Bank and credit card chargebacks are valuable tools, keeping consumers safe from credit card thieves, hackers and unscrupulous merchants. The Truth in Lending Act, signed into law in 1968, grants U.S. consumers the universal right to credit card charge reversals, while the Electronic Fund Transfer Act of 1978 affords the same rights to debit card holders. Few would argue the necessity of these laws in protecting American consumers from being swindled.
These rights are often abused by legitimate customers and fraudsters intent on scoring free merchandise, however. The restaurant industry — including quick-service restaurants (QSRs) — is relatively new to chargebacks, thanks to the advent of mobile ordering, and it faces unique challenges that can be overcome with several recently emerged tools.
Why Do Chargebacks Occur?
Restaurant chargebacks largely fall into one of two categories: legitimate requests and friendly fraud. The first occurs when customers do not receive items they ordered, resulting in them filing chargeback requests with their banks or credit card companies as opposed to contacting the restaurants and requesting replacements or refunds. The latter involves similar processes but is conducted entirely in bad faith. Customers falsely claim that their orders were incorrect or the result of fraud and file chargeback requests to receive money. The financial institutions (FIs) refund the customers and recoups these funds from the restaurants in question, leaving them with lost sales and irrecoverable inventory.
A joint study conducted by Chargebacks911 and Kount last year found that 28 percent of food and beverage industry respondents had chargeback rates between 0.5 percent and 1 percent of transactions, while an additional 10 percent reported chargeback rates of more than 1 percent. This may seem like a small amount, but it is a significant increase from five years ago, when restaurants reported no chargebacks at all.
This increase in chargebacks is largely the result of increased mobile ordering. Most food orders used to be placed and completed in restaurant, resulting in chargebacks being rare to nonexistent. The problem could be immediately remedied if customers received incorrect items, and a suspected fraudster’s order could be quickly verified by checking the restaurant’s point of sale (POS) system.
Mobile order-ahead options have resulted in less face-to-face interaction with restaurant staff, meaning that legitimate and fraudulent chargebacks have become much more common. Ordering via mobile app and only interacting with a delivery person who had nothing to do with the food’s preparation leads to far less customer oversight, providing ample reason for legitimate chargeback claims and plausible deniability for fraud.
Why Are Chargebacks Harmful?
Chargebacks are harmful to restaurants for a variety of reasons, the first and most apparent being the waste of employee time and energy that was devoted to preparing food that did not bring in revenue. Chargebacks are more damaging for restaurants than other retailers because they have no way to recoup what was purchased. A clothing shop can have customers return items, which can then be placed back out on the floor. Restaurants cannot resell items that were the subject of a chargeback and are forced to write off the entire transaction as a loss.
Further exacerbating damages are the fines FIs give restaurants. Visa’s Chargeback Monitoring Program oversees chargebacks to individual merchants and fines them if there are too many over a given period, for example. Merchants in the program are subject to a $100 fee for each individual chargeback and face additional fines if they fail to keep their chargeback levels below an acceptable threshold. Restaurants could even see penalties of up to $75,000 dollars each month, depending on how long they have been enrolled. Restaurants can even be barred from accepting Visa payments if their chargeback numbers do not decline, cutting off a massive revenue stream and alienating Visa card users.
What can be done to curb chargebacks?
The key to stopping excessive chargebacks varies depending on the type of chargeback, with fraudulent and legitimate chargebacks requiring different tactics. The best approach for mitigating legitimate chargebacks is prevention. Trust goes a long way toward encouraging customers to settle disputes directly with restaurants rather than go to their FIs. Eateries can institute a number of policies to encourage trust: Customer satisfaction issues should be addressed and resolved immediately, even if they result in refunds as they are greatly preferable to a chargeback.
Restaurants should also maintain direct lines of communication to their customer bases to encourage consumers to come to them before going to their FIs. That dialogue could be started by providing feedback forms after an order, exposing chargeback-provoking issues before they occur and demonstrating that the restaurant is willing to listen.
Friendly fraud requires different tactics, such as requiring customers to enter card verification value (CVV) codes, which are printed on the back of most major credit cards and certify that a customer is willfully placing an order. These codes cannot be stored on restaurants’ systems and are therefore less likely to fall into fraudsters’ hands. CVV codes can make chargeback disputes significantly easier for restaurants to win, as they can prove that the transaction was authorized.
It does not seem like chargebacks are slowing down, but with these tools and attention to fostering customer relationships, restaurants can limit their damage.