Quick-service restaurants have been characteristically quick to adapt to changing times, embracing delivery and in-store pickup options as way to offer more conveniences to their customers. The dark side of convenience is that the same things that make it appealing to customers makes it more inviting to fraudsters, too.
QSR establishments are dealing with higher fraud and chargeback rates than ever thanks to these practices. In order to keep your customers happy by continuing to offer these convenient options, you have to know how to minimize your risks. What can be done to prevent QSR fraud and chargebacks?
Quick service and fast food restaurants are a huge industry, pulling in more than $300 billion in 2021. The COVID-19 pandemic was a major complication for QSRs, bringing closures and a renewed consumer preference for dining in, but many restaurants were able to weather the storm by making customer-friendly accommodations. These included delivery options (provided either by the restaurant itself or through an app-based delivery service like DoorDash or Grubhub), online ordering, and curbside pickup.
These practices succeeding in keeping many QSRs afloat until pandemic restrictions subsided, but they created all sorts of new opportunities for fraudsters. In particular, they brought on an unprecedented wave of first-party misuse, also known as “friendly fraud.” Meanwhile, traditional credit card fraudsters ramped up their targeting of e-commerce business, which now included QSRs that had previously stuck almost exclusively to card-present transactions.
Delivery and pick-up options, beloved by customers, aren’t likely to go away any time soon, and neither are fraudsters. It’s up to QSR operators to figure out the best ways to protect themselves from fraud, illegitimate disputes, and avoidable chargebacks.
Fraud and chargebacks always result in revenue loss, but they also include fixed-rate fees and other negative consequences. For QSRs, which deal in a large volume of relatively small transactions, the financial impact of a high chargeback rate can be severe.
Fraudulent transactions almost always lead to chargebacks, and chargebacks are also caused by payment disputes that may or may not be legitimate. Every chargeback you get incurs a fee, and when you factor in other costs such as overhead, the average chargeback typically costs more than double the original transaction amount. On top of that, card networks and acquirers monitor your chargeback activity and will penalize you for carrying an excessive chargeback rate for too long.
There are several ways in which QSRs have become more vulnerable to fraud, most of them having to do with new practices related to online ordering, delivery, and pick-up services.
EMV chip readers have done a lot to protect merchants from credit card fraud in brick-and-mortar environments, but EMV chips don’t work for online transactions. When fraudsters can place orders online, it’s easier for them to use stolen cards successfully.
Many cybercriminals engage in card testing, which is where they use a stolen card to make a small, easy-to-overlook transaction just to see if the card is safe to use. If the test purchase succeeds, they know they can use it to make a larger, more lucrative transactions. Small QSR orders are often used for card testing.
Online ordering also makes QSRs vulnerable to account takeover attacks. When customers are able to create customer accounts and use stored payment credentials, funds, or reward points to make purchases, fraudsters will use phishing techniques and other schemes to gain unauthorized access to these accounts.
In the QSR industry, valid transactions can still result in chargebacks. Sometimes these are due to legitimate disputes, but oftentimes the dispute itself is an act of fraud.
Missed deliveries, mixed-up orders, and other disappointments will often result in the customer disputing the purchase with their bank in order to get their money back.
Customers also have to deal with theft—it’s easy for somebody to walk out with somebody else’s pick-up order, or to swipe a delivery left on a doorstep. However, a large number of restaurant chargebacks come from customers deliberately abusing the chargeback process. They’ll falsely claim that their order was stolen, or prepared incorrectly, just to get a free meal.
Because fraud and chargebacks can come at you from so many different directions, QSRs need to implement a comprehensive strategy to deal with them on all fronts.
The first order of business is minimizing self-inflicted chargebacks due to merchant error. Review your procedures and training to eliminate incorrect orders, missed deliveries, and other avoidable issues that result in legitimate chargebacks.
Next, defend yourself against true fraud. You can do this by using AI-based fraud filters to screen your credit card transactions, multi-factor authentication to validate customer identities, and strong password requirements to protect customer accounts. You can also prevent in-person theft by checking IDs or apps before handing off pick-up orders.
Preventing friendly fraud is a little trickier. You can’t often prevent it ahead of time, but you can fight it after the fact.
When you know a customer has filed a fraudulent chargeback, you can represent the charge along with evidence that disproves their dispute claims. To combat these chargebacks successfully, you’ll need to keep receipt copies, communication records, proof of delivery, and anything else that might constitute compelling evidence. You should also block friendly fraudsters from making future purchases, or they’re likely to become repeat offenders.
New industry trends mean that QSR establishments are getting a lot of experience dealing with new fraud and chargeback situations, but you don’t have to learn things the hard way. If you’re noticing an increase in fraudulent transactions and illegitimate disputes, put an order in for some expert help.
A chargeback management company with years of experience dealing with fraud and disputes across a wide range of industries can assist you in putting together the right strategy for getting your fraud and chargeback rate back under control.
Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions, or requests for advice to: win@chargebackgurus.com