Understanding and Preventing Chargebacks

Chargebacks are a cost many business owners will face after opening a restaurant as a consequence of accepting credit card payments. With less than 50% of Americans carrying anything more than $20 cash in their wallets, credit card payments and chargebacks seem to be a necessary evil. As more restaurants adopted online ordering, chargeback rates increased exponentially from less than .03% in 2013 to almost 1% in 2018. So what is a chargeback and how do you prevent them from happening to your restaurant? We’ve created a guide to help you avoid chargebacks and fight one if it happens to you.

What Are Chargebacks?

A chargeback is a disputed payment that a customer issues with their credit card company to deny a charge and receive their money back. A customer can refuse a charge for various reasons, with the ultimate goal being to reverse the original payment and have their money taken back from the business and returned to their card.

Common Chargeback Reasons

refund arrow concept blackboard with dollar sign in the middle

There are various reasons why a customer would file a chargeback. Here are some of the most common chargeback types you may encounter as a business owner:

  • Fraudulent Transaction - These are filed when a customer sees a charge they think/know they did not make. This can be from a location they have not been to or made at a time they were not there. These chargebacks tell the bank that the customer denies making the purchase and that it is a case of fraud.
  • Friendly Fraud - These chargebacks happen when customers are trying to cancel an order to get a refund and reach out to their bank instead of contacting the merchant.
  • Pricing Issues - A customer may file a chargeback when they notice that they were overcharged for a purchase. This can happen if additional items get added to their bill that they did not purchase, if their charge is miscalculated by the merchant, or if their order gets duplicated in the POS system.
  • Dissatisfaction with Product - A chargeback may be issued if the product doesn't meet the customer’s expectations. This may result from an unclear item description, if the item quality is poor, or if an item doesn't look like its photo. This can also happen if the item is not received or arrives damaged.
  • Dissatisfaction with Service - You may encounter this chargeback if a customer has a poor experience at a location or with a staff member.
  • Unrecognized Transaction - If a customer doesn’t recognize the name of the business attached to a charge, they may file a chargeback thinking it is a fraudulent charge.
  • Refund Delay - This chargeback type may occur if a customer requests a refund from a merchant but does not see the funds return to their card in a timely fashion.
  • Forgotten Subscriptions - Customers may forget about subscriptions they sign up for and not realize that funds are going to be automatically pulled from their card during the next subscription cycle. This may result in them filing a chargeback if an auto-reorder happens before they can cancel the subscription.

How Do Chargebacks Work?

So, how do credit card disputes work? After understanding why someone might file a chargeback, it’s important to know how they work so you can prevent them in the future. The following are steps involved in a chargeback process:

  1. Purchase - A transaction is made to a credit card either by the customer or someone committing fraud.
  2. Chargeback - The customer looks at their credit card statement and decides they need to file a card dispute on a particular charge. They can contact their bank or use their bank’s app/website to initiate the chargeback.
  3. Bank Involvement - Once the bank receives a chargeback request, they’ll start their investigation by contacting the customer for more information and reaching out to the merchant for evidence of the charge. The funds go on hold from the merchant’s bank account.
  4. Merchant Rebuttal - At this time, the merchant can refute the claim by providing invoices, receipts, or proof of deliveries as evidence that they received a legitimate purchase and provided what was requested.
  5. Bank Decision - The bank will review the proof sent over by the merchant and decide whether or not the charge was valid and which party has a right to the funds. If the bank decides in favor of the customer, the customer receives the held funds back to their account.
  6. Customer Rebuttal - If the bank decides in favor of the merchant, the customer will either pay the original charge or have the right to continue the dispute, which is called the arbitration process.
  7. Arbitration - In this case, the issuing bank will review the evidence from both parties once more and make a final decision. The funds are then returned to the winning party.

How Long Does a Chargeback Take?

The chargeback process may vary from bank to bank and typically takes 60-90 days to resolve.

