Understanding Mastercard’s Dispute Administration Fee
Merchants who sell to customers in the European Union need to know about Mastercard’s Dispute Administration Fee, or DAF. Fees are one of the most problematic aspects of the chargeback process—they proliferate as each party involved in the chargeback process has the ability and incentive to levy fees to recoup some of their costs. With no parties further down the line to pass these costs off to, fees impact merchants and their customers the hardest. The DAF is supposed to improve the chargeback process, but how does it really affect merchants?
We often remind merchants that the cost of a chargeback isn’t just the transaction amount the customer is trying to reclaim. You also have to factor in the time and resources spent acquiring and listing the item for sale, processing the transaction, and managing the chargeback, as well as the fees charged by the banks, card networks, and payment processors. All told, the true cost of a chargeback can be as much as 2.5 times the original transaction amount.
To understand how much chargebacks are really costing you, and to properly calculate the ROI on your chargeback mitigation efforts, you need to be able to anticipate and comprehend the fee structures you’re operating under. The way the DAF works can be confusing at first glance, but it’s important to know what purpose it serves and when it gets levied.
What is the Mastercard DAF?
Mastercard alternately charges the DAF to issuing banks and acquiring banks whenever one of those entities initiates a new phase of the chargeback cycle. These fees are automatically generated through the Mastercard Consolidated Billing System.
- For the initial chargeback, the issuer receives a credit of €15 and the acquirer is debited €15.
- Upon representment (the second presentment of the charge), the acquirer is credited €30 and the issuer gets the corresponding debit of €30. This nets out to a credit of €15 to the acquirer and a debit of €15 to the issuer.
- If the representment receives an arbitration chargeback, the issuer is credited €45 and the acquirer is debited €45, leaving a net fee of €30 credited to the issuer and €30 debited to the acquirer.
To look at it another way, for a single chargeback, the acquirer pays a €15 fee to the issuer. Representment reverses this, leaving a net fee of €15 paid by the issuer to the acquirer. If the chargeback is submitted again following representment, the bottom line is that acquirer is effectively paying a €30 fee to the issuer.
If the chargeback goes to arbitration at the card network level and the acquirer wins the case, they can collect €60 from the issuer within 45 days of the final outcome.
The DAF applies to all inter-European and intra-European transactions, but transactions carrying certain Merchant Category Codes are exempt:
- 5499 (miscellaneous food stores—convenience stores, markets, specialty stores)
- 5735 (record shops)
- 5815 (digital goods—audiovisual media including books, movies, and music)
- 5816 (digital goods—games)
- 7311 (advertising services)
- 7399 (business services—not elsewhere classified)
Needless to say, merchants should expect their acquirers to require reimbursement of any DAF fees they end up stuck with. Some banks and payment processors will “repackage” the fees that they pass along to their merchants, adding additional charges that enable them to make a profit off of these and other fees.
What Purpose Does the DAF Serve?
The DAF is intended to compensate participants in the chargeback process for their time and labor. It’s also supposed to encourage merchants and issuers to fight illegitimate chargebacks.
Many merchants consider chargebacks to be just another cost of doing business, and some issuing banks feel that it isn’t worth their time or money to exercise their representment rights to fight chargebacks. Merchants who actively and effectively submit representments are a rare breed. The reasoning behind the DAF is that providing compensation to issuers will lead to the back-and-forth aspects of the dispute process functioning more as intended, and will incentivize merchants to take chargeback prevention more seriously.
Does the DAF Really Help Merchants?
Unfortunately, €15 doesn’t adequately cover the costs associated with putting together and submitting a representment with compelling evidence and a well-reasoned cover letter. Mastercard’s heart is in the right place here, but blanket encouragement to engage in more represntments could be counterproductive.
The fact is, most chargebacks won’t be reversed through the representment process. Not only must the chargeback be invalid—based on incorrect facts, a false premise, or friendly fraud—but you must also submit evidence that the issuer will understand and adjudicate correctly. Representing legitimate chargebacks will almost always result in a second chargeback, ultimately leading to the acquirer (and by extension, the merchant) liable for additional fees.
The DAF does not change the essential calculus of effective chargeback management: you have to identify the root causes of your chargebacks, take steps to address the vulnerabilities that lead to legitimate chargebacks (true fraud, merchant error) and fight the illegitimate chargebacks (friendly fraud) with compelling evidence.
The DAF may nudge the chargeback process in a more equitable direction as far as getting banks to shoulder their fair share of the financial burden when they initiate or extend a dispute, and it could serve as a useful wake-up call to merchants who still haven’t tried to wrap their heads around what chargebacks mean for their business and what they need to do to manage them.
For merchants who are already knowledgeable about chargebacks and working hard to prevent and fight them, the DAF sadly just means that more costs will fall on them when a protracted chargeback dispute ends up getting resolved in the cardholder’s favor. For this reason, it is extremely important to enter into representment fully armed with the right documented evidence and a solid basis to expect that the chargeback should not be allowed to stand.
Identifying the chargebacks that can be defeated through representment and putting together the right evidence packet can be among the most challenging parts of chargeback management. Just remember, you’re never alone in this fight. Experienced firms like Chargeback Gurus who know the inner workings of the chargeback process inside and out can help you establish a reliable, flexible game plan for dealing with all kinds of disputes.