BOPUS & Online Ordering Causes Surge of Restaurant Industry Chargebacks

Impossible Burgers and boba tea are popular trends right now in the restaurant scene. However, nothing in the last decade has impacted the way we dine as significantly as online ordering.

The “buy online, pick up in store” sales model (BOPUS, as it’s commonly known) involves merchants leveraging their web presence, often in the form of proprietary apps. The result is a faster, more convenient experience for customers, and greater profitability for food sellers.

Of course, the rise of this new sales channel doesn’t occur in a vacuum. There is, in a sense, a downside to convenience; as merchants in the food and beverage space invite more eCommerce elements into their operations, they also bring in eCommerce challenges. Most notably, a dramatic increase in chargebacks over the last few years.

Chargeback Abuse on the Rise

Chargebacks are, of course, a form of forced payment reversal. When a cardholder claims to be a victim of either fraud or abuse, the issuing bank can overturn the transaction. The merchant, in turn, loses sales revenue and product. They also pay added fees and see increased administration costs. Plus, if the situation gets out of hand, the business could ultimately lose their card processing rights.

One study conducted back in 2013 found that merchants in food and beverage reported practically no chargeback activity. Fast-forward just five years, though, and we find that 28% of restauranteurs had a chargeback-to-transaction ratio between 0.5 and 1% of total transactions. Another 10% had a chargeback rate in excess of 1%.

Merchants established in the eCommerce space are already very familiar with the problems that chargebacks cause. Those in the food and beverage industry, though, have little experience with transaction disputes, or what can cause them.

It might be natural to assume most chargebacks are caused by fraudulent criminal activity. The truth is that between 60-80% of all chargebacks are probable cases of friendly fraud, which occurs when a cardholder abuses the chargeback process.

Friendly fraud can be an honest mistake caused by a simple misunderstanding. For instance, a customer at a restaurant might claim that her order was cold, or that it wasn’t as described on the menu online. Or, maybe the customer can’t recognize the restaurant by their billing descriptor. In any of these cases, the buyer could file a chargeback without first contacting the merchant, thus making it friendly fraud.

Of course, chargeback abuse could also be intentional. This is a practice known as cyber-shoplifting; essentially a “digital dine-and-dash.” Regardless whether it’s accidental friendly fraud or deliberate cyber-shoplifting, the end result is the same as far as the merchant is concerned.

Is Anything Being Done?

There has been some progress made to try and stem the rising tide of chargebacks throughout the digital market. For instance, policy overhauls like Visa Claims Resolution and Mastercard Dispute Resolution represent positive steps toward modernizing the chargeback process. However, these disparate moves are mere attempts at treating the symptoms. The real solution is standardization.

The market has transformed substantially in the nearly-five decades since the chargeback process was first introduced. In that time, each of the major card schemes developed their own complex, confusing guidelines for chargeback processes. What we need is a simplified process, applicable across each card scheme.

Standardizing the chargeback process will make it easier for merchants in the food and beverage industry—and in general—to develop their digital platforms. They can offer new experiences for customers without risking a sudden spike in chargebacks. Until that point, though, merchants are largely on their own.

Food and beverage merchants can help manage their risk by employing a multilayer fraud strategy. Tools including fraud scoring, address verification, and geolocation are complimentary technologies, and are all part of a multilayer strategy. On top of that, merchants can implement best practices to try and eliminate errors wherever present.

Ultimately, though, individual merchants’ efforts can only be so effective without standardization. Until we have a modernized, comprehensive guidelines for the chargeback process, merchants in all product verticals will see chargebacks continue to climb.