Restaurants, bars, and cafes have always been a target for fraud. That said, the food and beverage space hasn’t traditionally been an industry rife with chargebacks.
Now, however, these businesses are becoming a hot target. What gives? Why does it feel like things are getting worse?
The easy answer is that the economy has yet to recover from the pandemic. From inflation and supply chain issues to skyrocketing living expenses and fueling costs, we’re still not back to “normal,” and we probably won’t be for some time to come.
Many consumers are feeling unprecedented economic pressures. There’s a direct connection there to the elevated fraud statistics we’re seeing now. Often, when times turn desperate for consumers, fraudsters aren’t far behind. And, after nearly 4 years of pandemic-related woes, restaurants and cafes are certainly experiencing the resulting rise in fraud and illegitimate chargebacks.
All that being said, the trend was already well-established before covid. While restaurant industry chargebacks were accelerated by the pandemic, that’s not ultimately what prompted the surge in chargeback activity.
Restaurants vs. Chargebacks
No industry is “safe” from chargebacks, though some tend to be more ready targets than others.
About 10 years ago, restaurants and cafes had a relatively low chargeback tally, with an average rate beneath 0.01% of incoming transactions. A few years later, the situation began to change rather dramatically. According to a 2018 study we conducted at Chargebacks911, nearly 30% of food and beverage purveyors reported high chargeback levels. Fast forward to 2022, and fraud is expected to cost global merchants over $400 billion annually.
What’s going on here?
Chargebacks are a natural side-effect of transactions being made in the card-not-present space. We’ve essentially set the stage for any number of fraudulent transactions and illegitimate disputes. In fact, nearly 80% of all fraud committed in 2022 was a direct result of CNP fraud, or fraud committed without a physical card being present.
Restaurants used to have lower chargeback rates when most of their customers were required to come into the restaurant to make payments. That makes sense. However, things changed with the rise of online ordering and delivery options. Introducing card-not-present elements into the business went hand-in-hand with a surge in dispute issuances.
It’s a lot easier to commit fraud when one isn’t physically present for verification. No matter what you do to combat this situation, your business will be at risk for card-not-present fraud as long as you accept any digital payments.
Where this will directly affect restaurants and cafes in two ways: online ordering and phone orders.
Fighting Back Against Fraud in Online Ordering
Online orders are a savvy addition to any food and beverage purveyor’s repertoire. Not only does the availability of online ordering take the stress out of the experience, but it can also vastly improve revenue. After all, third-party delivery services exist because there is such a high demand for online ordering and delivery options.
You have to take the possibility of fraud and chargebacks very seriously if you offer online orders, though. If you conduct online ordering through your website or proprietary app, it is absolutely worth it to invest in advanced authentication software.
3-D Secure 2.0 technology is one example. You can also opt for cloud-based payment providers that use AVS, CVV, or even geolocation to verify customers for each order. This won’t stop chargebacks, per say, but it will decrease your risk of CNP fraud for online orders.
Also, note that if you opt for a third-party delivery service like Grubhub, you will share profits, but the company will accept the lion’s share of the risks associated with CNP transactions. Just some food for thought.
Fighting Back Against Fraud in Telephone Orders
Most people are growing increasingly comfortable with digital orders and payments. Not every potential customer will be, though, so the phone is still a necessary channel for restaurants.
Naturally, telephone orders are also an easy target for fraudsters. Again, it’s difficult to verify a person you can’t see.
Some companies will eschew any advice here that complicates ordering and payment processing or introduces friction into the process. In the long run, though, losing an impatient customer or two is far preferable to losses associated with fraud and chargebacks.
Here are a few pieces of advice I have for telephone orders:
- Whenever possible, encourage your customer to pay for their order in person, or on your website which would have the necessary verification tools in place.
- Never write or process orders manually. Input every order directly into your CRM or POS terminal.
- When a card number is presented, let the customer know that it will take a moment to verify their payment.
- Collect phone numbers, email addresses, and anything else that could be cross-referenced against that user later on.
The Bottom Line
Ultimately, CNP fraud is going to be any restaurant’s biggest hurdle long before chargebacks enter the equation. To keep your business safe, updating your POS to modern standards will help eliminate many of the risks associated with digital payments. However, remember, you can’t prevent chargebacks in the same way.
Chargebacks are a post-transactional threat that pop up many weeks after the payment was processed. Simply put, if you want to fight back against chargebacks with the same gusto as CNP fraud, you’ll need a multi-layered strategy that addresses first-party fraud, third-party fraud, and also merchant errors.