How to Avoid Chargebacks

Being familiar with the reasons and processes of chargebacks can help you figure out how to prevent them for your business. Chargebacks can be expensive hassles that are often avoidable. We have some tips for preventing chargebacks that you can put into practice for your shop or restaurant:

1) Set Clear Expectations and Menu Descriptions

woman looking at menu while waitress waits to take order

One way to avoid chargebacks is to prevent customer dissatisfaction by clarifying the expectations. To ensure that your customers have a satisfying experience at your restaurant, try the following suggestions:

  • Write clear menu descriptions that describe the elements of each meal, flavor profiles, and identify any allergens in the recipe.
  • Add photos of meals on your menu that accurately represent the final product that your customer will receive when ordered.
  • Make rule signs easy to see and understand, whether that be for your mask policy, dress codes, tipping rules, large-party policies, or payment methods.
  • Train your servers to clarify meal descriptions, inform customers of sold-out items, and provide wait times before customers place their orders.
  • If issuing refunds, let customers know how long it could take for them to see it reflected on their credit card statement.

2) Address Unhappy Customers Quickly

Addressing customer grievances before guests pay and leave your restaurant is a great way to catch chargebacks before they happen. If you or your staff notices that a customer is dissatisfied with their meal or service, get the details of the situation immediately and see if the issue can be pacified with some sort of compensation.

A free menu item, coupon, or partial refund can be all it takes to keep the customer from disputing the charge when they get home. Try to resolve the issue before the customer is presented with their check at the end of the meal so the price can be adjusted and properly charged to the customer’s card. A refund at your restaurant is cheaper and less time-consuming than battling a chargeback after the fact.

3) Provide Contact Information for Follow Up

Whether it’s through feedback cards on each table, a contact form on your website, or a Yelp link, be sure that you provide your customers with a way of getting in touch with you. If they can relay concerns and feedback, they will be less likely to file a chargeback for issues that came up during their visit.

It is important to include a timeframe for when your customer will hear back from you about their concerns so they have a clear expectation for how long they should wait. Once you receive a negative comment, contact the customer as soon as possible to address their grievance.

4) Track Customer Complaints to See Patterns

Keep track of customer complaints to identify trends and address/eliminate issues that are causing customers to have a negative experience at your restaurant. You’ll want to collect your information from the following sources.

  • In-Person Customer Grievances
  • Negative Online Reviews
  • Paper Feedback Forms
  • Previous Chargebacks

Once a trend becomes clear, work quickly to resolve the issue and reduce the possibility of it causing another chargeback in the future.

5) Use EMV Readers and Updated Technology

barista charging a credit card

Stay on top of the latest POS and credit card technology to prevent chargebacks for your business. Using EMV readers for cards with chips on them can decrease the chance of fraudulent charges by 30%-50%, compared to just swiping the card. Chip cards encrypt the customer’s information, making it difficult for fraudulent activity to replicate. This protects your customer and your business from chargebacks.

Because EMV chips are considered to be the highest level of credit card security, businesses who swipe EMV cards instead of dipping them into the reader are held liable for fraudulent transactions by the credit card company (as of Oct 1, 2015). When EMV readers were first released, they could take over 15 seconds to process, which was a nuisance for staff members to use in busy settings. EMV readers have since been updated to take less than 3 seconds to process, making it the best choice for your business.

6) Provide Receipts and Request Signatures

The most important piece of evidence you’ll need to fight a chargeback is proof of purchase. Whether your customer places an order off premise or in-store, providing them with a receipt can prevent a disputed charge down the line. Here is how you can use receipts to avoid chargebacks:

  • Itemize receipts so it is easy to identify all of the items the customer purchased. This can remind them of a legitimate purchase or help identify issues upfront so they can be handled in-store.
  • Obtain a signature from the customer on a merchant copy of the receipt. In the event of a chargeback, a signature can be indisputable evidence that a purchase was made by the customer.
  • Send the customer an email copy of the receipt if they do not want a paper copy. This ensures that the customer has clear proof of the purchase in some form when it comes time for them to review their credit card statement.
  • Keep a record of all purchases and file away the receipts in an organized fashion so they are easy to find in the event of a chargeback.

