Restaurant Chargebacks: How they Work & How to Prevent Them

Restaurant Industry Chargebacks: Delivery Platforms & BOPUS Options Lead to Greater Losses. Here’s What to Do About it.

Third-party delivery platforms have completely transformed the average operator’s relationship with their customers.

825,000 restaurants have a presence on Uber Eats. Another 500,000 food outlets are registered with DoorDash.

These platforms can be a crucial lifeline for merchants that are trying to appeal to on-the-go young consumers who might not be interested in the traditional sitdown restaurant experience. But, the convenience of door-to-door delivery and online ordering options come at the cost of greater chargeback risk.

The Financial Impact of Restaurant Industry Chargebacks

TL;DR

On average, restaurant chargebacks are less common than in some high-impact product categories. But fraud has a multiplier effect that ups the impact and severity of friendly fraud.

Recent data suggests that merchants in the food and beverage space have a lower average chargeback rate compared to higher-risk verticals like SaaS, gaming, and travel. But, that’s only part of the story.

According to LexisNexis Risk Solutions, every dollar lost to fraud ultimately costs merchants $4.61 to investigate, contain, and resolve. This means that the real impact of chargebacks could be much worse than it appears at first glance, especially in the restaurant space, which has notoriously thin margins.

There’s another issue: food and beverage chargebacks, as we’ll see later, are difficult to fight. That’s because a dining experience is a consumable service, so it’s harder for merchants to gather the before-and-after evidence needed to challenge a cardholder’s claim. This means operators should expect lower-than-average chargeback win rates and net recovery rates.

Did You Know?

According to the Chargeback Field Report, merchants won 45% of the chargebacks they represented on average. But, this represents just 18% of overall chargebacks.

A Real-World Look at Chargeback Management

Based on a survey of over 400 merchants, the report presents a comprehensive, cross-vertical look at the current state of chargebacks and chargeback management.

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Valid & Invalid Reasons for a Dispute

TL;DR

There are several reasons why a cardholder might file a valid chargeback. For example, if you processed a transaction without authorization, or a delivery order was paid for but never arrived. But, there are numerous invalid reasons why cardholders file disputes, too.

When we’re talking about food delivery and online ordering, there are a lot of issues that could come up that might justify a chargeback. For example, maybe part of the order was missing, or the delivery driver dropped the food at the wrong door.

But, there are also a lot of claims a buyer might make that do not qualify for a chargeback.

Valid reasons to dispute a charge at a restaurant:	Invalid reasons to dispute a charge at a restaurant:
The cardholder never authorized the purchase	Diner feels the meal was too expensive after eating it
The server ran the card multiple times due to system error	Food “didn't taste good,” but customer ate the entire meal
An unauthorized tip amount added without customer consent	Service was slow or staff was unfriendly
The restaurant canceled a reservation but charged no-show fee	Customer disputes clearly stated cancellation or no-show policy
Delivery order was paid for but never arrived	Didn't cancel catering order within required timeframe
Food was contaminated or contained undisclosed allergens causing illness	Another authorized user on the account made the purchase
The wrong order was delivered	Claims they didn't authorize tip that they clearly signed for

Still not sure about the scale of the problem? Here are some first-hand stories from Reddit that can help illustrate:

Chargeback on online order
byu/legendarywitch inrestaurantowners

Chargebacks
byu/Independent_Box8057 inrestaurantowners

Chargebacks on Online Orders
byu/Sojuboy inToastPOS

Customer chargeback
byu/Snoo-60283 inrestaurantowners

Common QuestionWhy are “digital dine and dash” schemes easier for fraudsters to rationalize?Ordering online through a third-party platform creates psychological distance, which makes it easier for customers to rationalize fraud. A faceless transaction conducted through an app feels less personal, which in turn makes a chargeback seem “victimless,” rather than what it is (ripping off a small local restaurant).

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Why Do Restaurants Struggle With Chargebacks?

TL;DR

While it’s easy for diners to engage in friendly fraud, it’s tough for food and beverage merchants to gather the evidence they need to successfully challenge it. Other factors include psychological distance between you and your customers, a lack of verifiable evidence, and low-dollar threshold per transaction.

Merchants operating in a service-centric vertical like restaurants inherently face more challenges than product-based businesses when it comes to winning friendly fraud disputes. For merchants in this space, friendly fraud is tough to challenge because:

BOPUS Makes Dining-&-Dashing Easy

Customers-turned-fraudsters know that it’s easy to dispute BOPUS orders for bogus reasons. A cardholder who claims that someone else took their order or that they received the wrong order is likely to prevail in a dispute. Unless the restaurant has compelling evidence to the contrary, they’re unlikely to succeed in getting that chargeback overturned.

