Chargeback Prevention, Payments

Mastercard Return Authorization Mandate

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The credit card networks are starting to overhaul the way refund transactions are handled. Mastercard and Visa are both currently in the process of rolling out new mandates that will mean big changes in the way merchants issue refunds to their customers. Beginning in April of 2019, Mastercard started requiring their issuers and acquirers to support refund authorizations. The idea is for banks to treat refunds more like purchase transactions, so that cardholders can see them on their statements as pending transactions as soon as they are initiated, and watch them update from pending to complete in real time.

The way things currently stand, refunds do not show up on cardholder bank statements until they have been finalized by the banks and the funds have actually been returned to the cardholder's account. This can take several days, during which time the cardholder can see no proof on their end that the refund has really been initiated.

Cardholders often get frustrated and impatient while waiting for their refunds to show up, and may make repeated customer service inquiries to find out the status of their refund. They may even give up on the merchant and decide to dispute the transaction with their bank. Then you end up with a chargeback, a double refund, and a merchant who will bear the worst of the consequences if the entire mess isn't sorted out..

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Timeline for Banks and Merchants

Mastercard's new return authorization mandate, which will apply to all of their credit, debit, and Maestro cards, places a some new responsibilities on merchants, but it should also reduce customer service inquiries and help prevent situations like the one described above.

The next phase of the mandate occurs on April 17, 2020, when issuing banks must display pending refund authorization transactions on their customers' bank statements, including apps and online banking pages that display transaction updates in real time. The cardholder will know exactly when the refund was initiated and will see it change from pending to completed when the funds arrive in their account.

Effective that same day, all merchants who process Mastercard transactions will be required to send refund authorization transactions through their payment processing system any time they process a refund. (Mastercard is exempting airlines from this requirement.) Merchants who are capable of processing return authorization transactions may currently do so, but are not required to.

Chargeback Implications

Merchants who fail to comply with the new mandate will be exposing themselves to greater chargeback liability. Currently, merchants are liable for "Credit Not Processed" chargebacks if they do not process a refund within fifteen days of agreeing to a return or cancellation of services. After the next phase of the mandate begins, failure to submit a return authorization transaction will leave merchants vulnerable to any of the authorization-related chargeback reasons Mastercard has specified.

"Authorization was required but not obtained" is justifiable grounds for a chargeback according to Mastercard's rules, so merchants who find themselves faced with chargebacks related to unresolved refunds will find themselves without a legitimate means to defend against those chargebacks after April 2020.

Tips for Merchants

Mastercard has released some additional compliance guidelines for merchants:

  • Return policies should limit returns to no more than six months from the original purchase date.
  • Primary account numbers should be verified—in truncated or tokenized form, when necessary—prior to processing refunds, to ensure that the refund is going back to the same card that made the purchase.
  • Refund authorization transactions must be submitted within 24 hours of providing the customer with confirmation that a refund will be processed.
  • Return and refund policies should take into account the fact that some cards, such as prepaid debit cards, cannot accept refund transactions.
  • Issuers can decline return authorizations for certain types of transactions, such as cash transfers and gambling purchases.

Merchants should also know that return authorizations can carry identifier codes that tie them back to the original purchase, which can help to expedite their processing on the banks' end. Such identifying information should always be provided, when possible.

Tips for Merchants

The card networks are always keeping merchants busy staying on top of the rolling phases of their various mandates, but merchants should cheer on Mastercard and Visa's efforts to bring refund processing in line with current consumer expectations. The refund authorization mandate should speed up refund processing, reduce the workload of customer service departments who deal with inquiries about refund statuses, and eliminate many "friendly fraud" chargebacks that result from customers getting impatient with the slow and opaque refunding processes of yesterday.

Mandates like these are necessary improvements that make the payment space safer for consumers. Unfortunately, what is "good" for a consumer can sometimes be "cumbersome" for a merchant. Chargeback Gurus is here to help inform businesses on industry news and best payment practices. Please submit topic suggestions, questions or requests for advice to:

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