Mastercard’s Dispute Administration Fee (DAF): Enhancing Fairness in Chargeback Processing

In the payments industry, dispute resolution is expensive and challenging, which is why back in 2015, Mastercard introduced the Dispute Administration Fee (DAF) for European transactions. The goal was to help issuers recover chargeback processing expenses and create a fairer payment ecosystem.

As e-commerce expanded globally, so did the cost of dispute management. In 2022, Mastercard extended the DAF to the Middle East and Africa, where rising chargeback volumes and associated costs had created financial strain for issuers and acquirers.

In this blog, we’ll cover the purpose and impact of the DAF, which will help issuers and acquirers understand how this fee affects dispute resolution.

What is the DAF?

The DAF is a charge imposed by Mastercard and is part of the chargeback process for transactions carried out in the European Union and the Middle East/Africa. This fee is charged when a chargeback is requested and is intended to pay issuers for the costs associated with dispute resolution.

Why Was the DAF Introduced?

In Europe, the European Commission’s reduction of interchange fees led to revenue losses for issuers. The DAF was introduced to help offset these losses and maintain financial balance in the payment ecosystem, allowing issuers to receive partial compensation for these expenses. These expenses include:

• Fraud-related losses that cannot be recovered
• Bad debt
• General operational costs of issuing payment cards

In the Middle East and Africa, the rapid expansion of electronic commerce, accelerated by the pandemic, led to a surge in chargebacks and their associated costs. MasterCard aimed to adhere to Europe’s strategy, which involved initiating only valid first chargebacks, pre-arbitration, and arbitration cases. 

They also wanted to encourage acquirers to only submit valid second presentments and accept valid pre-arbitration cases, since it cost issuers, acquirers, and merchants an average of EUR 25 to resolve a chargeback.

By enforcing these measures, the DAF aims to enhance the sustainability and fairness of the chargeback process across the payment ecosystem.

How much is the DAF?

The fees for the DAF vary according to the stage of the dispute process. In addition to these charges, the issuer and acquirer would pay a processing fee of €0.90 (EU) and $3 (MEA) when initiating a chargeback or responding with a second presentment:

Dispute Stage	Issuer Fee	Acquirer Fee	Net Gain for Issuer
Chargeback	Receives €15 / $15	Debited €15 / $15	€15 / $15
Second Presentment	Debited €30 / $30	Receives €30 / $30	– €30 / $30
Arbitration/Pre-Arbitration	Win Case: Receives €45 / $45	Loses Case: Pays €45 / $45	€30 / $30 (net)

The arbitration/pre-arbitration fee must be collected within 45 calendar days of the ruling decision or acceptance by the acquirer. 

DAF’s Ripple Effect: Impacts in the Payment Ecosystem

The DAF affects various parties in the payment ecosystem:

• Issuers: Receive compensation for the costs associated with processing chargebacks.
• Acquirers: May pass the fees down to merchants, potentially with additional markups.
• Merchants face the majority of the financial burden of these costs, so they must develop effective chargeback prevention and control techniques.

While DAF seeks to promote more balanced and efficient dispute resolution procedures, it significantly complicates chargeback management and emphasises the importance of proactive dispute prevention initiatives.

How is the DAF processed?

The DAF is processed as part of the billing cycle by Mastercard’s Consolidated Billing System (MCBS). The fees are automatically handled at the end of each month, which eliminates the need for manual intervention.

This charge can be manually collected by the issuer in two cases. The first occurs when the acquirer wrongly debits the DAF after issuing a credit to the cardholder, and the second occurs when the issuer wins the pre-arbitration or arbitration dispute. The issuer may recoup the cost by submitting a Miscellaneous Fee Collection within 45 calendar days after receiving the DAF dispute message. A miscellaneous fee is necessary since these cases do not fall under the standard payment processing categories.

Final Thoughts

The Dispute Administration Fee (DAF) has been in place for nearly a decade, and it plays an important role in balancing the financial impact of chargebacks for issuers in Europe and the Middle East/Africa. 

While it helps to reduce revenue losses caused by interchange decreases, it also adds to the complexity of transaction disputes. Understanding how the DAF works enables banking institutions to better manage their chargeback procedures and guarantee compliance with Mastercard standards.