercard Chargeback? (Should Merchants Care?)

• How Long a Mastercard Chargeback Lasts: Up to 120 days (17 weeks)
• Fees: $20 – $100

A Mastercard chargeback occurs when a cardholder disputes a transaction made with their Mastercard and requests a refund from their issuing bank.

If the bank finds the claim valid, they reverse the transaction, returning the funds to the cardholder and debiting them from the merchant's account.

As you can see, it’s the same as a regular chargeback (aka dispute). Some people or organizations may use the terms chargeback and dispute interchangeably.

Other times, they could use “dispute” to refer to a scenario in which a customer claims a transaction isn’t legitimate. Then, a chargeback is the reversal.

And here’s why you should care (as a merchant):

• Financial Loss: Not only do they lose the sale amount, but they also incur additional fees from Mastercard.
• Operational Costs: Dealing with chargebacks is time-consuming and resource-intensive. 
• Reputation Damage: Payment processors and acquiring banks monitor chargeback ratios, and high rates can lead to penalties, increased fees, or account termination.
• Customer Relationships: Can strain the relationship between merchants and customers, leading to negative reviews, and lost business.

Regarding operational costs. Mastercard estimates that merchants incur an additional $15 – $70 in operational costs for each dispute [1].

Let’s compare the merchants’ rights versus the customers’.

Summary: A Mastercard chargeback is a reversal of funds when a cardholder disputes a transaction.

Consumer Protection vs. Merchant Rights: Is Mastercard Fair With Chargebacks?

Mastercard prioritizes protecting consumers from unauthorized or fraudulent transactions. Ensuring they receive the goods or services they paid for or are reimbursed if they don't.

This is evident in the various chargeback reason codes that allow cardholders to dispute transactions for reasons such as:

• No Cardholder Authorization (4837): Protects against unauthorized use of their card.
• Goods or Services Not Provided (4855): Ensures delivery of purchased items or services.
• Goods or Services Not as Described or Defective (4853): Allows disputes for products that are not as advertised or faulty.

Mastercard also offers the chargeback protection period, which allows cardholders to dispute transactions within a specific timeframe. Even if the merchant has already shipped the goods or provided the services.

As for merchants rights:

While prioritizing consumer protection, Mastercard also recognizes the rights of merchants and provides them with opportunities to defend themselves against chargebacks. This includes:

• Second Presentment: Merchants can submit evidence to prove the validity of a transaction or offer a remedy to resolve the dispute.
• Pre-arbitration and Arbitration: Merchants can participate in these processes to present their case and challenge the issuer's claims.
• Compliance Cases: Merchants can file compliance cases against issuers for rule violations that have caused them financial harm.

Their chargeback process aims to balance consumer protection with merchant rights by providing a structured framework for dispute resolution. This ensures that both parties have a fair opportunity to present their case.

Summary: Mastercard's chargeback system aims to protect consumers while offering merchants a chance to defend against disputes.

Our Tips to Fight & Win a Mastercard Dispute

Follow these tips to increase your chance of winning a chargeback:

• Respond Promptly: Respond to chargeback notifications within the specified timeframes to avoid automatic losses.
• Understand the Reason Code: This code indicates the specific reason for the chargeback and will guide your response strategy.
• Gather Compelling Evidence: Collect all relevant documentation to support your case, such as transaction receipts, invoices, and delivery confirmations.
• Submit a Strong Rebuttal: Craft a clear and concise rebuttal letter that addresses the specific reason code and provides a compelling argument supported by your evidence.some text
  • Be sure to highlight any inconsistencies or inaccuracies in the cardholder's claims.
• Follow Mastercard's Guidelines: Ensure that your response includes all necessary documentation and is submitted through the correct channels.
• Consider Pre-Arbitration: If the chargeback is not resolved after the second presentment, consider initiating pre-arbitration.some text
  • This can be an opportunity to present additional evidence or arguments and potentially resolve the dispute without escalating to arbitration.
• Be Prepared for Arbitration: If the dispute proceeds to arbitration, be prepared to present your case to Mastercard. Ensure that your evidence is well-organized and that you can clearly articulate your arguments.
• Seek Professional Help: If you're unsure about the chargeback process or need assistance with your response, consider seeking help from a chargeback analyst or legal professional.

Know when it’s worth fighting a chargeback.

In general, 77% of merchants have a 30% dispute win rate among all industries [2].

If you lack sufficient evidence to support your case or the evidence is ambiguous, it may not be worth disputing the chargeback. Mastercard's decision is based on evidence, and a weak case could result in losing the dispute and incurring additional fees.

In cases of "friendly fraud" where the cardholder is genuinely mistaken or wants a refund, you might have a better chance of winning. So long as you have sufficient evidence.

As, the win rate boosts to 43.82% (on average) with this type of chargeback [3].

And if the reason code strongly favors the cardholder, the risk of losing the dispute might be high. In such cases, accepting the chargeback might be the better option.

For instance, fraudulent cases. Merchants typically win 9.27% of these chargeback cases. Making them not worth pursuing.