7) Make Your Business Name Recognizable

Customers may file chargebacks if they do not recognize the business name listed on their credit card statement. If the name that shows up on your receipts and bank statement is different from your restaurant or business name, customers may have a hard time remembering where the charge came from.

You can make your business easily identifiable by contacting your credit card provider to edit your statement display name to match the name of your business. You’ll also want to check in your POS system to ensure that your business name is listed on printed and emailed receipts.

8) Look Out for Fraudulent Activity

One of the best ways of staying ahead of chargebacks is keeping a close eye on your credit card statement for potentially fraudulent activity. Some fraud red flags include the following:

  • Duplicate orders
  • Orders with higher price points than normal for your business
  • Various small orders from the same customer
  • Orders with multiple high-priced items on it
  • If you keep an out on your statement, you’ll be able to establish a normal baseline for your restaurant.

You can also gather customer information and track patterns for your customers so that potentially fraudulent orders can stand out even more. If you see an order you are unsure of, reach out to your customer to determine if they intentionally placed the order or if it is in fact fraud.

9) Use Delivery and Pick Up Orders Precautions

Chargebacks are more common with pick-up and delivery orders because of the limited interaction with customers. With the rise of contactless delivery and “buy online, pick up in-store” orders, it’s important to take some precautions to avoid chargeback under these circumstances. Here are some tips for preventing credit card disputes for no-contact orders:

  • Request a signature upon pick up or delivery from the customer.
  • Record the timestamps of when the order was received, prepared, in transit, and delivered.
  • Have delivery drivers take a photo of the delivered order if it is left at the door.
  • If using an app, have the customer confirm that the order was delivered, you can also do this by obtaining a review or tip.
  • Record tracking numbers if a product is shipped to a customer.

10) Remind Customers of Subscriptions/Membership Fees

Recurring payments can be forgotten and lead to chargebacks for your business. If your business has membership rewards and subscriptions, you’ll want to remind your customers, with advanced notice, about any fees that will be pulled from their card. Inform the customer before they sign up for the subscription about the recurring payment, how often they will be charged, and when they can expect those charges. Provide a way for the customer to indicate that they agree to the terms during the application process.

Notify them at least a week before they are charged to ensure that they will recognize the charge or have the opportunity to cancel before the charge is pulled. If a customer forgets about the subscription and contacts you for their money back, remember that a chargeback can be more expensive than just offering them a refund upfront.

How to Fight a Chargeback

sales receipts

It can be very intimidating to receive a notification from your bank letting you know a customer is disputing a charge against your business. There are a few steps you can take when fighting a chargeback to maximize the chance of winning it:

  1. Contact the customer to find out why they are disputing the charge.
  2. Collect evidence of their order (i.e. receipts, tracking numbers, order confirmation, delivery photos, delivery confirmation).
  3. Write a chargeback rebuttal letter to the bank to address the customer’s claim and indicate why you believe the charge was legitimate.
  4. Send the information to their bank.
  5. Await the bank's response.

Chargeback FAQs

The following are some of the most frequently asked questions when it comes to chargeback disputes:

What Are Chargeback Fees?

When a chargeback occurs, you don’t just risk losing money from the original sale, you may also encounter additional fees. You can be charged anywhere from $15-$100 for administrative costs that accrued during the investigation and dispute fees if the bank decides against you. These fees can add up over time to hundreds or even thousands of dollars in fees. If your business encounters regular chargebacks (higher than 1% chargeback rate), you may even be fined or get your account frozen by your credit card company. This can lead to you getting blocked from opening accounts with other creditors.

Why Do Chargebacks Exist?

