Like any business, sometimes you may have to deal with an unhappy customer. Traditionally, this meant the manager would come out and apologize to the customer, then offer a discount or a free meal.
This system has worked quite well in the past. However, a lot has changed in the last four or five years. The widespread adoption of branded apps, online ordering and delivery, accelerated by the Covid crisis, has forced restaurants to face a problem they have mostly avoided until now: chargebacks.
Historically, restaurant chargebacks usually happened when a customer found something wrong on their credit card statement, such as double-charging or adding an unauthorized tip to the bill. Instead of calling the restaurant, the customer called the bank and reversed the payment. The merchant then loses the dollar value of the meal and must pay fees and other costs resulting from the chargeback.
Until recently, chargebacks in the restaurant industry were relatively rare. So what has changed?
The impact of online ordering
The digital age has had a huge impact on the food and beverage space.
Being able to order dinner online and have it delivered has opened new doors for catering establishments. The big chains have created their own mobile applications. Local restaurants have often gotten into the game by working with third parties to facilitate delivery services.
Many consumers still wanted the dining out experience, so digital channels did not disrupt the industry. Instead, they just let traders increase their business with a new source of income.
Then came the Covid.
With mandatory quarantines in place, gathering to eat was not even an option. Adjusted consumers; between 2019 and 2020, online food/beverage orders grew by a record 93%.
Customers placed orders from their phone or computer, paid by credit card, and had food delivered without even speaking to the delivery person. Online ordering may have saved the restaurant industry, but the salvation comes at a price. The rise of digital channels has been accompanied by a comparable increase in chargebacks.
Clearly, customers had been using credit cards in restaurants for years. These payments, however, were made in a card present situation. The server or host was able to physically see and manage the customer’s payment card. Additionally, in 2019, up to 35% of in-person restaurant purchases were paid for in cash. None of these methods are particularly sensitive to chargebacks.
During Covid, however, in-person shopping has dropped dramatically. No one even ate in the restaurants, let alone handed cash or a credit card to a waiter. The majority of payments were now card-not-present transactions, making them much more susceptible to chargebacks.
For starters, online orders don’t benefit from the fraud protection provided by EMV chips. In fact, since no physical card scanning is required, a fraudster may not have a physical card at all. Instead, they may have hacked into a legitimate cardholder’s account or concocted a fake persona from bits of data purchased on the dark web.
Friendly Fraud and Abuse of the System
Criminal fraud exists in the food and beverage industry. That’s a relatively tiny number of cases, though; the bulk of chargebacks come from first-person sources like friendly fraud.
Naturally, not all customer complaints result in a chargeback. For example, miscommunication is much more likely with online or phone orders than orders placed in person. An order taker may write the wrong item or misunderstand the instructions. In these cases, the customer will often call the restaurant and attempt to resolve the issue.
But what about online orders? In an increasing number of these cases, the buyer calls the bank that issued the credit card and requests that the charge be waived, rather than contacting the merchant.
Why is it? Well, the fact that you’re dealing with an online form, rather than someone on the phone, makes it less personal, so there’s less inhibition about filing a chargeback. Or in situations where the order was placed through a third party, the buyer may not be able to reach the restaurant in question.
Also, unfortunately, there are people who play the system just to get a free meal.
The anonymity of online ordering has made it much easier to place an order with the intention of abusing the chargeback process. Since the buyer is interacting with an online form rather than a real person, it’s easier to rationalize this behavior as a “victimless crime.”
Whatever the reason, by the time the merchant learns of the dispute, it’s all over and done. Worse still, the guest has the right to file a chargeback for months after the date in question.
Things are bad everywhere
Restaurants may be new to the threat of friendly fraud, but they’re certainly not the only victims.
As we mentioned earlier, chargebacks and friendly fraud have increased during the Covid outbreak. The numbers continue to climb, according to findings from the recently released Chargeback 2022 field report.
The study, a joint venture between Chargebacks911 and Card Not Present, reflects survey results from over 300 retail merchants across all verticals. Of those surveyed, nearly two-thirds said chargeback abuse, commonly referred to as friendly fraud, had increased.
How Merchants Can Fight Back
The report also shows that more businesses are accepting payment methods other than cash or credit cards. For catering establishments, in particular, this may be something to consider. Most friendly fraud comes from credit card orders, so offering alternative payment options can help reduce the risk of chargebacks for online orders.
That said, there are many other steps food and beverage merchants can take to minimize opportunities for scammers.
Some solutions are common sense approaches. For example, merchants should double-check phone orders with customers. They should ask for the CVV number on the back of credit cards for all orders and check the order against the receipt before delivery.
Another good chargeback prevention technique is to focus more on customer service outside of the restaurant. Every property should have someone who regularly monitors review sites and social media. All comments should be acknowledged, whether good or bad. If a customer has a complaint, for example, an apology message directly from the owner, with a solution to help rectify the situation, can have a big impact.
Some fraud prevention techniques are the same regardless of vertical. All merchants must strictly adhere to the requirements and best practices of each card network. Having clear, easy-to-understand billing descriptors is also important: many chargebacks can be avoided if the cardholder can recognize the name of the restaurant where the purchase was made.
Some restaurants are also having trouble with “digital dine-in and dash” situations. This refers to customers ordering and consuming food, then calling the bank and claiming the order was wrong, or the service was bad, or the food never arrived. The bank then files a chargeback on behalf of the fraudster.
To combat this type of fraud, merchants must have proof that the claims are not valid. It is essential to include a receipt with each order, the merchant keeping a copy. Photographs of orders and tickets before they are picked up and after delivery can be helpful. Requiring buyers to show ID at delivery provides proof.
Even in the best conditions, it’s hard to be in the restaurant business. Now, circumstances have forced even sit-down restaurants to get into the delivery game. This leads to an increased risk of fraud and chargebacks.
The threat will likely continue to grow, but that doesn’t mean managers and owners have to be victims. Like other businesses, restaurants need to adapt to these new circumstances, recognize the threat, and take action now to effectively manage chargebacks wherever they can.