Food is Consumed, So There’s No “After”

Invalid restaurant chargebacks are difficult to falsify because there’s little evidence to collect after the diner receives the food. Restaurant merchants can furnish standard evidence like proof of purchase or even CCTV footage to show that the food was picked up. But even then, allegations of subpar service or poor food quality are hard to challenge.

Restaurants Can’t Contest Serious (But False) Allegations

When it comes to serious accusations, like a customer claiming to have contracted a foodborne illness, restaurants have even less recourse. To protect themselves from liability, issuers may be inclined to side with the cardholder, even if the diner’s claim was bogus. This leaves the establishment with little chance of recovering their loss.

Small AOV Means a Lax Investigative Process

Takeout orders tend to be comparatively small-dollar transactions. Meanwhile issuers handle thousands of chargeback claims per day. So, an unauthorized purchase claim involving a $5,000 transaction is probably going to take precedence over investigating a $15 meal at a food truck. In other words, the issuer probably won’t spend much time investigating the cardholder’s claim before approving the chargeback.

In fact, issuers are known to skip over the provisional credit stage and automatically approve small-dollar disputes as a courtesy to cardholders. For restaurants, that’s a death knell that virtually guarantees a loss.

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How Restaurant Owners & Operators Can Prevent Chargebacks

TL;DR

Restaurants can lower the incidence of friendly fraud by issuing pre-emptive refunds, providing excellent customer service, personalizing experiences, and verifying BOPUS orders prior to pick-up.

It should be pretty clear by now that restaurants can’t afford to be reactive when it comes to food and beverage chargebacks. They’re difficult — or even impossible — to re-present successfully at scale. If you want to get chargeback costs under control, then prevention is going to be key.

Not to mention, proactive prevention is often cheaper and more straightforward. To stop chargebacks before they strike, you can consider:

Enrolling in Chargeback Alerts

Chargeback alert services can notify you when a customer has initiated a dispute with their bank. This gives you a brief window of time to issue a pre-emptive refund to the cardholder before the dispute cements into a formal chargeback. Doing so allows you to dodge the associated chargeback fees and the hit to your chargeback ratio.

Providing an Exceptional Dining Experience

Not all chargebacks begin with fraudulent intent. Some simply begin as legitimate grievances involving poor food quality or service issues. Training kitchen and support staff to reduce errors, communicate clearly, and effectively manage customer complaints on the spot can better equip you to defuse problems — and disputes — before they escalate.

Personalizing the Ordering Experience

When customers place orders through an app, there’s a barrier of impersonality there. You can bring down this barrier by humanizing the online experience. For example, include staff photos on your online profiles, send personal thank-you messages with orders, or enroll diners in digital loyalty programs. Tactics like these can make customers think twice before committing friendly fraud.

Verify Order Quality & Accuracy

Claims involving incorrect or missing items are common reasons for disputes. You can mitigate this by implementing a simple verification process. Have staff verbally confirm pickup orders with customers before they leave. For delivery orders, photos of the packaged contents just before pickup can be used as evidence to challenge bogus claims and discourage fraudulent disputes.

Running a Restaurant is Hard Enough. Leave Chargebacks to Us.

Handling dozens or hundreds of customers a day, maintaining an ever-changing stockpile of perishable ingredients, and juggling shifts of front- and back-of-house staff is a nerve-racking experience.

You’ve got more than enough on your plate already. So, when it comes to friendly fraud, don’t go about it alone. Get help instead.

At Chargebacks911®, our dual-layered friendly fraud prevention and representment solution can do the heavy lifting for you by stopping the bulk of bad actors before they bite and arming you with the tools to fight back against the ones that do.

Have questions? Or, want to learn more about how much you can save? Get in touch with one of our experts for a no-obligation ROI analysis today.

FAQs

Can you do a chargeback on a restaurant?

If you had an unsatisfactory experience at a restaurant, you may be able to file a chargeback with your issuing bank, provided that you first attempted to resolve the dispute directly with the restaurant.

Do merchants ever win chargeback disputes?

Yes, although it’s not common. On average, merchants win about 45% of the chargeback disputes they represent.

Can I dispute a restaurant charge if I didn't like the food?

It depends. If you simply did not like the food, you may not have a case for a dispute. It’s generally better to reach out to the restaurant directly and ask for a refund. If there was something seriously defective about the food (e.g. you developed food poisoning after eating it), then you may have grounds for a formal dispute.

What evidence do you need for chargeback?

To file or fight a chargeback, you’ll need to furnish proof of purchase, copies of emails or text messages with the merchant, and pictures of the merchandise or food you bought.