The right to file a chargeback was created by the Fair Credit Billing Act in 1974. It was designed to protect consumers against inaccurate and unfair credit billing practices, including incorrect amount charges, stolen cards, and charges for undelivered goods. While the bill protected cardholders, it encouraged merchants to provide quality goods with honest expectations in a timely fashion.

Chargebacks are an intimidating part of owning a business, but they don’t have to be. Use our guide to help protect your business from disputed charges and become prepared if you do encounter one. Be sure to also visit your credit card company’s website to learn more about their guidelines for navigating chargebacks.

Posted in: Management & Operation|By Janine Jones
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If you are approved, you will be contacted and your funds will be disbursed. Small Business Loans for Restaurants: The 7(a) Loan The SBA’s most common type of loan, 7(a) loans can be granted in a maximum amount of $350,000 and are repaid with monthly payments of principal and interest. Loans may be granted for real estate purchase and renovations, equipment purchase and maintenance, and working capital. Loans for real estate must be repaid in a maximum of 25 years; equipment loans in 10 years; and working capital loans in 7 years. According to the SBA, to qualify for a 7(a) loan, your restaurant must: Be a for-profit venture Be small, according to SBA Standards Be located in the United States Have reasonable invested equity Use alternative financial resources (including personal assets) before seeking financial assistance Demonstrate a need for loaned funds Use the loaned funds for sound business purposes Not be delinquent on any existing debt obligations to the U.S. government 4. Restaurant Equipment Financing Restaurant equipment financing loans are typically provided by financial institutions or specialized lenders who understand the unique needs of the restaurant industry. These loans can be used to purchase a wide range of equipment, including ovens, refrigerators, stoves, grills, dishwashers, and more. One of the key benefits of a restaurant equipment financing loan is that it allows restaurant owners to acquire the equipment they need without having to pay the full cost upfront. Instead, the loan is structured in a way that allows the borrower to make regular payments over a set period of time. This helps to alleviate the financial burden of purchasing expensive equipment and allows the business to allocate funds to other areas, such as marketing or employee training. Pros of Restaurant Equipment Financing: Preserves cash flow Provides access to high-quality restaurant equipment Cons of Restaurant Equipment Financing: May require collateral Longer repayment terms compared to other types of loans Applying for Restaurant Equipment Financing Create a comprehensive list of the equipment you require, including their estimated costs. Research lenders that specialize in restaurant equipment financing loans. Look for lenders with experience in the industry and a good reputation. Prepare a loan proposal that outlines your business plan, the amount of financing you need, and how you plan to use the funds. It should also include a repayment plan, highlighting how you intend to repay the loan. After submitting your application, the lender will review it to determine your eligibility. This process may take some time, so be patient. Once approved, carefully review the loan terms and conditions, including interest rates, repayment schedule, and any associated fees. How to Qualify for a Restaurant Loan When it comes to securing a restaurant startup loan, there are several factors that lenders consider to determine your eligibility. To increase your chances of qualifying for a loan, it's important to prepare the necessary documents and provide a comprehensive overview of your business plan. By preparing these documents, you can increase your chances of qualifying for a restaurant startup loan. Remember to present your information in a clear and organized manner to make it easier for lenders to assess your eligibility. Loan Application - The first step in qualifying for a restaurant startup loan is to complete a loan application. This application will require you to provide basic information about your business, such as its legal structure, industry, and location. Additionally, you will need to disclose the loan amount you're seeking and provide a detailed explanation of how the funds will be used. Business Plan & Overview - A well-crafted business plan is crucial for securing a restaurant startup loan. This document should outline your concept, target market, competitive analysis, marketing strategies, and financial projections. It's important to demonstrate to lenders that you have a solid understanding of your industry and a clear plan for success. Your business plan should also include an overview of your management team and their relevant experience. Personal Background - Lenders will often assess your personal background to evaluate your ability to manage a restaurant successfully. This includes reviewing your educational background, work experience, and any relevant certifications