On Guard! How to Protect Your Independent Restaurant from Unjustified Chargebacks

Illegitimate Chargebacks -- A RestaurantOwner.com member posts in the Member Discussion Forum recently...

"We are at our wits end, recently we have been getting chargebacks from people that are literally just scamming us, some very unsavory characters. Apparently we have been told that this is becoming more prevalent (we are in the Orlando non tourist area) and that short of buying a fifteen thousand dollar plus chip reader there is NOTHING can do, my question is how do restaurant owners handle illegitimate disputes , does this happen frequently to others? I can't believe it's so easy for people to scam small businesses. It's enraging..."

The pandemic accelerated takeout and delivery sales for nearly every industry. And these shifts are not likely to fade away, as consumer behavior has changed according to research by Restaurant Accounting Services, Inc. Many restaurants - perhaps yours, as well - are now fully-fledged participants in the “Amazon economy”, fueled by technology that allows businesses to take orders and accept payments at arm’s length.

But as much as folks like to fill online shopping carts from their mobile devices and have goods show up on their doorsteps the next day, they are more wary of unauthorized transactions. They scour credit card statements to ensure they match their recollection of transactions. And cardholder’s banks have made it easier than ever to seek “chargebacks”.

As defined by Chargebacks911?, the chargeback management and risk mitigation service, chargebacks are a forced transaction reversal initiated by the cardholder's bank. They are designed as a consumer protection mechanism but are often overutilized. Monica Eaton-Cardone, the company’s chief operating officer and founder, learned how they work and their pitfalls from the proverbial school of hard knocks 15 years ago, when she applied her technical education and expertise to launch a web-based online sales business. 

 “It was a humbling experience,” she says, recalling how chargebacks made running an e-commerce retail business even more challenging. “There wasn’t any advice on chargebacks,” she adds. “If I ended up refunding the transaction, I tried to call customers. They never returned my call.” As a result, she learned how the chargeback system works, and now applies her experience and technology to assist other online retailing businesses.

 Why You’ve Become More Vulnerable

 As a restaurateur, most likely you have been insulated from her experience. As a full-service operator, you had opportunities to reconcile a disputed charge at the counter or tableside.

 Now, with a greater number orders being handed off to drivers or to customers curbside, this could change quickly, and particularly if you embrace the virtual kitchen model. In fact, one of the benefits of working with a national turnkey virtual kitchen company is management of chargebacks.

As an independent operator, it is unlikely you will have as many chargebacks as most online retailers. Shawn Walchef, founder of Cali BBQ in San Diego, had only five chargebacks in the past year, in spite of a significant increase in off-premises orders.

 As Eaton-Cardone notes, however, even a handful a month can be expensive in time and money, explaining the process for disputing chargebacks is time-consuming and unforgiving. As easy as it is for a consumer to initiate chargebacks, the process and system for businesses to dispute them is based on an “archaic infrastructure”, she says. “If a merchant doesn’t know what to do with their data, they are going to lose.”

 In spite of the hassle, Eaton-Cardone does not recommend accepting chargebacks as a cost of doing business, even if you only experience relatively few. Rolling over on these claims can mark you as an easy target to bad actors who fraudulently use chargebacks as a way of getting something for nothing. Your inaction can be costly. According to Eaton-Cardone, every $1 lost to chargebacks costs the business $3 in time and lost profits. It adds up.

Friendly Fire

It is not just professional fraudsters who create the most chargebacks risk for restaurants. A large number are “friendly”, she explains, noting 80% of chargebacks are initiated by women. This may partly be caused by the fact that women tend to manage the household finances, and could also be a result of the fact that women’s wellbeing has been hit harder by the pandemic.

 Keep Learning…

 Women Are Managing the Finances in Most Households

 Poll Results: Women Are Managing the Finances in Most Households - Consumer Credit

  “There is a lack of education on how chargebacks work,” Eaton-Cardone continues. “For one, consumers often don’t understand the impact of a chargeback on a business, including fines and fees,” say Eaton-Cardone. “They assume the money is coming out of some government slush fund, not out of the business’s pocket.”

 As Eaton-Cardone discovered early in her career as an e-commerce entrepreneur, “most consumers believe they do not have to contact the business to resolve the dispute.” And given the ease filing them, consumers often act hastily in claiming a transaction was unauthorized without contacting the retailer for an explanation.

She also cites misunderstandings arising from credit card pre-authorizations, which ironically are designed to sidestep chargebacks and fraud. For example, if the customer’s credit card statement indicates $20 is charged for a $7 transaction midway through the pre-authorization “hold period”, the customer is likely to report it as a mistaken charge, rather than seeking explanation from the business. In fact, says Eaton-Cardone, this became a recurring source of chargebacks for a restaurant chain client of her company.

 “Chargebacks can also occur during shifts in behavior, such as buying habits brought on by the pandemic which resulted in increased use of credit cards,” she adds. Elderly consumers are new to the online transaction environment. They can inadvertently reorder the same purchase multiple times.

 In addition, parents often provide their teenagers use of their credit cards and are surprised by restaurant purchases. One of Chargebacks911’s clients received a chargeback notification because a teenager purchased a large order of fried chicken to be delivered to friends’ houses.

 In other cases, consumers are confused by the vendor’s name on their credit card statements. Your restaurant’s d/b/a might be “Bluefish Grille”, but if it is incorporated and appears on the statement as “Downtown Restaurant Group, LLC”, the customer might not recognize the transaction. And unfortunately, many customers don’t take the moment to consider the source of their confusion.

Chargebacks911 amalgamates chargeback data, which they can use to trace each dispute back to the original transaction. “We identify chargebacks based on their source, then dispute unwarranted chargebacks on behalf of the merchant,” Eaton-Cardone says.

Eaton-Cardone suggests that turning over chargeback management to a company like hers aligns with best practices in other areas of business management. With critical and specialized tasks, such as payroll management, a do-it-yourself approach may not the most productive use of your staff’s time. The same is true for chargeback management. Plus, while POS companies are integrating credit card processing functions, not all of them process chargebacks.

 Preemptive Strikes

 Carefully checking the accuracy of orders before they leave the restaurant can sidestep disputes. Also, providing encouragement for the guest to contact your business with complaints or disputes, including questions about the transaction. This might be as simple as placing a card in the bag with the order. Or you might text the guest after delivery or pickup to inquire about their satisfaction.

 If you provide a virtual kitchen for other brands, ensure the company manages and resolves chargebacks. You are invisible to the customer and have very little control over the transaction beyond fulfilling it and handing it off to a delivery driver.

 As Eaton-Cardone suggests, particularly for a single-unit or small multi-unit concept, subscribing to a chargeback management service can free you from one more aggravation at a relatively low cost. This is especially pivotal as, if you become a target for fraudulent chargebacks, it will send a message to wrongdoers to look for an easier target.