A growing “chargeback culture” that’s expanded beyond the commonly hit ecommerce sector is an unfortunate reality in 2022, and businesses in hospitality have been hit hard in recent years.
In fact, almost half of consumers who canceled their hotel stays in the past year followed the chargeback process, to the detriment of companies.
How did this happen and why? What implications does it have for companies? Why should one avoid chargebacks at all costs, and how?
Chargebacks vs Refunds
The rise of chargebacks in hospitality did not solely take place due to the pandemic, but the ensuing confusion and ever-changing legislation have certainly exacerbated the trend. The Merchant Refund Policies report released in late December calculates that 49% of consumers who had or chose to cancel their reservations in travel and entertainment went through the chargeback process successfully, with an additional 34% getting refunded directly from the business.
It is important to draw a clear line between refunds and chargebacks, despite initial appearances. A refund occurs when you as a company choose to return a payment, pre-payment or other charge to the customer. Once you have been approached and decide to satisfy the customer’s request, this is normally a straightforward process managed through your payments processing and PoS software.
On the other hand, a chargeback occurs when a customer approaches their card issuer bank rather than the merchant to request their money back. As with the refund process, this could be legitimate, a mistake or even an attempt at fraud – and there are several types of justification for it.
Importantly, unlike a refund, the chargeback process costs businesses much more than the cost of the lost item or service – as much as 2.60x or even 3.50x, according to expert estimates. This has brought upon a rise in chargeback management software and tools whose application spans various sectors, with companies scrambling to cut processing times, reduce chargeback rates and deal with these requests as painlessly as possible. Chargeback mitigation strategies can be proactive or reactive; with the former helping catch and block most chargeback fraud before it happens, weeding out fraudsters attempting to make payments, and the latter helping manage and streamline the chargeback process, itself including disputes.
The reason chargebacks are so much more expensive than refunds lies in how they affect processing fees, the time and effort required to resolve them, as well as the fact banks will penalize businesses that incur a lot of chargebacks – perhaps through no fault of their own. The result is the same: If it has to be one or the other, you should always aim to give a direct refund than get caught in a chargeback request.
Friendly Fraud and Covid Woes Driving Trends
But effectively safeguarding one’s business from the rise of chargeback requests starts with understanding how and why these happen.
According to a Chargebacks911 report from the summer of 2021, 68% of merchants state that the pandemic has brought a noticeable growth in chargeback rates. In reality, chargeback requests can for a wide spectrum of reasons, anywhere from legitimate claims because of a merchant error to one’s card being stolen and used without their knowledge, and even to friendly fraud. The latter is when the legitimate cardholder/shopper themselves misrepresents facts in order to keep both their money and the item/service purchased.
In December, a restaurateur from Manchester, UK came forward to draw attention to the unreasonable explanations provided by his customers – who ordered online, received their food and then requested a chargeback, because “the ice cream was too cold”. Such instances are almost certainly examples of friendly fraud, yet consumers often succeed because of the number of middlemen involved – online food ordering services, their bank, and the cardholder’s bank, in this case. It should be noted, however, that chargeback policy depends on the individual food ordering platform and their locale. These vary, while merchants should look into both the chargeback and the dispute policies or clauses of their own partner service, which are not always the same.
In the case of hotels and other accommodation, justification provided by cardholders to their bank can include, in addition to stolen card details, unsatisfactory services provided, being charged more than they expected, services not rendered (e.g. if they never stayed with you), delayed or non-recognized payments, or services not being as described. But, largely, as we have all felt to some extent, it was cancellations and inability to travel that have been linked to so many chargebacks in the past two years.
Traditionally, the travel-adjacent sector has not incurred as many chargeback requests as have resulted from ever-changing local travel requirements and bans during the pandemic.
The ways different companies chose to address this though is increasingly the subject of public scrutiny. In the case of Ryanair, it made news when it decided to ban some passengers who received chargebacks from flying with them again, in October of 2021. In fact, one year earlier, the budget airline was involved in another chargeback-related news story when it sparred with travel firm Loveholidays over chargebacks for canceled flights. At the time of writing, the latter’s terms and conditions strongly discourage customers from requesting chargebacks, to the extent that this is legal.
It therefore seems that in addition to the financial losses and loss of morale linked with repetitive chargeback requests, even your reputation can take a toll.
Chargeback Mitigation Best Practices
The measures recommended to help minimize the impact of the chargeback trend on your hospitality business range from simple policy changes to sophisticated end-to-end payments management and anti-fraud solutions.
Let’s look at some of them, from the simplest to implement to the more efficient as well as more demanding. Make sure you research the ones that seem more suitable to your needs. Most fraud prevention and chargeback prevention companies have extensive pre-sales consultations, as well as free demos, so you can get a better feel for the process and potential suitability.
- Always be proactive in encouraging your customers to approach you directly with complaints rather than their bank. Remember that refunds are preferred over chargebacks.
- Work with your legal team or consultants to ensure your service terms and conditions are as clear as possible and can protect you in a dispute.
- If collaborating with a booking or ordering provider, be very aware of your contract terms for chargebacks, and consider changing service if they seem to put you at a disadvantage.
- Consider setting up your own ordering/booking app or portal, as chargeback fraud and other fraud is easier to catch this way, and you are not subject to others’ T&Cs.
- Consider rejecting by default any payments where the billing address and the delivery address are not the same – these are more likely to be fraudulent.
- Find out if a chargeback guarantee model works for you. Some anti-fraud companies promise to pay any chargebacks you still incur themselves – yet the bank will still penalize you rather than them, while the software might be too eager to reject suspicious payments in their attempts to save money.
- Depending on your risk appetite and the extent of the issue, look into implementing anti-fraud software or even hiring professional fraud analysts.
- Chargeback dispute resolution software can help gather all necessary documentation to challenge a request and keep track of pending decisions.
As always, there is no one-size-fits-all solution that will work for every business in hospitality – or any sector, for that matter. One would be advised to study chargeback patterns as well as additional types of fraud to help decide what type of solution will address their needs and preferences.
About the Author
Gergo Varga has been fighting online fraud since 2009 at various companies – even co-founding his own anti-fraud startup. He's the author of the Fraud Prevention Guide for Dummies – SEON Special edition. He currently works as the Senior Content Manager / Evangelist at SEON, using his industry knowledge to keep marketing sharp, communicating between the different departments to understand what's happening on the frontlines of fraud detection. He lives in Budapest, Hungary, and is an avid reader of philosophy and history.