or licenses. It's important to highlight any industry-specific training or experience you have, as this will demonstrate your commitment and expertise. Business Financial Documents - To qualify for a restaurant startup loan, you will need to provide detailed financial documents that show the financial health of your business. This includes profit and loss statements, balance sheets, cash flow statements, and tax returns for the past few years. Lenders will use these documents to assess your business's profitability, liquidity, and ability to repay the loan. Ownership & Affiliation Documents - Lenders will also require you to provide ownership and affiliation documents to ensure that your business is legitimate and compliant with regulations. This includes providing copies of your business licenses, permits, and registrations. Additionally, you may need to disclose any affiliations or partnerships you have with other businesses or organizations. Restaurant Financing Depending on a variety of factors, restaurant financing might be needed to cover several different types of restaurant expenses. It’s important for restaurant owners to understand the full scope of their financing needs. Below, we’ve listed some of the biggest costs owners might want to cover with their restaurant start-up loans: Overhead Costs - Overhead costs are expenses that are not directly tied to the production or sale of a specific product or service, but are necessary for the overall operation of the restaurant. These costs include rent, mortgage, or lease payments, as well as utilities and maintenance costs. Kitchen Equipment - Depending on your menu and concept, you may need to invest in commercial-grade cooking equipment, such as ovens, refrigerators, freezers, grills, fryers, and dishwashers. Properly equipping your kitchen with reliable and durable equipment is crucial for maintaining efficient operations and meeting the demands of your customers. Staffing - Staffing costs are a major consideration when considering restaurant financing options, as labor is a significant component of any successful establishment. You will need to budget for salaries, wages, and benefits for your kitchen staff, servers, bartenders, hosts, and other necessary positions. Inventory - From food and beverage ingredients to cleaning supplies and paper goods, it is important to estimate the cost of stocking your shelves and refrigerators. Additionally, consider the cost of maintaining appropriate inventory levels to avoid wastage or shortages. Marketing - Allocating a portion of your budget to marketing is essential for creating awareness and driving customer traffic to your establishment. Marketing expenses include several different aspects such as creating a website, running advertising campaigns, and creating a cohesive restaurant brand. Insurance & Fees - Understanding the necessary insurance coverage and fees associated with your restaurant is crucial for safeguarding your business and complying with local regulations. These fees might include but aren’t limited to: general liability insurance, property insurance, workers' compensation insurance, permits and licenses, health department fees, and any other legal requirements specific to your location. How to Evaluate Restaurant Loans Not all loans are equally suited for your restaurant, and it is important to evaluate the terms and conditions of each loan option before making a decision. Below, we will discuss key factors to consider when evaluating restaurant startup loans, helping you to make an informed decision for restaurant financing: Payback Amount - The total payback amount includes both the principal amount borrowed and any interest or fees associated with the loan. Understanding the payback amount is essential in determining the overall cost of the loan and its impact on your restaurant's financials. Term Length - Consider your restaurant's projected cash flow and financial goals when evaluating the term length of a loan. Longer terms may provide lower monthly payments, but they also mean more interest paid over time. On the other hand, shorter terms may result in higher monthly payments but allow you to pay off the loan faster. Interest - It is important to compare interest rates offered by different lenders to determine the most favorable option for your restaurant. Lower interest rates can save you money over the life of the loan, but they may also come with stricter eligibility criteria. Collateral - In the case of restaurant startup loans, lenders may require collateral to mitigate the risk of lending to a new business. Common forms of collateral may include real estate, equipment, inventory, or personal assets. When evaluating loan options, consider whether you are comfortable providing collateral and the potential consequences of defaulting on the loan. Restaurant startup loans can be a valuable tool for entrepreneurs looking to turn their culinary dreams into reality. However, it's crucial to thoroughly research and compare lenders to find the best loan terms for your restaurant’s specific needs. With the right financing in place, you'll be one step closer to opening the doors to your new restaurant and delighting customers with your culinary creations.