Chargebacks: A Fast-Growing Threat Facing the Restaurant Industry

The sales model referred to as “buy online, pick up in store”—commonly shortened to BOPUS—is one of the fastest-growing trends in the food service industry. After all, what’s not to love about this sales channel? The arrival of BOPUS means your customers can have access to your products at any time with just a couple of clicks.

A mobile platform enables you to keep customers up-to-date on promotions, and even integrate loyalty programs into your offerings. Your customers can also save their payment information, minimizing friction in the checkout process.

Despite the opportunities presented, though, the BOPUS model still has drawbacks. For instance, you have less direct interaction with customers. The result has been a fairly-staggering increase in the number of chargebacks filed by cardholders in this vertical over the past few years.

A Growing Problem for Food & Beverage Sales

A chargeback is essentially a kind of forced refund conducted by a cardholder’s issuing bank. It’s a consumer protection mechanism meant to give consumers a way to recover their funds in case of fraud or abuse.

Back in 2013, the food and beverage industry had one of the lowest average chargeback rates of any business vertical. At that time, the typical restaurant saw a chargeback rate of barely 0.01 percent of transactions. Fast-forward a few years, though, and the picture looks very different. According to the 2018 State of Chargebacks survey, 28 percent of respondents in the food and beverage industry reported having a chargeback rate between 0.5 percent and 1 percent of overall transactions.

We can draw a straight-line connecting use of BOPUS payments in food service to the dramatic increase in chargebacks. The crux of the problem: customers are abusing the chargeback process.

While intended to help consumers, the rise of digital commerce transformed chargebacks increasingly into a tool to commit fraud. Every year, more and more customers file chargebacks without proper justification. This is what we call “friendly fraud,” and it’s a fast-growing problem.

It’s not always a deliberate practice. Something simple like buyer’s remorse, or even miscommunication between cardholders and the merchant, could trigger a consumer to file a chargeback and thus commit friendly fraud. Of course, some of the craftier and more dishonest consumers out there could deliberately abuse chargebacks; a practice known as “cyber shoplifting,” which amounts to nothing more than a digital dine-and-dash.

Either way, between 60-80 percent of chargebacks filed by consumers are suspected cases of friendly fraud. And, given that chargebacks losses totaled $31 billion in 2017, we can’t afford to look away from this problem, especially as it spreads to new verticals like the restaurant industry.

What Can We Do?

Restaurant operators are now learning what other eCommerce merchants have known for years: the chargeback process is broken. So, we know there’s a problem…but what is being done to resolve it?

There are some efforts underway to curtail the impacts of friendly fraud and other chargeback losses on the industry. For instance, the Visa Claims Resolution initiative undertaken back in 2018 saw a complete overhaul of Visa’s chargeback process. They cleaned up their reason code list, and automated some processes to enable faster and more accurate resolutions. Just a few months later, Mastercard rolled out their own equivalent initiative, called Mastercard Dispute Resolution.

These are positive moves in a broad sense. Visa and Mastercard’s initiatives are recognition that the process needs reform, and that the necessary change demands proactive moves from the card schemes. That said, what we really need is a standardized process that is consistent across card brands.

From the merchant’s perspective, chargeback regulations and processes are hopelessly complex. There are hundreds of pages of industry rules governing chargebacks spanning decades. Many of the processes we use to resolve chargebacks are relics of a pre-internet age. As we’ve seen, these inconsistencies create vulnerabilities that can be exploited to separate you from your hard-earned money.

In the Meantime …

Until we have that level of comprehensive transformation across card brands, you’re going to have to look out for yourself. This means identifying chargebacks based on their three fundamental sources: criminal fraud, friendly fraud, and merchant error.

With criminal fraud, the solution is to embrace a multilayer approach. You can incorporate multiple complimentary fraud tools into your arsenal, including CVV verification, geolocation, and 3-D Secure 2.0 technology, just to name a few. These tools should also work alongside fraud scoring to gauge each transaction’s relative risk level.

For merchant error, the best solution is to provide excellent and responsive service. This includes support across multiple channels—phone, email, and social media—as many hours a day as possible.

These are all pre-transactional, preventative measures. Of course, friendly fraud is post-transactional. Friendly fraudsters look just like any other legitimate customer, right up until they file a chargeback. Unfortunately, the tools you’d use to identify criminal attacks like clean fraud or account takeover can’t help you spot friendly fraud.

While you can’t really prevent friendly fraud, you can respond to it through the chargeback representment process. This is essentially a litigation-based process by which you attempt to prove that a transaction was valid.

Over time, we’ll eventually develop the kind of comprehensive change necessary for the chargeback process to adapt. Until then, though, you’ll need to be more proactive than ever before about these disputes. Otherwise, you could find yourself developing an out-of-control problem.