What is a Chargeback? How to Avoid Chargebacks in Your Restaurant
By: Molly Donaher
May 17, 2018
No restaurateur likes dealing with chargebacks.
On one hand, you’ve likely got a case of fraud or a disgruntled guest, while on the other, you’ve lost money that was already in the bank. For a new restaurant, incurring those first few chargebacks can be a shock to the system.
There are a handful of best practices worth adopting to avoid chargebacks altogether. Before we go there, let’s take a step back and nail the basic questions that many restaurants have:
A chargeback is initiated when a cardholder disputes a transaction, resulting in a forced reversal of the original payment.
Said another way, when a guest denies a charge that appears in their credit card statement via a few clicks, the charge is reversed and funds are immediately withdrawn from a restaurant and returned to a cardholder.
Following a cardholder’s chargeback initiation, a restaurant has the opportunity to prove that the original transaction was legitimate and the cardholder’s claim is unfounded, but not before a forced-refund is processed.
Fighting chargebacks has become easier for restaurants who employ a point of sale system that has digital receipts, which is often the evidence required to attempt to disprove a chargeback claim. Although digital receipts prevent sifting through boxes of paper receipts, spending any time fighting chargebacks can still be a headache – especially when the chargeback is legitimate.
Chargebacks are added costs that all merchants, in every industry, will incur in order to accept credit cards. Rules and government regulations heavily favor cardholders in chargeback claims, and generally-speaking, a restaurant is treated as guilty until proven innocent.
Why Do Chargebacks Exist?
The Fair Credit Billing Act affords consumers the right to chargeback "to protect the consumer against inaccurate and unfair credit billing and credit card practices."
Examples of “unfair billing practices” range from incorrect amounts charged, to charges made via a stolen card, to charges made for goods or services not delivered as agreed. The regulations are designed to protect cardholders from fraud/theft while incentivizing merchants, like restaurants, to provide quality products, helpful customer service, and timely refunds as needed.
This is where it gets tricky for restaurateurs. Serving a meal at a restaurant involves both a good and a service: the food and the experience. If a diner’s expectations are not met (say if a burger isn’t cooked to a guest’s definition of “medium”), that guest has the right to claim a chargeback and the onus to prove otherwise is the responsibility of the restaurant. In fact, 4% of chargebacks are because the final product did not match the description.
Although a daunting example, these situations are very rare for restaurants which have extremely low chargeback rates (% chargeback rate = # of chargebacks/total # transactions) compared to other industries.
If you notice an unhappy guest or receive a complaint, open up the lines of communication and try to quickly resolve the issue before a diner gets to their card statement to deny a transaction. If you think the guest would win a chargeback, offer a refund or a partial refund. In either scenario, a refund is cheaper than a chargeback.
2) Exchange contact info and encourage follow up.
Make sure your restaurant’s contact info is easily available on a receipt so that a guest may reach out if they have a complaint. This will afford you the opportunity to address the concerns before getting a chargeback
If you have comment cards, make sure you are collecting guest contact information so you can reach out and respond directly to any negative feedback.
3) Track patterns of dissatisfaction and solve their root causes.
Always be watching out for common negative comments/reactions and solve any rising trends as they appear. In response to the first two tactics, see if there's a common thread in customer dissatisfaction and make the proper changes.
For example, maybe your chargebacks are consistently related to overcooked food complaints. If so, talk to your BOH crew and ask them to turn the heat down a notch on the grill.
4) Follow the guidelines established by the major card brands.
Every major credit card brand has a collection of best practices for all merchants to follow. Learn more below:
Clearly describe menu items and preparation to avoid a misunderstanding on your guests' expectations. Setting the right expectations is key to ensuring a positive guest experience. Whether through the clear menu descriptors, pictures of the final product, or proper server training, educating a diner on what they can expect will help prevent dissatisfying surprises and chargebacks.
Best practices dictate you should run all your cards through a restaurant EMV reader processor instead of magstripe – not just those over a certain ticket size. This is effective at avoiding chargebacks from fraudulent credit card use.
However, this can slow down operational efficiency during busy shifts, so consider which will cost you more in the long run: a stolen coffee here and there or a slew of disgruntled customers who choose to go to a cafe that conducts transactions faster.
Keep Calm and Charge On
When you take pride in offering outstanding service and delicious food, receiving a chargeback can be frustrating and seemingly unfair - remember that incurring chargebacks are a necessary requirement of accepting credit cards; no one is immune. Employing a few best practices can go a long way in preventing chargebacks.
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