It has to be frustrating for quick-service restaurants (QSRs), because they often fall prey to chargeback issues. Regardless of the reason, whether it’s real or fraudulent, QSRs are getting hit with chargebacks from all sides for a variety of reasons, and they have to work hard to avoid receiving so many of them.
Why Chargebacks are a Problem
There are two types of chargebacks: Legitimate and friendly fraud
Legitimate chargebacks are usually made because customers didn’t get something they ordered. And rather than complain to the restaurant manager and ask for a refund or replacement, they tell the bank and the bank issues a chargeback. Friendly fraud chargebacks are where the customer did receive the food, but then lies to the bank and says there was a problem.
In either case, the financial institution is more than happy to issue a refund, which restores the money back to the customer, erases the sale from the QSR, and the restaurant loses the subsequent inventory and labor costs.
One is based on laziness, the other is based on outright deception. And both are having a dramatic effect on the QSR industry.
After all, it’s one thing to issue a chargeback because a food delivery failed to show up at all, it’s another thing to issue a $20 chargeback because someone accidentally got a small fries instead of a medium.
According to a 2019 PYMNTS article, a 2018 study 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 not seem like much, but five or six years ago, QSRs were reporting no chargebacks at all.
The chargebacks are happening, says PYMNTS, largely because of the increase in mobile ordering. When orders were placed right in the restaurant, and the food was picked up and checked, there were almost zero chargebacks. Even the people who had problem orders in the drive-thru didn’t call their bank.
Before mobile ordering, problem orders could be rectified, and any attempted fraud could be detected just by checking the restaurant’s point of sale system.
But mobile ordering has made the problem worse. As PYMNTS said in their article:
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.
The legitimate complaints are at least a little understandable. It’s one thing to turn around and go back to the drive-thru when they forgot your apple pie. It’s a whole other thing to get into the car and drive five miles just two minutes after the delivery driver left. (Still, the chargeback seems like a nuclear option when an order has one or two small problems; those could be remedied another way.)
Additionally, with QSR chargebacks, the time and inventory are unrecoverable. At least retail items can be returned and resold — the customer has to return a microwave or ill-fitting sweater if they want a refund. The retailer isn’t out all of their costs like the QSR.
And in chargebacks where the return amounts are usually bigger, the merchant is more likely to contest the chargeback, and elevate the dispute. That forces the customer to prove the reason for their chargeback.
But is it really worth it to contest a $7.50 chargeback when it’s just one more in a small handful of refunds and errors you had to fix each day? Who’s to know if each chargeback is legitimate or fake, nitpicky or worth fighting for? And that’s the problem QSRs face: do you chase bad money with good, trying to spot the occasional fraud or extremely minor issue?
Banks are more than willing to hit the restaurants with fines. Visa’s Chargeback Monitoring Program will fine merchants who receive too many chargebacks, eventually cancelling their merchant account and putting them into the high-risk category. PYMNTS said restaurants can be hit with penalties as high as $75,000 per month. Which means it could be worth trying to comb through each chargeback and disputing the ones that are fraudulent and minor.
How Can QSRs Reduce Chargebacks?
The methods for fighting chargebacks depend on whether it’s legitimate or friendly fraud.
As you might have guessed, the first step is to prevent the chargeback from happening in the first place. Restaurants should settle disputes directly with the restaurants, which means encouraging the customers to return to the restaurant for disputes. Give them a hotline number to call, give them a money-back guarantee, and be willing to give a refund. A refund is cheaper, or at least less damaging, than a chargeback.
Another prevention method is to be able to prove you got it right the first time. While you always strive to get each and every order right, you may have to set up a special step to double-check all mobile orders just to ensure they were correct when they left your premises. Then you can use that documentation to contest any chargebacks that come because of alleged errors.
You should also provide feedback forms after an order has been made: text a Net Promoter Score or short quality survey to your customer as soon as the order has been delivered. Send an email asking for feedback. And address possible problems proactively. Send a text message that says, “Did we get your order right? Was there anything missing?” as soon as the order is delivered, and people will be more likely to respond to that than to call their bank.
To avoid friendly fraud charges, require customers to enter the CVV code from the back of their credit card: that shows that they’re in possession of the card when they place the order. Then, the only recourse a fraudster has is to report their card stolen in order to get a refund.
There is also software available that will monitor patterns of chargebacks and tell you if there are a pattern of chargebacks over a certain number of days, such as friends taking turns ordering food and then charging it back, night after night. Other solutions allow banks to push back against chargebacks and confirm that food was delivered to a customer’s correct address and was charged to the correct account number.
To learn more about how QSRs can reduce both legitimate and friendly fraud chargebacks, please visit our website or call us at (800) 408-0095.
Photo credit: Mike Mozart (Flickr, Creative Commons 2.0)