Our white paper examines the chargeback landscape of five U.S. industries. One of them is the restaurant industry and this article focus.
We took a look at some data from the Federal Reserve Bank of Kansas City. And these metrics are an eye-opener for restaurant chains and restaurateurs alike. Let us see how these numbers affect you and your bottom line. Here is an extended view from Industry Dispute Ratios: A Deep Dive into Key Dispute Metrics including Ratios, Dollars Lost and Reason Codes.
Non-Present Transactions Make Valuable Chargebacks
Restaurant merchants can expect chargebacks to be more valuable from CNP and eCommerce transactions. Visa and MasterCard transactions clearly show chargebacks being more valuable when there is a digital transaction.
For example, eCommerce disputes developed an average chargeback value of $84 per transaction. That was 19.05% higher than the average chargeback value from CP transactions and 10.71% higher than its CNP counterpart. When it comes to merchant loss, which was valued at an average of $78 per transaction, eCommerce transactions had a 16.67% margin over CP transactions and a 17.95% margin over its CNP counterpart. This clearly shows Visa and MasterCard developed more valuable chargebacks whenever a transaction was made within the digital landscape.
American Express and Discover disputes had an overall chargeback value of $85 per transaction. CNP transactions earned a 41.78% margin over that average. There does not seem to be a trend that matches Visa and MasterCard transactions. But CNP transactions developed the highest chargeback value nonetheless, along with a 43.15% margin over its CP counterpart. Restaurant merchants need to be aware that non-present disputes develop more valuable chargebacks and merchant losses. And it will more likely increase in the near future. Especially with online ordering and apps such as GrubHub and Uber Eats making a pervasive combat.
High Chargeback Ratios Across the Board
Disputes were likely to originate from CP and CNP transactions across all card networks. eCommerce transactions were found to have a stronger likelihood of chargebacks from American Express and Discover transactions (93%) more so than Visa and MasterCard transactions (79%).
But merchant losses seemed to be less likely from Visa and MasterCard transactions. A 8-point deficit was revealed when all transactions were combined. The largest deficit came from CNP transactions. That showed merchant losses being 15% less likely than a chargeback. But a merchant loss ratio of 80% shows its valuation still being probable from this type of transaction.
Let’s take another quick look at American Express and Discover transactions. It is worth noting that the chargeback ratio from eCommerce transactions had a 31% margin over its merchant loss ratio.This shows a chargeback can occur. But restaurant merchants may not experience revenue loss (although a 62% ratio still calls for attention).
Ask yourself these questions while you review your chargeback management tactics:
- How do my employees engage with a disputed customer in-person?
- How does my customer service team engage with a disputed customer online?
It is always best to have your team follow the policies. But following the policy will only protect you from a chargeback taking some of your revenue. It may not be enough to actually prevent the chargeback from happening in the first place. Your team should foster an environment where customers feel comfortable to resolve the dispute. This involves all parameters from the moment they order some food to receiving an email that says, ‘Thank you for eating with us!’
Chargebacks Soon Find Their Place
And that place will eventually have its value rise or decrease. The largest chargeback values developed by Visa and MasterCard transactions came from No Receipt Goods ($148 per transaction), Cancel ($146 per transaction) and No Receipt Information reason codes ($129 per transaction).
Given that eCommerce disputes developed the highest chargeback values, it is not surprising that these reason codes earned high values as well. However, that does not imply that the remaining reason codes are non-threatening. For example, Quality reason codes developed average chargeback value of $68 per transaction while merchant losses were $80 per transaction. Restaurant merchants seemed to have been penalized slightly more than what the chargeback was valued in the first place. That is understandable since quality goods and services are essential in the restaurant industry.
Now let’s take a look at American Express and Discover transactions. Cancel reason codes ($304 per transaction) developed the highest chargeback value across all reason code categories. Quality reason codes developed average chargeback values that were 30.26% less than what was developed by Cancel reason codes.
While cancel-related chargebacks is something restaurant merchants should be aware of, quality-related chargebacks are more concerning from American Express and Discover transactions. These chargebacks were 70.75% more valuable than it would be from Visa and MasterCard transactions.
Overall, it seems chargeback values and merchants losses were much higher from reason codes that evaluate customer service. Notice how American Express and Discover transactions had developed chargeback values and merchant losses that were over $100. These do not include Fraud, Processing Error and Authorization. You would think something as severe as fraud would have a high valuation. But your inefficiency of customer service will cause more problems in the near future. That of course depends on the likelihood of a chargeback occurring – and whether that initiates revenue loss.