Summary: Gather compelling evidence, submit a strong rebuttal, and follow Mastercard's guidelines to win chargebacks.

Ways We Recommend Preventing Mastercard Chargebacks

The actions you’ll need to take to prevent Mastercard chargebacks and disputes are the same as those of any card provider and payment processor. With some differences in the tools offered.

However, here are our general tips:

• Clear and Transparent Communication: Ensure that your refund and return policies, terms and conditions, and product descriptions are clear, accurate, and easily accessible to customers.
• Accurate Transaction Records: Maintain records of all transactions, including authorization codes, transaction amounts, dates, and customer information.
• Prompt Customer Service: Resolving issues quickly can prevent disputes from escalating into chargebacks.
• Fraud Prevention Measures: Implement fraud prevention tools such as Address Verification Service (AVS) and Card Verification Value (CVV) checks to minimize fraudulent transactions.
• Secure Payment Processing: Use secure payment processing systems and follow best practices for data security to protect sensitive cardholder information and prevent unauthorized transactions.
• Compliance with Mastercard Rules: Stay up-to-date with Mastercard's rules and regulations regarding chargebacks and ensure that your business practices comply with these standards.some text
  • This can help you avoid penalties and maintain a positive relationship with Mastercard.

Combine all these preventative measures in addition to the following tools that Mastercard offers to help prevent chargebacks and disputes.

Summary: Prevent Mastercard chargebacks by maintaining clear communication, accurate records, fraud prevention, and complying with Mastercard rules.

1. Mastercom Collaboration

Mastercom Collaboration is a platform to facilitate communication and collaboration between issuers and acquirers during the dispute resolution process.

It streamlines the exchange of information and documentation, making the process more efficient and transparent.

If you’re familiar with Visa’s chargeback resolution, it’s like Visa Resolve Online (VROL).

When a dispute arises, the issuer or acquirer initiates a case through the Mastercom Case Filing application. This could be a chargeback, a second presentment, a pre-arbitration case, or an arbitration case.

From there, both parties can then use Mastercom Collaboration to communicate directly with each other, exchange messages, and upload supporting documentation related to the dispute.

Here’s a visual of how it works:

Image from Mastercard.

According to Mastercard, it reduces processing costs by 20% and shortens the resolution time by 72 hours (from “weeks or months”).

Summary: Mastercom Collaboration streamlines dispute resolution by allowing issuers and acquirers to communicate and share documentation directly.

2. Ethoca Consumer Clarity

Mastercard's Ethoca Consumer Clarity is a platform that helps reduce chargebacks by providing cardholders with detailed transaction information directly within their banking app or through their bank's call center.

Information includes:

• Merchant name
• Logo
• Location
• Purchase date
• Itemized receipts

Such information helps cardholders recognize transactions they might not immediately remember, preventing them from initiating unnecessary chargebacks.

Because usually when a customer doesn’t remember a transaction, they’ll dispute a friendly fraud (unknowingly fraudulent) chargeback.

This also gives cardholders more control over their subscriptions. That way, they won’t “forget” to cancel a subscription, which can help you during a chargeback if you offer such services.

Summary: Mastercard's Ethoca Consumer Clarity reduces chargebacks by providing transaction details to cardholders.

3. Ethoca Alerts

Mastercard's Ethoca Alerts is a platform that helps reduce chargebacks by providing merchants with real-time notifications of potential disputes and confirmed fraud.

This early warning system gives merchants the opportunity to take proactive measures before a chargeback is officially filed.

Mastercard will charge you per alert with Ethoca, which will vary.

When a cardholder reports a transaction, Mastercard will send an alert to the merchant, who can then investigate the issue and take appropriate action. This might include canceling the order, issuing a refund, or contacting the customer to clarify the situation.

By enabling merchants to act quickly and decisively, Ethoca Alerts reduces the number of chargebacks initiated.

In 2021, Ethoca Alerts prevented more than 7.1 million instances of fraud [4]. In total, their products (including Consumer Clarity) stopped over $326 million worth of fraud and over 10.6 million chargebacks.

Screenshot from Ethoca (PDF link).

It’s like Resolve’s Cardholder Dispute Resolution Network (CDRN) or Visa’s Rapid Dispute Resolution (RDR). You can combine 1 or both of the other alert providers with Ethoca for maximum coverage for various card networks, but it’s costly.

And you could encounter duplicate alert charges.

However, we’ve partnered with all 3 alert providers and make accessing all of them easy and more affordable. Learn more.

Summary: Mastercard's Ethoca Alerts helps merchants reduce chargebacks by providing early fraud warnings.

Finishing Up

While sharing similarities with other networks in reason codes and evidence-based resolution, Mastercard's distinct terminology and emphasis on compliance set it apart in handling transaction disputes.

As mentioned, we partnered with Ethoca, CDRN, and RDR to help reduce chargebacks for merchants by up to 90%. Take a step toward eliminating chargebacks by learning more.

Sources

• [1] Mastercard: What is a chargeback?
• [2] Midigator: Chargeback report
• [3] Charge Flow: Chargeback report
• [4] Ethoca: Chargeback tools