In its continuing drive to ease merchants' concerns and excite them about on-line commerce, MasterCard International has modified its chargeback policy.
Effective April 1, sellers of goods on the Internet will have a greater incentive to accept transactions that comply with the Secure Electronic Transactions protocol because losses are sure to go down, said MasterCard senior vice president Steve Mott.
Under current rules, Internet merchants are treated the same as those in mail-order and telephone sales. Because they are plagued by high levels of payment disputes-the cause of costly chargebacks-those merchants' rights to "re-present" transactions are limited and their exposure to losses is higher than in conventional retailing.
The rule change establishes a re-presentment right on properly authorized "SET-compliant" transactions with digital certificates.
"About half of mail-order and telephone-order chargebacks are cardholders repudiating, saying they didn't do the transaction," Mr. Mott said. "Many are just pulling the wool over the merchants' eyes" in a way they could not in an SET situation.
"When we went out and asked what we could do to get on-line merchants into the game, (re-presentment) was what they told us would have the greatest impact," he added.
"The conventional wisdom is that you have to change the interchange (fee) to give merchants an incentive" to go to SET, he said, referring to the charges that merchants and their banks pay to accept a credit card. "We have found this (chargeback rule) to be more important."
SET is designed in part to prevent repudiation. Each party to a transaction has to use a valid digital certificate. The benefit is authentication, giving the merchant confidence that the purchaser has been certified by the card-issuing bank.
If a dispute arises, the transaction has been authenticated and documented more reliably, through encryption and digital signature technology, than would be the case in mail and telephone sales.
"We fully anticipate that chargebacks for merchants in the emerging electronic commerce market will decrease as a result of the rule change and the broader adoption of SET," Mr. Mott said. "When merchants, especially the direct-marketing companies so active in Internet commerce to date, have confidence in selling more products and services on-line, consumers will purchase more.
"In the end, merchants, banks, and consumers all will benefit."
Mr. Mott said the merchant policy change, announced last week, is part of MasterCard's aggressive SET promotion strategy. It said it has commissioned almost 70 pilots in 32 countries; 23 of the pilots are "transactional."
"Merchants are looking at electronic commerce as a global market and a place they should be, but it takes a lot of work to get there," Mr. Mott said. The rule change "solves one of the biggest backroom problems for MasterCard transactions."
The Purchase, N.Y.-based bank card association held its policy change up as a competitive thrust against Visa. Unlike MasterCard, Visa instituted some fee waivers for SET transactions, which Mr. Mott dismissed as insignificant.
But Visa spokesman Greg Jones said his organization had implemented a similar merchant-protection rule on end-to-end, SET-certified transactions in September 1997. Though disputing MasterCard's claim to an advantage, he called its move "a prudent business decision."
