The Most Common Reasons for Chargebacks in Restaurant Deliveries

In the past, food delivery was exclusive to a specific restaurant industry segment. But these days, delivery orders can make up a significant chunk of a restaurant's revenue. People love delivery options, and the meteoric rise of third-party delivery service apps has made them more accessible than ever.

Accepting and fulfilling delivery orders can lead to greater growth opportunities for any restaurant. However, they can also create new headaches. Case in point: Chargebacks!

Chargeback disputes cost restaurants money, and banks often put the burden of proof on merchants. While the chargeback process exists to protect consumers and facilitate safer credit card transactions, they can put a strain on restaurants like yours.

In this guide, we'll review some of the most common reasons why chargebacks occur and what you can do to prevent them.

An Overview of the Increase in Food Delivery Orders

Restaurant deliveries are nothing new. But thanks to mobile apps and third-party delivery service platforms, restaurants have seen a substantial increase in delivery orders over the past several years.

The pandemic put the concept at the forefront, and many restaurants had no choice but to adapt to keep doors open. While the world largely returned to normal, food delivery was one pandemic-era adjustment that stuck around.

Today, diners can get food delivered from fast food joints, mom-and-pop eateries and even upscale establishments. This arrangement is mutually beneficial for both customers and restaurants. Offering delivery options can create a brand-new revenue stream for businesses, and many restaurateurs are venturing into delivery-only cloud kitchens!

Restaurant deliveries aren't just here to stay. Projections show that it'll become an even bigger revenue booster in the future. The latest estimates show that the food delivery market reached over $29 billion in value in the United States during 2023. Some forecasters expect it to reach over $84 billion by the decade's end!

The Importance of Understanding Chargebacks

Chargebacks are a natural risk of doing business in our tech-focused era. Debit card and credit card transactions are increasingly common, and many restaurants rarely deal with cash at all. Because many patrons order digitally through dedicated mobile apps and third-party platforms, they usually pay with a card.

While most transactions go through without a hitch, chargebacks can be a nightmare. Customer disputes, allegations of fraud and other common reasons for chargebacks cost businesses more than most realize.

These events are an added cost and a risk of accepting card payments. Frequent chargebacks can lead to significant losses. When financial institutions reverse a payment, you lose the original transaction amount, and merchants can incur additional fees. Pair that with existing overhead; a chargeback can cost you double the original amount! Plus, it may lead to reputational damage.

It's an unfortunate reality of doing business and taking card payments. But in our increasingly cashless society, you can't afford not to accept credit cards and debit payments!

That's why it's important to understand the chargeback process and the options available to you when dealing with them. A deeper understanding of chargebacks and what causes them can help you minimize these events, safeguarding your business.

What are They?

A chargeback is the result of a payment dispute. The Fair Credit Billing Act protects consumers by requiring financial institutions to give people 60 days to dispute a transaction. Thanks to this federal law, individuals can dispute a transaction they see on their debit or credit card statements.

There are many reasons why customers could dispute a transaction and trigger the chargeback process. These events generally occur due to unauthorized transactions, suspicion of fraud or unsatisfactory service. The issuing bank or credit card provider will investigate when an account holder initiates a chargeback request.

The problem is that financial institutions often put the burden of proof on merchants. Because restaurants handle thousands of orders monthly, they're frequently ill-prepared to handle chargeback disputes. As a result, banks usually side with customers and reverse the charge. Financial institutions will take funds away from your restaurant and charge additional fees when that happens.

Every chargeback hits your bottom line. When they become an ongoing issue, chargebacks can be a serious source of lost revenue for your business, threatening its success and growth. Profit margins are already thin in the restaurant industry, so that additional burden can and does cause establishments to shut their doors.

Top Reasons They Happen

Chargebacks are more common than most realize. Customers have the upper hand here and can dispute a transaction for numerous reasons. However, a handful of delivery-focused situations are common sources of disputes in the restaurant business. Understanding them can empower your business to prevent chargebacks.

Delivery Mishaps

One of the most common causes of chargebacks is issues with the delivery service. Food delivery is a complex process with many different logistics to iron out. It doesn't matter whether you have an in-house delivery person or work exclusively with third-party platforms like DoorDash or Uber Eats. Things can go wrong in many ways with delivery service.

When they do, customer satisfaction plummets and chargebacks can occur.

Your restaurant handles food preparation and fulfillment. But once orders go out the door, they are out of your hands and up to the delivery drivers' performance. Unfortunately, not everything goes smoothly.

Drivers can get stuck in traffic, causing massive delays. By the time customers receive their order, food can be cold. Backups on your end can also cause delays, leading to lengthy wait times.

Delivery people can also create a poor customer experience. For example, rude behavior, lackluster customer service and other issues could anger patrons enough to dispute a charge. Sometimes, delivery drivers could ruin an order by losing items, spilling food or even eating it!

Tons can go wrong during the delivery process, and the experience could cause customers to initiate a chargeback.

Communication Breakdowns

Good communication is crucial when handling restaurant deliveries. You need to communicate order details from your customers, stay in touch with delivery drivers and more.

Unfortunately, communication breakdowns do occur.

For example, flawed third-party app integration can lead to order screw-ups. Customers may have difficulty communicating what food they want or special requests with food preparation, leading to issues from the jump.

Poor communication can also hinder the delivery process. For instance, a breakdown between delivery drivers and your restaurants could send orders to the wrong address, creating massive delays. Even failing to communicate the status of an order to a customer can lead to unsatisfactory experiences and chargeback requests.

Payment Disputes

Payment disputes are another common issue. Your restaurant may inadvertently charge customers the wrong amount. For example, it's not uncommon to accidentally double-charge someone. Those billing errors often lead to transaction disputes.

