Understanding Chargeback Costs and Their Impact on Your Restaurant's Finances

Chargebacks are becoming an increasingly costly problem for restaurant owners. Even business owners doing online sales have to deal with them. However, recent shifts toward online ordering in the restaurant industry are making them more prevalent than ever.

When a chargeback occurs, your restaurant business loses money. Not only do you lose the original transaction amount, but you must also pay fees and cover additional hidden expenses. While restaurants often comp meals and go the extra mile to deliver a killer customer experience, a high chargeback rate can be a significant source of revenue loss.

In this blog, you'll learn about the true costs of chargebacks and how they impact your restaurant's finances and path toward success.

Breaking Down the Financial Ramifications of Chargebacks

It's easy to see chargebacks as nothing more than simple refunds. But they're far more impactful than that. In the high-risk restaurant industry, frequent chargebacks can be a major expense that ruins your bottom line. Let's look at some of the major financial ramifications of this type of dispute.

Direct Financial Losses

Every payment dispute and chargeback can result in a direct financial loss. Whether it's a legitimate issue of unauthorized transactions or an attempt at friendly fraud, you lose the original transaction amount.

For example, a customer may see an unfamiliar charge of $50 on their bank or credit card statement at your restaurant. That could have been an order they forgot or an example of fraudulent activity due to credit or debit card theft. Whatever the case, they can turn to their card issuer to initiate the chargeback process.

If the financial institution or issuing bank finds that the charge is a fraudulent transaction and you can't provide evidence otherwise, you lose that $50. Cardholders are legally entitled to dispute payments, and banks and credit card companies must initiate an investigation. During that time, the merchant's bank holds the original transaction amount.

A single chargeback doesn't seem like much in the grand scheme. But that's potential revenue you will never see, and frequent chargebacks create significant revenue losses.

Operational Costs

You're losing more than just the cost of food. In our example above, the $50 order is easy to identify. However, there are also hidden operational costs to consider.

It takes time to process and prepare orders! The time your staff took to cook, package and deliver the meal is something you'll never get back. If that order came during peak hours, the time you spent on it could have gone to delivering a better customer experience for others.

Operational costs are difficult to calculate, but they're substantial — every minute counts in the fast-paced restaurant industry, and you're paying for your employees' time. The loss from a chargeback is something you'll never get back, and it can affect your profit margin.

Reputational Damage

Chargebacks can also cause reputational damage among customers and your payment processor. If chargeback requests arise due to legitimate issues, such as quality problems or errors on your restaurant's part, frequent chargebacks can negatively impact your reputation in the market.

Word spreads fast, and restaurants live and breathe by their reputation. Frequent chargebacks will make your customers question your restaurant's quality and lose trust.

But that's not all.

Payment processors will also take note of chargebacks. Merchants need payment processors to accept cards. You can't afford to lose your processor when roughly four out of ten Americans don't carry cash.

However, frequent chargebacks turn you into a high-risk merchant in the eyes of financial institutions and processors. Depending on how often chargebacks occur, you may violate the terms of your merchant account, resulting in sky-high penalties, more frequent audits and the eventual termination of your account!

Calculating the True Financial Impact

Recent studies show that chargebacks cost businesses over $3 per dollar of the original transaction amount! So, $50 refunds on credit card payments can cost you $150 or more in the end.

But where do those costs come from?

Understanding Loss on a Per-Transaction Basis

When you look at the core transaction that triggered the chargeback process, all you see is what a customer paid. That's just the base loss you incurred. On top of that, you'll also pay additional fees. Those fees may come from your merchant bank, the card-issuing bank or both!

The amount you'll pay depends on the financial institution's policy. However, a single chargeback fee can be anywhere between $20 and $100 for high-risk businesses — that's per transaction! It doesn't matter if the payment dispute was for hundreds of dollars or the cheapest item on the menu; you could pay $100 or more for that chargeback.

Now, it's easier to see how much chargebacks hurt your business. That simple refund turns into a major expense when you consider fees.

Hidden Operational and Reputational Expenses

On top of the eye-watering chargeback fees, you must consider operational and reputational costs. Operational costs refer to losses due to wasted ingredients and wages you must pay your employees. Say it took your staff 15 minutes to cook and process an order.

If you pay them $20 an hour, that's $5 in wages. Multiply that by how many employees spent time on the order, and the operational expenses climb. Throw in the cost of ingredients, and it gets even higher!

Reputational losses can be the biggest hit. Read your merchant contract with your bank and payment processor. Focus on the terms surrounding chargebacks and actions those financial institutions can take. Frequent chargebacks will put you in the high-risk category, resulting in more frequent audits that cost your restaurant business.

In some cases, banks may also charge huge penalties that climb into the thousands!

Strategies to Protect Your Bottom Line

As a restaurant owner or manager, your goal should be to lower chargeback rates as much as possible. The chargeback process can occur at any time for several reasons. While you can't prevent payment disputes from genuine fraudulent transactions, there are many strategies to minimize chargebacks and their impact on your business.

Implementing Stringent Quality Controls

One of the best ways to make chargebacks more infrequent is to adopt tight quality control measures at your restaurant. Quality issues are a common reason for chargebacks. If your customers don't get what they ordered, they'll try to get a refund!

Every missing item, poorly made dish or unclear menu item creates a high risk for chargebacks. Adopt measures to maintain impeccable quality for every order that leaves your kitchen.

You can train staff to implement best practices and invest in technology that helps you catch errors in real-time.

Enhancing Communication Protocols

Good communication with your customers can reduce errors and chargebacks. Improve your communication channels and reach out to unhappy customers to make things right.

If people order through your app, website or a third-party app for delivery, you can have a system in place for order confirmation. An address verification system can prevent delivery delays, and text messages or phone calls can clarify special requests or order changes.

Having a strong order-tracking system can make a difference, too. The goal is to communicate better with your customers, staff and delivery drivers to avoid confusion, delays and errors.

Investing in Payment Security Measures

Finally, take extra measures to keep your business and your customers safe. Updated security measures for payment processing make all the difference. In-store, you can adopt POS systems that accept cards with EMV chips. For online ordering, you can use strong encryption and order confirmation systems to alert customers whenever you process a payment.

Those extra measures can significantly reduce fraudulent activity and chargeback fraud. Plus, the additional documentation can help you fight payment disputes during the initial investigation cases or arbitration.

Get Started With Superorder Today

Don't let chargebacks be a significant source of revenue loss for your restaurant business. Chargebacks and fraud are becoming a bigger headache in the restaurant industry, but there are many strategies and tools to safeguard your business.

One example is Superorder, a restaurant management software platform with countless features to help your business grow. The robust dispute management tools can detect fraud, help dispute chargebacks and more. Meanwhile, features to improve operational efficiency in your restaurant can make quality control a breeze.

Check out Superorder today to protect your restaurant and develop strategies for greater success.