Ratios Have Its Highs and Lows
American Express and Discover transactions had a stronger likelihood of producing chargebacks than Visa and MasterCard transactions. Merchant loss from Visa and MasterCard transactions was more likely from fraud-, quality and no receipt information-related chargebacks.
The only reason code category that had the least likelihood of chargebacks was Cancel reason codes (33%). And a merchant loss was even loss less likely (21%). This suggests that cancel-related chargebacks did not occur as often you might think. But the opposite is true with American Express and Discover transactions. The chargeback ratio from its Cancel reason codes was 85%. And its merchant loss ratio was 76%. The importance of clear, visible policy statements cannot be overstated when it comes to Visa and MasterCard transactions.
With regards to American Express and Discover transactions, the merchant loss ratio was the lowest within Quality reason codes. That showed merchant losses being less probable by 43%. But a chargeback may occur nonetheless (79%). One explanation for this is that quality-related disputes were resolved more efficiently from the restaurant merchant themselves. However, other chargebacks such as cancel-related ones potentially raised more concerns.
Fraud Was The Inevitable Champion
Restaurant merchants had some risk in receiving fraud-related chargebacks (0.45) from Visa and MasterCard transactions. But the risk of losing revenue was more severe (1.11).
All other reason categories showed restaurant merchants performing well in preventing chargebacks. But the risk of a chargeback causing merchant loss was more prominent from Processing Error (0.39) and Authorization reason codes (0.2). Restaurant merchants need to re-evaluate its fraud prevention methods, as fraud-related chargebacks pose a significant risk. Given that eCommerce transactions produced more valuable chargebacks, restaurant merchants should look into fraud features that work well for digital transactions. Chargeback Alerts is a feature provided by the Chargeback App. And it helps notify fraud in real-time as merchants processing other transactions.
Like Visa and MasterCard transactions, Fraud reason codes posed some risk in receiving chargebacks (0.37). And its merchant loss rate was 2 times higher than its chargeback rate. Again, all other reason code categories show restaurant merchants performing well in preventing chargebacks.
The only two categories that posed some risk were No Receipt Information (0.13) and Authorization reason codes (0.11). The merchant loss rate was more than 3 times higher within No Receipt Information reason codes. With CNP and eCommerce transaction earn higher chargeback values, restaurant merchants should make an effort to provide thorough, clear information about the transaction.
Your rates can be reduced if you have the right tools for real-time dispute resolution and post-transactional fraud. This is where the Chargeback App comes in. Let us explain why this SaaS software is beneficial for your business:
1. Prevent Fulfillment of Goods
This will come in handy for American Express and Discover cardholders. The Chargeback App alerts you whenever a dispute has been filed. You can reroute shipments through the app if there is a dispute associated to a No Receipt Goods reason code. You will even be able to notify the cardholder that her order are its way.
2. Data Points that Prove Authorization
The Chargeback App allows to integrate all MIDs and payment technologies under your account. This means you can detect where you are in the payment processing cycle, whether you use Authorize.Net or Stripe. The Chargeback App also gives you verification when a transaction has been authorized (e.g., CVV and AVS). You can also draft responses that show these data points and the policies that state the cardholder’s acknowledge of a transaction.
3. Alerts that Flag Fraudulent Activity
You can never be too careful when it comes to suspicious transactions. That is why the Chargeback App offers Alerts that inform you when fraudulent activity occurs. Our dashboard also provides data visualization and categorization that helps you find the roots of fraudulent activity that affect you.
Restaurant Industry At A Glance
The National Restaurant Association’s 2017 State of the Industry report projected that U.S. restaurant merchant had earned $798.7 billion in sales last year. And out of the $736.8 billion that will come from commercial restaurant services, 74.93% of sales will originate from eating places, excluding bars and taverns. The two categories that earned the most sales from commercial restaurants services were full-service restaurants (e.g., Chilis) and quick-service restaurants (e.g., McDonald’s), where each are projected to earn $263 billion and $233.7 billion, respectively.
It is worth noting, after inflation, that quick-service restaurants will earn a higher percentage change (2.5%) than full-service restaurants (1.1%) when compared to its sales in 2016. The decision to franchise with a full-service or quick-service restaurant, or deciding to establish your own restaurant, will have a mixture of risks and opportunities. But the necessity to adopt technology (e.g., mobile payment) is growing as consumers and restaurant entrepreneurs are increasingly becoming mobile.