Understanding the Chargeback

Understanding the Chargeback Chargebacks. Great for customers, a real downer for restaurants. Let’s unpack this inevitable event, learn your rights as a restaurant owner, and help find ways to avoid them in the first place.

First off, what is a chargeback? We had to look up the term, too. Luckily there is a website devoted to them, aptly called Chargeback.com. According to them, chargebacks are “a transaction reversal meant to serve as a form of consumer protection from fraudulent activity committed by both merchants and individuals.” In basic terms, a cardholder disputes a charge on their card, and the owner of the charge (i.e. the merchant) is forced to pay it back.

Chargebacks were brought into commerce in the 70s with the invention of the credit card, at a time when consumers were pretty skeptical of the idea of a plastic rectangle allowing you to make a purchase without actually having any money. Many worried they’d lose their card, while others feared businesses would make false charges in their name. In comes the Fair Credit Billing Act of 1974 to help protect consumers from fake charges, stolen cards, and more.

As a merchant you can either accept or dispute a chargeback. Most chargebacks are accepted if the cost of disputing it outweighs the cost of the chargeback. Accepting one means you don’t want to take additional action and are willing to pay the chargeback fee set by your account. Disputing a chargeback can be worth it if you have evidence to back up the transaction and the amount you’d retain is far higher than the amount it would cost to dispute. You’ll have to be prepared to submit evidence to support your case if you do go this route, such as digital receipts.

You may be wondering why a restaurant would experience chargebacks. According to a study on Chargebacks911.com, 4 percent of consumers file a chargeback because the goods didn’t mean their expectations. Pretty vague excuse, we’d say. Also interesting from this same study is that “A typical business will only hear from 4 percent of dissatisfied customers—the remaining 96 percent are at risk of filing a chargeback.” So that customer who ate his entire entrée can easily dispute the charge and claim he didn’t like it at all.

You can prevent chargebacks entirely if you stop accepting credit cards, but that’s not likely in today’s world. To help avoid them, make sure your restaurant is equipped with an EMV reader to prevent the use of fraudulent cards. Tackle guest unhappiness quickly to limit chargebacks related to dissatisfaction. And put your contact info front and center on your receipts, giving customers the opportunity to reach out if they have a complaint.

Finally, know the rules and know your rights. Every credit card company has a set of tips on how their merchants should handle chargebacks. Here are the guides for Visa, Mastercard, American Express, and Discover. Chargebacks are complex and inevitable, but they don’t have to bring your business down. If chargebacks are delivering a serious hit to your revenue, swing by ARF Financial and read up on our restaurant-focused small-business loans. We just might be able to help you get your head above water—on your terms.