The Ultimate Guide to Restaurant Chargebacks for Business Owners

Running a restaurant is a labor of love, but even the most successful businesses face challenges. One often overlooked hurdle? Chargebacks. A chargeback occurs when a customer disputes a credit card transaction with their bank, potentially leading to lost revenue, fees, and reputational damage for your business.

Are you frustrated with chargebacks affecting your bottom line (and your customers’ patience)? This guide will arm you with the knowledge and strategies to understand, fight, and minimize chargebacks.

What are Chargebacks?

Before you can fight to prevent chargebacks, you must understand what they are. A chargeback is a refund initiated by a bank for a credit card purchase. These happen when a cardholder (in this case, your customer) disputes a charge they deem fraudulent.

While chargebacks were initially designed to protect customers from legitimate fraud, they are sometimes used to commit fraud themselves. In such cases, the onus is on your business to prove to the bank that the charge was legitimate.

What Causes a Chargeback?

To effectively combat chargebacks, you need to understand what causes them. Here are some common culprits in the restaurant industry:

• Friendly Fraud: Customers sometimes claim they didn’t authorize the transaction, usually to avoid paying for an expensive meal or get a “free” meal.
• Unrecognizable Charges: Vague or unclear descriptors on credit card statements can lead to customer confusion and disputes.
• Processing Errors: Incorrectly entered amounts, duplicate transactions, or other processing mistakes on your end can result in a chargeback.
• Quality of Service Disputes: Customers can dispute charges due to dissatisfaction with food quality, service, or long wait times.
• Card-Not-Present Fraud: Unauthorized transactions using stolen credit card information are prevalent with online ordering and delivery.
• Double Refunds: Even if a customer has already been refunded, they may decide to issue a chargeback anyway, forcing you to pay twice.

The Impact of Chargebacks on Restaurants

While chargebacks don’t affect the restaurant industry the most — only averaging at 0.12% — they can still cause harm to your restaurant in a variety of ways.

Here’s why they’re more than just a minor inconvenience:

• You lose the revenue from the initial transaction, absorb the cost of the disputed goods, and face hefty chargeback fees.
• Dealing with chargeback requests requires valuable time and resources, which can prevent you from focusing on your core business.
• A high chargeback ratio can flag your business as high-risk to payment processors, damaging your reputation and potentially leading to higher fees or account termination.
• A fraudulent chargeback is extremely difficult to dispute and win, even if you provide all the relevant documentation and evidence.

Chargebacks can also affect different types of restaurants at varying rates. For example, quick-service restaurants tend to experience a higher chargeback rate because they process a large volume of transactions in a short period of time.

The Chargeback Representment Process

Knowing the enemy is only half the battle. Even if you’ve done everything possible to prevent chargebacks, they are sometimes unavoidable. Understanding how chargebacks work can help you better manage and contest them when they occur.

Familiarize yourself with the chargeback representment process to effectively protect your business:

1. Chargeback Filed: When a customer decides to dispute a charge for goods or services, they go to the issuing bank and file a chargeback. That chargeback request is sent to the card network and the acquirer.
2. Fee Charged: Once the customer initiates a chargeback, your business will be charged the fee. The fee level will depend on your contract.
3. Representment Submission: Next, the bank will request additional information from your business. With the help of your payment gateway, you will compile all relevant chargeback representment evidence (including documents receipts, shipping proofs, logs, signatures, etc.) You’ll send your payment processor this evidence, and they will submit any documents to the issuing bank.
4. Final Judgment: After reviewing the evidence from both parties, the issuing bank will decide whether the chargeback is upheld. If this is the case, then you will lose the funds. If you successfully win the dispute, you will receive the disputed amount back.

However, the story doesn’t always end there. If you’ve won the dispute, but the customer is still unsatisfied, they can still file for pre-arbitration. This will incur an additional cost to your business. Alternatively, if you did not win the dispute, you can file for final arbitration — this comes with the risk of losing and paying an even higher penalty, though.

How to Win a Chargeback Dispute

We’ve gone over the representment process at a high level, but how exactly can you ensure you win a dispute against a fraudulent chargeback? Like consumers, merchants have rights, too — so we’ll show you how to exercise them.

To give your business the highest chance of success, you’ll want to follow these steps:

1. Gather All Evidence

To defend your business, you must prove that the transaction was legitimate and the chargeback is unwarranted. Compile as much evidence as possible, such as:

• Transaction Details: This could include receipts, order confirmations, or signed credit card slips – anything that confirms the purchase took place.
• Customer Information: Order details, contact information, and any communication logs (emails, messages) related to the transaction can be helpful.
• Proof of Service: For dine-in, this might include reservation records or POS system timestamps. For online orders, provide delivery confirmations or pick-up verification.
• Additional Documentation: Think outside the box! If a customer claims they never received their food delivery, provide GPS records from your delivery app.

2. Structure Your Evidence

Now that you have your evidence, it’s time to present it clearly and concisely. Don’t overwhelm the bank with a jumbled mess of documents. Instead, fill out the chargeback representment form provided by your payment processor. Check out Shift4’s form below:

Simply fill out the form and upload all your collected evidence to the appropriate section. You can learn more about how Shift4 aids in the chargeback representment process on our knowledge base.

