The chargeback process can be confusing and frustrating for merchants and customers, with the varying deadlines, limits, and regulations. To make it as smooth as possible for both parties, Mastercard and Visa, two major global card schemes, have some standard rules in place. Over the years, these rules have been revised and improved to make payments more secure and protect merchants and customers against fraud worldwide.
Let's discuss some of the most important Mastercard and Visa chargeback rules, how each card network handles disputes, and how the chargeback process works.
What is a chargeback, and under what circumstances can it be initiated?
A chargeback is a mechanism via which a customer who believes they have been a victim of payment fraud can file a dispute with their card company.
The case is then investigated, and if the fraud is proven, a refund is issued to the cardholder, and the corresponding amount is deducted from the merchant's account.
While it is primarily a fraud protection mechanism built for customers, there are several situations in which a chargeback could be initiated. Here are a few common scenarios where chargebacks are filed.
- The merchant fails to deliver the promised products or services to the customer against the payment they made
- There is a fault in the product or service delivered by the merchant, and they are not taking responsibility for it or compensating the customer
- The customer's credit card is lost or stolen and ends up being used for one or more unauthorized transactions
- The customer's credit card information falls into the hands of a fraudster
- The customer falls victim to an account takeover attack via a data breach, phishing scam, payment fraud, or other financial crime
- The customer is charged twice for a single purchase
- The merchant refuses to address the customer's complaint and fails to resolve the initial dispute filed with them
The Visa chargeback process
The customer, usually called the cardholder in this context, notices something wrong with a transaction on their statement and approaches their bank to reverse said transaction. The bank tries to get the relevant transaction data from the Visa Resolve Online (VROL) platform. An invalid claim is simply voided or canceled by the issuing bank without being forwarded to the merchant. If the claim is found to be valid, the issuer informs the merchant's acquirer about the chargeback. The funds are taken back from the merchant's account, and the customer is provisionally refunded.
The merchant is then asked how they would like to respond to this decision. If they accept the decision, that's the end of the dispute life cycle. They lose the transaction amount and also have to pay a chargeback fee to the acquiring bank, and the customer gets their money back. However, if they deem it unfair and want the chargeback reversed, they need to file a counterclaim, often called a representment or rebuttal, where they present evidence to the issuing bank that proves the customer's claim was baseless. If the merchant successfully represents their case, they are refunded. Otherwise, the chargeback process moves on to the next stage.
The last stage is where the issuing bank forwards the case to Visa, who announces the final decision after carefully analyzing all the evidence gathered from both parties.
The Mastercard chargeback process
While the overall chargeback mechanism for Mastercard transactions is similar to those of Visa, you might come across some slight differences in language and process.
The original transaction, called the "first presentment", is processed like any other. When the cardholder initiates a chargeback and it is validated, an automatic credit is issued by Mastercard to the claimant, i.e., the issuing bank, and the merchant acquirer is debited. This is called the "first chargeback".
If the merchant acquirer accepts the chargeback, the transaction refund is confirmed. If they raise an objection, they are given a chance for a representment or "second presentment". Mastercard moves the funds again. The ball is in the issuer's court now. If the issuer accepts the second presentment, the decision is finalized and the case closed. If they reject it, the process moves to the pre-arbitration stage, where the issuer presents evidence to refute the validity of the second presentment.
If the acquirer rejects the pre-arbitration case as well or fails to take any action within the next ten days, the transaction moves to the arbitration phase. The issuer presents further supportive evidence, which the acquirer can accept or refute. Upon further rejection, the Mastercard Dispute Resolution Management (DRM) team steps in as the final judge.
The evolution of Mastercard and Visa chargeback rules
The rules for Visa and Mastercard chargebacks have changed several times over the years, covering many areas, such as applying new thresholds to fraud and chargeback monitoring programs and leveraging the latest technologies for better dispute resolution.
Let's talk about some of the most significant changes we have seen over the years.
The Mastercard Dispute Resolution Initiative (MDRI)
The Mastercard dispute process has been undergoing major changes since October 2018 in an effort to protect the card network from invalid Mastercard disputes, reduce chargeback volume by making the dispute handling process faster, and ensure that the dispute resolution process is more aligned with the realities and demands of digital transactions. The changes have been applied over several phases.
Phase 1 – Effective from 12th October 2018
The changes applied in the first phase aimed to minimize chargebacks raised with necessary information missing. Issuing banks would now have to request more information from cardholders in order to file a chargeback for the following reason codes.
4863 – Cardholder Does Not Recognize—Potential Fraud (when the cardholder does not recognize the transaction and charge on their bill)
4853 – Cardholder Dispute (for digital goods and recurring payment transactions)
4834 – Point-of-interaction (POI) Error (for processing errors such as duplicate charges)
4831 – Transaction Amount Differs (when a cardholder claims they've been charged an incorrect transaction amount)
Furthermore, the pre-compliance and compliance case filing time frames were reduced to 120 days (previously 180 days) from the central site processing date/violation date and 45 days from the chargeback reject date/fee collection date.
