How to Prevent Chargebacks in Your Restaurant

Chris Rumpf

Founder and CEO, 15+ Years of Restaurant Technology Innovation

How To Prevent Chargebacks in Your Restaurant

As a restaurant owner, you may already be familiar with chargebacks and you, understandably, want to prevent them, but how do you do that exactly? We’re going to break down what chargebacks are, why they exist, the types of chargebacks you need to know about, and practical steps you can take to prevent chargebacks in your restaurant

What is a Chargeback?

A chargeback is a dispute of a purchase that has already been charged to an account that can result in a return of funds. This is different from a refund because a refund is paid for by the merchant directly while a chargeback is handled and processed by the credit card issuer or bank.

Why Do Chargebacks Exist?

Good question! In the 1970s when credit cards were still somewhat rare, many people didn’t trust them and feared what would happen if they were lost or stolen. In order to address these concerns, the federal government passed the Fair Credit Billing Act of 1974, which created the concept of chargebacks among other provisions. This helped grow consumer confidence in credit cards and increased the popularity of credit cards.

What Types of Chargebacks Exist?

There are a few different types of chargebacks that you may encounter as a business owner but almost 80% of chargebacks are proven to be chargeback fraud or friendly fraud. Let’s break down each of the different types of chargebacks so you understand them clearly.

1. True fraud

True fraud is what you’d think of when you think of fraud: the unauthorized use of a card, likely as a result of compromised, leaked, or hacked payment information. This covers the common scams you’ve probably heard of like card skimming. This is your classic credit card or debit card fraud.

2. Friendly fraud

Friendly fraud is used for cardholders who file disputes with no malicious intent. For instance, they may have forgotten they made a purchase or they may have forgotten they provided their card to a family member to use. Another cause of friendly fraud can be misunderstanding the merchant’s return policies and upon being denied a refund, the cardholder may raise the issue to their bank.

3. Chargeback fraud

Chargeback fraud is the fraudulent request for a return or refund in the form of a chargeback. In this case, the person disputed a transaction and it cleared the fraud prevention process but the motive of this is somewhat malicious. With chargeback fraud, the cardholder filed a dispute to get their money back and they plan to keep the product or service that was rendered. Perhaps the person just decided to take advantage of the fraud system to try to get themselves a free meal. This type of chargeback is incredibly frustrating to restaurant owners because it is clearly malicious.

So now that you understand what chargebacks are, how they work, and why they exist, how can you prevent chargebacks in your restaurant?

How To Prevent Chargebacks

There are several things you can do as a restauranteur to prevent chargebacks but the most important thing to do is to be an honest merchant. That means accurately describing what you’re selling so the customer isn’t surprised, producing quality food, and providing the very best customer service you possibly can.

Unless your restaurant is entirely cashless (which we do not recommend), it is nearly impossible to avoid all chargebacks in your restaurant, but there are ways to reduce chargebacks as much as possible. Here are some specific things you can do in your restaurant to reduce chargebacks.

1. Run all of your cards throughout a restaurant EMV reader processor instead of magstripe

Many restaurants only do this for tickets over a certain amount but this is an incredibly simple thing you can do that is effective at avoiding chargebacks due to fraudulent card use. It is an extra step but explain to your staff why this matters so they understand the importance of this additional step. 30% of chargebacks involve fraudulent credit card use so by taking this single step, you can reduce chargebacks significantly.

2. Deal with all guest issues immediately

If a member of your staff tells you about an unhappy guest or you receive a complaint directly, communicate with the customer directly to try to resolve the issue immediately. You may feel that the guest is being picky or the complaint is unwarranted but you should consider whether they’re likely to win a chargeback or not. If they are likely to win a chargeback should they dispute the transaction, it makes more sense to offer a full or partial refund to appease them and remedy the situation. Remember, a chargeback doesn’t just cost you money, it costs you time and a refund most often cheaper and easier than dealing with a chargeback.

3. Include your contact information on the receipt

Is your restaurant’s contact information clearly presented on a guest’s receipt? This may not sound important but it allows a guest to reach out to you directly if they have a complaint or an issue. Any time you can deal with a customer directly, you have the opportunity to address their concerns and remedy the situation before they dispute the transaction and you get a chargeback.

4. Review the patterns

The great thing about data is that you can track it to discover patterns and track those patterns back to their root causes. If for instance, most of your chargebacks are occurring on drink tabs, you can investigate the causes and work to prevent chargebacks in this area in the future. Perhaps your chargebacks are related to food being overcooked. In that case, you can talk to your BOH crew and ask them to adjust the heat down slightly to see if this prevents further issues. You could also review how to check meat temperature with them to refresh their memory and ensure they’re actually doing it and not just estimating.

5. Be clear with guests and pre-empt any issues

Are there particular items on your menu that guests tend to get confused about? Perhaps you serve sushi and you find that people order it for the first time, not knowing what they’re doing and wind up sending it back because it doesn’t meet their expectations. You could add something to your menu that says “New to sushi? We want to help you find the right choice for you. Ask your server to explain the options to you!”

You could also ask your servers to ask guests if they’ve ever had sushi before when they order. This comes across as helpful and it helps prevent issues that come from misaligned expectations. The key to avoiding unwanted surprised and dissatisfaction is by setting the expectations up front so customers know what to expect. No one likes to be surprised by what they ordered in a negative way.

6. Teach your staff to spot counterfeit cards

Your staff is your first line of defense against counterfeit cards so it makes sense to educate them on what to look out for. Have them ask for an ID so they can check it against the cardholder’s name on the credit card. Show them how to look for common discrepancies in logos, holograms, signature fields, and magnetic stripes. Taking an hour to train your staff on this will save you money and prevent chargebacks in the future.

7. Process chip cards properly

If someone has a card with a chip, make sure your staff if using an EMV-ready terminal to process the payment. If you do not do this and you swipe the card or type in the digits, you’re no longer protected. Make it clear to your staff that you want them to take the extra minute to do this properly and that you won’t be mad at them for asking for another form of payment if the card isn’t working.

8. Review the guidelines from the major credit card brands

All of the 4 major credit card brands have a guide of best practices for merchants to follow. Read through these and make a note of anything you’re not currently doing that you could implement to prevent chargebacks.

9. Make sure that the payment descriptor on your merchant account is accurate & clear

You’ve probably spotted a transaction on your credit card or bank statement that you didn’t recognize because of the name they used. Some restaurants use their store number or the legal name of the business instead of the name of the restaurant and that creates confusion. Make sure that what’s on your sign is what’s used as your payment descriptor.

10. Get a signature

When a customer pays with a traditional magstripe card that doesn’t have a chip, be sure to get a signature on the receipt. Some customers make think this is just a formality but make sure your servers and bartenders clearly ask them for their signature in a friendly way. If you fail to collect a signature and you get hit with a credit card dispute, you’ll lose that chargeback by default and be liable for the cost of the dispute. If possible, get their signature digitally on your POS terminal to make it easier to locate in the future.

Fighting chargebacks has definitely gotten easier for restaurants that use a modern point of sale system that has digital receipts. These receipts are often what is required to attempt to disprove a chargeback claim and digital receipts make them easier to locate and manage. The best thing to do though is to prevent chargebacks before they happen because the time and energy spent on dealing with chargebacks is frustrating and can feel like a waste of your time. Why wait for a chargeback to happen when you can set up measures to prevent them up front?