3. Submit Your Dispute

With your compelling evidence package assembled, it’s time to submit your chargeback dispute. With Shift4, all documents are submitted on your behalf via our representment form. Working with a best-in-class processor like Shift4, built into SkyTab, gives you the tools you need to potentially increase your chances of winning this dispute.

Remember, fighting chargebacks is a crucial part of running a successful restaurant. By being proactive and partnering with the right payment processor, you can significantly increase your chances of winning disputes and protecting your bottom line.

Strategies for Managing Chargebacks

Chargebacks can be costly headaches for your business. Luckily, they can be managed and prevented. They exist to protect consumers and provide recourse when a transaction goes wrong, so your job is to ensure that those things don’t go wrong.

Outside of fraud, legitimate chargeback requests can be issued when:

• Refunds are not properly credited back to the customer’s account.
• Orders are lost in transit or significantly delayed.
• Website errors lead to duplicate charges or incorrect order processing.
• Charges are made with compromised or malfunctioning cards.

A top-notch payment processor like Shift4 will provide various advanced features to prevent these issues. Let’s dive into how your business can stay protected from and cut back on chargebacks.

1. Card Security Codes

We’re all familiar with needing to input credit card security codes when checking out online. But they’re not just used in online shopping — if your restaurant accepts online orders or payments with QR codes, you should also capture those codes. These anti-fraud measures prevent illegitimate transactions on a customer’s card, lowering the risk of your business receiving a chargeback.

Because your business is being trusted with sensitive payment information, you must do your due diligence to ensure that it’s being protected and processed correctly. So, ensure that your card-not-present transactions are prompting for security codes. SkyTab, for example, has built-in CSC functionality for both SkyTab Online and QR code payments.

2. 3DSecure

Because card-not-present transactions are more susceptible to fraud, your business should provide extra security to protect your customers when they make those transactions. That’s where 3DSecure comes in.

3DSecure is an authentication service that adds an extra layer of protection to transactions where the card is not present (like online ordering). This can help to prevent fraudulent transactions, which typically lead to chargebacks.

When your business uses 3DSecure, the liability shifts from you to the issuer for transactions successfully authenticated through the service. If a chargeback occurs, then the issuer will cover the cost.

3. Dispute Management

If you don’t have a way to manage the chargebacks that come through, you’ll have a more challenging time defending yourself from them. Your payment processor and POS system should offer dispute management capabilities to help support you in the chargeback process.

With dispute management tools, all dispute activity can be aggregated, and everything you need to respond to a chargeback is in one easy-to-access place. As we covered earlier, Shift4’s chargeback representment form is one such tool, making it simple to upload documents and submit a response.

4. Retrieval Requests

Sometimes, customers don’t immediately jump to a chargeback when they see a transaction on their account that they don’t recognize. Let’s say that they simply forgot that they made the order, or a family member used their card without letting them know. In situations like these, where the customer doesn’t automatically assume fraud, they may first perform a retrieval request instead.

A retrieval request is simply a request for information about the transaction. This allows your business to respond and provide the relevant information to resolve customer confusion.

By responding to a retrieval request quickly, your restaurant can better prevent the likelihood of a chargeback. Your payment processor should make it easy to respond to these requests. For example, Shift4 provides all the forms you need to resolve these types of requests.

5. Address Verification

An incorrect address can lead to various issues, from delivery orders never showing up to incorrect billing information. If a customer orders online and never receives their food because the address was wrong, they may issue a chargeback.

The best way to avoid this situation is to ensure that your business has captured the correct address. That’s where the Address Verification Service comes in. With the correct address, your business can successfully deliver orders and capture accurate billing information. Continuously test your website’s checkout and online ordering functionality to ensure no issues. If problems arise — and they will — make sure your business stays aware and resolves them quickly with a refund.

6. Service Quality

Outside of online ordering and customer communication, sub-par customer service may be what’s hurting your business. If a customer has a bad experience at your restaurant — due to long wait times, sub-par food, or inattentive staff — their frustration may lead to a chargeback request.

Preventing these issues hits two birds with one stone — you’re preventing chargebacks from costing you money and reputation, and you’re improving the customer experience. And how can you do that? Better training.

Wait staff should work to provide the best service to customers when they choose your restaurant. Kitchen staff should be held up to standard regarding food quality. POS technology in your restaurant should keep everything running like a well-oiled machine. Stay on top of your workforce, and your customers will leave happier.

Keeping a Lid on Restaurant Chargebacks

Yes, chargebacks are inevitable — but that doesn’t mean they have to be common. Now that you understand why they happen, how they work, and what you can do to prevent and dispute them, you can protect your business while staying on good terms with your customers and payment processor.

By staying proactive and having best-in-class payments tech to back you up, you can ensure that chargebacks stay managed rather than giving you a constant headache.

Disclaimer: This content is provided solely for informational purposes and is not intended to serve as accounting, tax, legal, or other professional advice. You are solely responsible for your own compliance with laws and regulations. You should contact your accountant, attorney, or other relevant advisors for advice specific to your circumstances.