The problem is that payment processes charge additional fees per transaction. While returning any gains from billing errors is the right thing to do, the payment process and chargeback will make those small mistakes a big expense.

Fraudulent Activities

Suspicions of fraud are a good reason to dispute a transaction. Credit card fraud is, sadly, becoming more widespread. Fraudsters steal peoples' information and card numbers and use them to order food at restaurants.

If someone sees an unfamiliar transaction with your restaurant, they can and should bring the issue up with their bank or credit card provider. When they do, it's up to you, the merchant, to prove the transaction was legitimate.

Fraudulent transactions are a growing concern in the restaurant industry. With apps and digital payments becoming more prevalent, fraudsters continue to take advantage of security loopholes. Some consider food orders a form of “friendly fraud,” but it's fraud nonetheless.

Another issue you should be wary of is chargeback fraud. In these cases, the customer commits fraud instead of cybercriminals and credit card thieves.

There's a growing trend of ordering food and disputing legitimate transactions to get a free meal. Many experts say this form of fraud is among the leading reasons why chargebacks are more common in the restaurant industry. It's a form of theft that's hurting businesses nationwide.

Because many restaurants don't keep accurate records, they're often incapable of disputing the chargeback. As a result, the fraudster wins!

Customer Dissatisfaction

Finally, there's customer dissatisfaction. If the quality of a customer's order doesn't meet their expectations, they can dispute the transaction to get a refund.

Quality issues are complex, and there are countless reasons why a patron may be so dissatisfied that they request a chargeback. Undercooked food, foreign objects in their meal and more are common reasons. Customers can also explore the chargeback route if what they receive doesn't match the description on your menu or if their order is missing certain items.

Restaurants often go above and beyond to make things right, but chargebacks will still cost you. Furthermore, quality concerns can lead to bad reviews, reputation damage and other issues that hurt your business.

Impact on Restaurants

The costs of chargebacks are substantial. At face value, you're looking at lost revenue. When a customer wins a chargeback dispute, they receive a full refund. That means you prepared and delivered the order for free.

That's lost supplies and wasted time you'll never get back. Occasional comped meals aren't a huge deal. However, when your restaurant experiences frequent chargebacks, that loss in revenue can hurt your business.

But that's not all. You must also consider the fees involved with chargeback disputes. Investigations take time and resources. Card networks approach disputes differently but almost always charge merchants for the chargeback process. Even if you win the dispute, your card network processor may charge you up to $100 in administrative costs!

That's not spare change! That's a huge fee; frequent chargebacks can lead to thousands in fees yearly.

If transaction disputes become chronic, your payment processor may take things further. Some processors will charge merchants fines of up to $10,000 if they frequently investigate disputes. Check the terms of your payment processing agreement, and you'll likely find details about when and why these fines occur.

After charging those hefty fines, processors could ultimately close a merchant's account. Even if most of your disputes are legitimate, frequent chargebacks may force a payment processor to freeze your account, making it impossible for your restaurant to accept debit or credit card payments.

How to Prevent Them

Chargebacks cost restaurants more than most realize. Luckily, there's a lot you can do to prevent them from happening.

Implementing Robust Communication Strategies

One of the best things you can do is employ strong and reliable communication methods. Use digital channels to keep your customers in the loop about the order fulfillment and delivery process. Give your patrons the means to send accurate orders and track the process.

Don't limit yourself to communicating only with customers. Strong communication with delivery drivers is important, too. Having the means to reach out to delivery drivers and customers can avoid most reasons for a chargeback.

If there's a delay or issue, you can reach out to customers, make things right and avoid starting the chargeback process.

Enhancing Security Measures

Stronger security measures can reduce the likelihood of fraudulent transactions. If you have an app for delivery orders, employ robust security tactics like full encryption and order verification. Send text messages and alerts whenever a customer places an order. If they don't recognize the transaction, you can cancel it, inform them of potential fraud and avoid future chargebacks.

Many restaurants are also investing in better security to avoid chargeback fraud. For example, you can use technology to flag accounts that frequently request unjustified refunds and chargebacks to help minimize revenue loss.

Quality Assurance in Deliveries

To prevent quality issues, take steps to improve your operations.

You can make quality assurance a big part of the delivery process. Have teams review the details of every order and double-check everything before meals go out the door. Transform your entire approach to food delivery and prioritize quality and accuracy.

Improving quality assurance measures can make a huge difference, preventing common issues and improving customer satisfaction.

Customer Education

Customer education is a proactive approach to chargeback prevention. In many cases, transaction disputes are a byproduct of misunderstandings. Customers may become confused when ordering food from your menu, resulting in dissatisfaction and perceived quality issues. They may also be unaware of the costs involved with food delivery or be unfamiliar with the time it takes to get their order.

Whatever the case, better education can solve many issues that lead to chargebacks. Review your menu and make it as user-friendly as possible. Prioritizing price clarity can also improve the user experience on your ordering app.

Include a “how-to” section or provide information about what patrons can expect. Education will provide better clarity and ease worries while leaving less room for legitimate disputes.

Manage Your Chargebacks With Superorder Today

Chargebacks can be a substantial source of frustration and revenue loss. But they don't have to be! With Superorder, you can revamp your entire approach to dispute management.

Superorder is an all-in-one restaurant management platform with powerful dispute management features. Catch order issues in real-time to correct problems before they create unhappy customers, reduce issues with third-party delivery apps, monitor for fraudulent activity and more. Superorder makes handling disputes and protecting your business a breeze.

Check out Superorder today to see how the right software can benefit your restaurant!