Restaurants are usually tight margin businesses with little breathing room for unexpected costs like chargebacks. Net profits in the restaurant industry typically reach between 3 percent and 6 percent. At this level of profit, a bill that is charged back will require the restaurant to sell between 17 and 34 similar meals just to make back the cost of what was lost. This doesn’t even include the chargeback fees that will be tacked on by the restaurant’s payment processor. Clearly restaurateurs need to be very wary of chargebacks.
In the U.S., some restaurants developed significant exposure to fraud-based chargebacks because they did not switch to EMV chip reading point-of-sales (POS) technology at their cash registers by the deadline imposed by the credit card networks. Following the deadline of October 1, 2015, whenever a customer uses an EMV chip card in person at a restaurant that does not have an EMV reader, any subsequent fraud charge becomes the liability of the restaurant. Many restaurants still opted to forego the switch to EMV because of the added cost of updating their POS.
However, as merchants in other traditionally more fraud prone verticals like electronics have switched to EMV enabled POS, the fraudsters have moved to the remaining holdouts like restaurants. Before the EMV liability shift, in 2012, the restaurant industry had approximately zero chargebacks, according to data collected by the Optimized Payments consultancy. This rose to 28 percent of restaurants with chargeback ratios between 0.5 percent and 1 percent of transactions and another 10 percent that had chargeback ratios exceeding 1 percent in 2018, according to Fintech Finance. When total net profit is between 3 percent and 6 percent of sales, these are significant figures!
The growth in restaurant chargebacks was turbocharged in 2020 with the global outbreak of Covid-19. Many restaurants reported a surge in friendly fraud with customers effectively “dining and dashing,” but with takeaway or delivery.
These extra chargebacks weren’t victimless crimes. Just last week, well-known Los Angeles Korean food eatery Spoon by H closed due to the financial fallout of dealing with chargeback scammers. A Los Angeles Times article that covered Spoon by H’s closing also discussed various measures L.A. restaurants were taking to avoid falling victim to friendly fraud, including taking photos of orders and requiring customers to show their driver’s licenses. Several different food establishment owners expressed worries over fulfilling large orders due to the possibility of fraud.
It doesn’t have to be this way. Restaurant owners can turn to a chargeback management service to fight the 80 percent of chargebacks that are from friendly fraud.
Justt is a chargeback management solution that is tailored to each individual merchant and the needs of their industry. Because of this, we have a market leading 83 percent success rate for chargeback cases fought. We also offer win-win pricing, where we get paid a percentage only when you win a case. Refocus on running your restaurant.