Phase 2 – Effective from 12th April 2019
The second stage of the MDRI addressed concerns around ‘unjust enrichment,' whereby situations where the issuer performs a chargeback while a merchant issues a credit to their customer were not allowed. Other changes that occurred at this stage included the following code being discontinued (issuing banks would not be able to file a chargeback under that reason code).
4863 – Cardholder Does Not Recognize
4840 – Fraudulent Processing of Transactions
Furthermore, for code 4834 (Point-of-interaction Error), changes were made to the timeframe, reducing it from 120 days to 90 days. POI error related chargebacks which involve ATM transactions remained at 120 days.
Phase 3 – Effective from 18th October 2019
Further changes to the timeframe of chargeback filing, representment, and arbitration were applied, depending on the type of chargeback. For example, the time for authorization-related chargebacks was limited to 90 days, and those related to installment billing were limited to 60 days. Businesses were to be given 45 days to respond to a chargeback.
Phase 4 – Effective from 17th April 2020
Second chargebacks were to be replaced by pre-arbitration chargebacks. These included chargebacks with the following reason codes.
4837 – Fraud (except 4870 (Chip Liability Shift) and 4871 (Chip/PIN Liability Shift) chargebacks)
4853 – Cardholder Disputes
4834 – Point-of-interaction Errors
4808 – Authorization-related disputes could still receive a second chargeback
The removal of the arbitration chargeback cycle and the mandated pre-arbitration process would come into effect for certain chargeback reason codes, applicable on first chargebacks that were processed on the 17th April 2020 onwards.
Visa's recent improvements in fraud and chargeback monitoring
Visa has also been working consistently to improve the efficiency of its fraud, chargeback, and acquirer monitoring programs, such as by applying new thresholds. The program's objectives have always been to maintain trust in the Visa brand and protect the integrity of its payment system for all parties involved.
In 2018, for instance, the Visa Claims Resolution (VCR) program was introduced. This program automated and further streamlined the resolution process for Visa disputes. For example, there used to be 22 dispute categories, but they were cut down to four.
From 1st October 2019, Visa announced that it would lower fraud and dispute-related thresholds for the Visa Fraud Monitoring Program (VFMP), the Visa Chargeback Monitoring Program (VCMP, now called the Visa Dispute Monitoring Program or VDMP), and the Visa Acquirer Monitoring Program (VAMP).
Based on the Visa Core Rules and Visa Product and Service Rules booklet, through these programs, Visa decided to monitor merchants who generated an excessive level of fraud and/or chargebacks, and acquirers who generated a large number of fraud disputes. One primary goal was to encourage merchants to lower their chargeback ratio in order to foster positive sentiments of trust with the cardholders.
Acquirers were made responsible for informing their merchants about Visa lowering its VFMP, VCMP, and VAMP thresholds from 1st October 2019 onwards.
Timeframes for merchants were also shortened over the years, with the aim of speeding up the dispute resolution process.
In 2020, the pandemic hit, and Visa consequently decided to make some adjustments, such as temporarily increasing the response time limits to travel-related chargebacks to offer more flexibility to both parties.
Wrapping up: How successful are the new Mastercard and Visa chargeback rules?
Both Mastercard and Visa are determined to regularly update and improve the chargeback process. Undoubtedly, Mastercard and Visa chargeback rules are designed to bring about positive change and assist merchants in terms of fraud prevention in a more digitalized world of commerce. The card schemes remain innovative in responding to changes in technology and eCommerce realities. They also exhibit a laser focus on simplifying the process around chargeback rules and dispute resolution for the merchants.
Any news regarding efforts to improve both the Mastercard and Visa claims resolution processes is welcome news for the financial industry. Each development has proved a step in the right direction for all parties involved.
Don't forget to check back in with payabl. for all the latest news and developments.
Frequently asked questions about Visa chargebacks
What is a Visa chargeback?
A chargeback is initiated when a cardholder files a transaction dispute with their issuing bank. The request must be reviewed by the cardholder's issuing bank. Visa gives the issuing banks up to 30 days to review the request and determine its validity. If the request is valid, the request is forwarded to the merchant's acquiring bank or payment processor, who in turn notify the merchant.
How do chargebacks work with Visa and Mastercard?
Both Visa and Mastercard have elaborate and very thorough processes for dispute resolution and chargebacks. The processes are carried out in cycles or phases, giving both customers and merchants ample time to present relevant evidence. With the right rules and limits in place, they make sure that both parties are protected from fraud as best as possible.
How long do I have to file a chargeback with Visa?
In general, a Visa cardholder has up to 120 days from the original transaction date (or service delivery date, in case of future-dated orders) to file a chargeback. Mastercard has a similar limit of 120 days for most transactions. Other transactions might allow a lower limit of 45 days only.
The limit for other card networks can vary between 45 and 180 days. The actual time available depends on the card association, and it's sometimes possible to dispute older charges depending on special circumstances.
Can Visa reverse a charge?
Visa cardholders can reverse or cancel a charge following a request to their card issuer as a result of a purchase where the items were not received or were different from what was ordered. This implies that the cardholder must be in a position to prove their claim.
Can a chargeback be denied?
Chargebacks may be denied if the requests are made after the card provider's chargeback time limits have crossed.