Chargeback Prevention, Payments

Mastercard Return Authorization Mandate

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Table of Contents

  1. Return authorization mandate requirements
  2. How the return authorization mandate affects chargebacks
  3. Mastercard dispute tips for merchants
  4. How does the mandate affect authorization chargebacks?
  5. Will the Mastercard return authorization mandate prevent chargeback fraud?
  6. What is payment authorization?
  7. What is the time limit for a chargeback?
  8. What happens when a merchant doesn’t respond to a chargeback?

The two largest credit card networks are have overhauled the way refund transactions are handled. Mastercard and Visa both created new mandates that made big changes in the way merchants issue refunds to their customers. Beginning in April of 2020, Mastercard started requiring their issuers and merchants to use return 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.

New call-to-actionUnder the old system, refunds didn't show up on cardholder bank statements until they were finalized by the banks and the funds had actually been returned to the cardholder's account. This can take several days, during which time the cardholder couldn't see any proof on their end that the refund had really been initiated.

Cardholders would often get frustrated and impatient while waiting for the money to show up and make repeated customer service inquiries to find out the status of their refund. They sometimes even gave up on the merchant and decided to dispute the transaction with their bank. Then you ended up with a chargeback, a double refund, and a merchant who bore the worst of the consequences if the entire mess wasn't sorted out.

Return authorization mandate requirements

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

The full rollout of the mandate occurred on April 17, 2020.  Since then, 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. That way 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.

The mandate also requires all merchants who process Mastercard transactions to send refund authorization transactions through their payment processing system any time they process a refund.

Mastercard is exempting airlines from this requirement, but all other merchants must initiate an authorization request within 24 hours of when the buyer was officially notified that a refund would be processed.

Merchants who fail to comply with the requirements of the return authorization mandate may be assessed non-compliance fees. Merchants whose current payment processing terminals or software doesn't support return authorization must update or replace those systems to avoid non-compliance.


How the return authorization mandate affects chargebacks

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Merchants who fail to comply with the new mandate will be exposing themselves to greater chargeback liability. Previously, merchants were only liable for "Credit Not Processed" chargebacks if they did not process a refund within fifteen days of agreeing to a return or cancellation of services.

As part of the changes that came with the return authorization mandate, failure to submit a return authorization within the new 24-hour deadline will leave merchants vulnerable to any of the authorization-related chargeback reasons Mastercard has specified.

Although the tighter deadline may place additional strain on some merchants, it should help to prevent situations where a customer who has been granted a refund files a chargeback as well.

Plus, while this rule change may seem like a disadvantage for merchants, Mastercard's rules include protections for merchants as well. They specify that issuers must make every effort to ensure that a chargeback isn't initiated while a refund is being processed, and dictate that if a double refund does go through and the merchant demonstrated this in their submitted representment, the issuer must reverse the chargeback.

Mastercard dispute tips for merchants

Mastercard also issued some additional advice 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.
  • 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.

The card networks are always keeping merchants busy staying on top 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 the status of refunds, and eliminate many "friendly fraud" chargebacks that result from customers getting impatient with the slow and opaque refunding processes of yesterday.

How does the mandate affect authorization chargebacks?

In addition to its return authorization requirements, the mandate also changed how issuing banks may submit authorization chargebacks. In order to process and authorization chargeback, the issuer must show that one of the following conditions was met:
 
  • The merchant ran the transaction without authorization
  • There is no primary account number associated with the transaction
  • The authorization chargeback protection time-frame of 7 days has expired AND one of the two following conditions are met:
    • In Europe: The account is permanently closed before processing the chargeback.
    • Outside of Europe: The issuer must identify the account as “not in good standing”.
Of course, the guidelines for the circumstances in which an issuer may process an authorization chargeback also serve as a guide for merchants to avoid them. Simply make sure your transaction process doesn't allow for any of these conditions to be met, and you won't have to worry about authorization chargebacks.
 
 

Will the Mastercard return authorization mandate prevent chargeback fraud?

The intention of this mandate is to make the return process more transparent and prevent chargebacks born from customer confusion. However, its scope is narrow, and most types of chargebacks, especially those caused by friendly fraud, won't be affected by adopting these procedures.
 

Mandates like these are necessary improvements that are intended to make the payment space safer for customers by standardizing how payments are handled by merchants across the globe and addressing any problematic merchant behavior they want to curtail. Unfortunately, even those changes that will benefit merchants and customers alike in the long run can be cumbersome or even costly for merchants to implement.

FAQ

What is payment authorization?

Authorization is when the cardholder’s issuing bank either approves or denies a credit card transaction. Part of this process includes verifying whether or not a card has been stolen. This process can return several reason codes for approval or denial of the transaction.
 

What is the time limit for a chargeback?

Typically, a cardholder has roughly 75-120 days to file a chargeback on a disputed transaction. The reason for the chargeback and the credit card network involved may change that time-frame, however, so consult with representatives in those networks.
 

What happens when a merchant doesn’t respond to a chargeback?

If you are a merchant who receives a chargeback and you do not respond within the network-designated period, you will automatically lose that chargeback, and may be assessed an additional fee.
 

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