Mastercard’s recent acquisition of Ethoca has been heavily scrutinized by experts in the payments industry. Mastercard has been on a buying spree lately, having purchased several companies that either complement their existing products, or aid them in offering new services in the payments space.
Reason for Acquisition
Last year, Visa launched the Visa Merchant Purchase Inquiry (VMPI) in the United States after testing it in Hong Kong and New Zealand. According to information released by Visa at several industry events, they consider the VMPI initiative to have been a success in both markets. VMPI was aimed at reducing fraudulent disputes and providing merchants with the ability to resolve claims before they could become chargebacks, and has been welcomed as a trend-setting initiative in the merchant community because it connects merchants directly with issuers and lets merchants send purchase information to the issuers through an alert notification system.
Since Visa has taken the lead by launching VMPI, there has been expectation among merchants that Mastercard would also be launching a similar initiative. Mastercard has been closely observing the pros and cons of the VMPI initiative and has been doing back-end development work on a technology they’re calling the MasterCom Dispute Resolution Initiative.
About Ethoca
Mastercard understood that trying to build a new connecting framework for all of the merchants and issuing banks across the globe would be a cumbersome task, and hence decided to acquire a partner with established connections between merchants and issuers. Ethoca offered a platform to merchants where issuers could notify participating merchants about fraud and customer service claims prior to a dispute, giving those merchants a 72 hour window of opportunity to proactively resolve the claim by issuing a refund.
This service has been widely popular among merchants who have an interest in keeping their chargeback rate down, either because of revenue loss or because they’re approaching their chargeback threshold. Ethoca’s platform has been well established around the globe, making them a highly attractive prospect for Mastercard to acquire.
Expected Claims & Dispute Changes
Based on conversations we’ve had with Mastercard, we understand that Mastercard has been making plans to enable issuers to join the Mastercard Claims Manager platform, which will allow issuers to work collaboratively with participating merchants on disputes and claims.
Mastercard is adding issuers to the Claims Manager platform in phases rather than forcing all the issuers to join the platform at once. Mastercard expects 90% of the issuers to join the Claims Manager platform by April 2020. We were told that the remaining 10% represented an estimate of issuers who would not be able to participate in the Claims Manager platform due to regulation in their home countries.
Mastercard plans to connect issuers and merchants through Ethoca’s platform. This tells us that the Claims Manager will be seamlessly integrated with Ethoca, thereby providing issuers and merchants with a collaborative platform on which to resolve claims prior to the dispute process. According to Mastercard, participating merchants will have the ability to coordinate with issuers, provide transaction information, issue refunds and hopefully prevent potential claims from becoming chargebacks.
Mastercard disputes will go through the following cycle after the Claims Manager portal launch:
- Issuer must use the Claims Manager platform to reach out to the merchant
- Once the issuer initiates a claim, there will be a 72 hour pause before it becomes a dispute
- Participating merchants will be enrolled in the Claims Manager collaboration tool through Ethoca
- Merchants will be able to provide transaction information (and possibly issue refunds) through the Claims Manager to avoid disputes
- Issuer will review the information provided by the merchant and if satisfactory, the dispute will be canceled; if not, the dispute process will begin after the 72 hours is up
- Any dispute initiated after 72 hours will proceed through the regular chargeback cycle
Our Prediction & Unknowns
So far, Mastercard has not clearly specified whether all merchants who accept Mastercard payments will be mandated to join the Claims Manager platform. We have heard mixed messages from two different Mastercard teams and we believe that a final decision may not be reached until the end of 2019.
Any new mandate, platform, or initiative might have hiccups in the initial stages. We don’t expect the Claims Manager platform and its stakeholders to utilize the platform exactly as Mastercard envisions at first. We expect merchants and issuers to have policy-related queries and challenges at the start. We anticipate Mastercard launching a Mastercard Claims Manager policy guide or doing a webinar before the launch of Claims Manager platform to educate all parties.
Ethoca has been onboarding merchants and proactively preventing chargebacks by initiating alert notifications from their participating issuers irrespective of the card network. After the Mastercard acquisition and the Claims Manager platform integration will Ethoca continue to issue prevention alerts to participating merchants for all card network transactions? We were told that Ethoca will continue operating under its own brand and do not foresee any challenge providing their service across all card network transactions. They are ecstatic about the Mastercard acquisition and are looking forward to leveraging their Mastercard brand to expand their issuer network by April 2020.
Mastercard’s acquisition of Ethoca has raised questions about the future of Ethoca’s rival. If Mastercard enables all their issuers to join the Claims Manager platform and connects with Ethoca, Ethoca will then be able to generate claim alerts across all issuers making them the largest prevention alert network. Currently many merchants have enrolled in both platforms, since the two networks covered a substantial portion of issuing banks together, but without much overlap between the two.
Future of Chargebacks & New Considerations
Platforms like VMPI and Mastercard Claims Manager will be able to reduce bogus claims and chargebacks, since these two platforms not only provide more transaction visibility but also enable merchants to issue refunds prior to the start of the dispute process. The launch of 3D Secure 2.0 and platforms like VMPI and Claims Manager will potentially eliminate pre-arbitration and retrieval requests in the future and will greatly minimize “No Card Holder Authorization” and “Fraud – Card Not Present” reason codes.
This is a great opportunity for ethical merchants to resolve claims and save time, but (in some cases) it enables unethical practices. Currently, deceptive merchants are identified as such based on their chargeback ratio. When a merchant has an excessive number of chargebacks, they are enrolled in chargeback monitoring programs and are closely watched. If their chargeback levels continue to rise, they are terminated from their payment processing service. With the VMPI and Claims Manager platforms, deceptive merchants will game the refund system to prevent chargeback spikes. This policy of evaluating merchants based on chargeback risk will be challenging for card networks or acquirers to watch their activity.
We strongly recommend that card networks introduce a refund monitoring program.
By introducing a system to monitor refund issuances, acquirers and card networks can closely watch merchants who have a rate higher than 5% to 7% and place them on a refund watch program. This would be a checks-and-balances system for merchants who try to fly under the radar by issuing refunds to avoid the consequences of their bad business practices.
Ethoca has been onboarding merchants and proactively preventing chargebacks by initiating alert notifications from their participating issuers irrespective of the card network. Will Ethoca continue to issue prevention alerts to participating merchants for all card network transactions after onboarding the 90% issuers?
