Chargeback Prevention

Serving Up the Straight Dish on Restaurant Chargebacks

restaurant chargebacks

Table of Contents

  1. Why Are Restaurant Chargebacks Increasing?
  2. Why Do BOPUS Orders Lead to Chargebacks?
  3. How Can Restaurants Prevent Chargebacks?
  4. Conclusion
  5. Frequently Asked Questions

Many restaurants make it a point of pride to make sure that any dissatisfaction a customer is experiencing gets resolved before they settle their bill, and so it can sting restaurateurs and food vendors when they get hit with a chargeback. Even worse is the danger that chargebacks pose to the already-thin profit margins that merchants in this industry often maintain.

With friendly fraud on the rise, merchants can’t depend on excellent customer service alone to keep their chargebacks down. How can merchants in the restaurant industry protect themselves from increasing chargeback rates?

Restaurants have a built-in advantage when it comes to dealing with some types of disputes. When a customer is unhappy with the quality of food or service, they can complain on the spot and a manager will often offer to comp their meal—and customers know this. For the most part, this works out. While the restaurant will occasionally have to eat the cost of a meal, their bank never gets involved, no fees are charged, and their chargeback rate does not go up.

What restaurants can’t do is comp the meal of a fraudster who never intended to make an honest transaction in the first place. Changing trends in the way people shop and dine are exposing restaurants and food vendors to new customers—and new threats. Eateries that might have gone years without getting chargebacks from their loyal neighborhood clientele are finding themselves dealing with strange new disputes, many of them fraudulent.

Why Are Restaurant Chargebacks Increasing?

Restaurants have historically enjoyed relatively low chargeback rates compared to other merchants. Part of that may be attributed to the fact mentioned earlier, that restaurants are more easily positioned to resolve customer disputes before finalizing a transaction, but it also stems from the protections restaurants have enjoyed as merchants in a card-present transaction environment.

New call-to-actionSince the EMV liability shift, card-present transactions are much less vulnerable to fraud. EMV chips are extremely difficult to counterfeit, copy, or electronically steal. So, fraudsters have largely directed their energies toward the less challenging task of finding new vulnerabilities in eCommerce systems.

However, consumers have been adopting more and more aspects of the eCommerce experience into their everyday shopping habits, and restaurants have had to adapt. For many, that translates into signing up with services like DoorDash or Grubhub, or offering their own in-house BOPUS ordering options—that’s “buy online, pick up in store.”

With BOPUS and delivery orders, customers can pay over a website or app with their credit or debit card or some other electronic payment method. They can purchase and receive the meal without having any direct interaction with the restaurant. During the COVID-19 pandemic, with orders in many areas to remain at home and minimize contact with others, this became the preferred or even exclusive method of doing business for many restaurants and their patrons.

While those restrictions are no longer in place, many customers are still taking advantage of BOPUS and delivery options now that they have been exposed to them. This can be of substantial benefit to many restaurants, expanding their customer base and allowing them to serve more customers than their dining space would allow. However, BOPUS does come with downsides.

Why Do BOPUS Orders Lead to Chargebacks?

Plain and simple, the reason many restaurants are getting hit with many more chargebacks than before is because of BOPUS and online delivery orders. There are two key reasons why these transactions are so susceptible to chargebacks.

First, it’s much easier for cardholders to justify dine-and-dash by way of chargeback against a faceless menu screen on an app, as opposed to an actual restaurant with servers and cooks and managers there to remind them of the fact that their theft will have an impact on real people.

Friendly fraudsters are frequently just ordinary people who have found some way to justify the act of defrauding a merchant to themselves, and the impersonal nature of BOPUS and delivery apps makes it easier to do that.

The second reason is that these claims are difficult to falsify. The cardholder can easily say “somebody else picked up my order,” or “the delivery person left it in the wrong place,” and the restaurant cannot prove otherwise. Often, the delivery person isn’t even their own employee. Without proof, the restaurant can’t effectively fight the chargeback. They themselves might not even know if the cardholder is telling the truth.

While there have been some recent efforts to fight these kinds of non-delivery chargebacks in other industries, such as having the driver take a photo of a package on the appropriate doorstep, most of these methods don't translate well to food delivery, since the customer is usually waiting to receive their order directly rather than expecting it to be left at their front door.

How Can Restaurants Prevent Chargebacks?

To stop chargebacks, merchants need to fight it on two fronts. They need to prevent as many chargebacks as possible from happening in the first place, and fight the ones that make it through. Of course, it takes time and effort to engage in chargeback representment, so merchants need to know which chargebacks are worth fighting and while ones are likely to stand no matter what.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyKnow your chargebacks and you’ll know how to respond to different dispute situations. By analyzing your chargebacks, you can spot patterns and learn to identify the root causes of your various disputes. Once you know where they’re coming from, you can take steps to address those vulnerabilities.

Restaurants and food vendors should uphold their industry tradition of listening attentively to customer complaints and doing everything within their power to make things right for the customer while you have the opportunity.

This often means just giving the customer their money back, and that’s always better than getting hit with a chargeback.

Not only do chargebacks typically cost nearly double the original transaction amount once you add in fees and overhead, but they can also get you kicked off your payment processor. Merchants who carry a chargeback rate of 1% or higher for too long may be penalized with account termination. Increased chargeback rates, even below the common 1% threshold, can also cause banks to require a higher level of reserve funds in a merchant's account.

Merchants who process their own online orders instead of going through a third-party app should consider using anti-fraud tools like 3-D Secure to prevent true fraud transactions from getting through.

Additionally, various anti-fraud tools can be used to screen out and either reject or send for manual approval transactions which are more likely to be fraudulent. This can be done either through a set of rules manually set up by a merchant or a chargeback management service, or by using an algorithm to assign scores to different pieces of transaction data in an effort to predict fraud as accurately as possible. Either method can take advantage of a merchants historical data on fraudulent and non-fraudulent transactions, to ensure that the metrics are customized to the individual business.

Conclusion

Opening themselves up to online orders may bring restaurants more business, but it also increases their chances of getting victimized by friendly fraud, true fraud, and other disputes. This is not a hazard to be taken lightly, but merchants can learn the strategies and best practices that help to minimize chargebacks and use them to mount an effective defense. With the right knowledge and tools, any merchant can find a solution that allows them to take advantage of the benefits of online ordering while minimizing the risks.

It can be especially disheartening when a previously low chargeback rate starts to go up, but remember, you’re not alone. These problems are industry-wide, and when chargebacks become unmanageable, there are always firms like Chargeback Gurus ready to help you get the situation under control.

FAQ

Can chargebacks be filed against restaurants?

Yes. Chargebacks are allowed for restaurant transactions, with the intention of dealing with issues like double billing, stolen credit cards, etc. However, this process if often abused through friendly fraud.

 


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