Making 2021 The Year To Solve The Chargeback Problem

By Larry Mogelonsky - Managing Director Hotel Mogel Consulting Limited

8 July 2021
  • Making 2021 The Year To Solve The Chargeback ProblemMaking 2021 The Year To Solve The Chargeback Problem — Depositphotos


Every dollar counts in the new normal. That’s because, even with all the cuts made during the pandemic, the costs of ramping operations back up with all the new safety requirements – while also servicing debt – are making hotels an increasingly difficult business to keep out of the red. Driving occupancy and maximizing total revenue per guest (TRevPAR) are the two top objectives we look at for properties nowadays, but there’s a hidden profit killer that you must also consider – chargeback disputes.

If you need to, you can look up the definition for this term and learn the nitty gritty of credit card payment processing on your time. What’s critical to grasp is that COVID-19 has acted as a catalyst for hotels by forcing nearly all guest transactions through electronic or other card-not-present (CNP) channels. As a catchall term, CNP denotes every instance where the customer is not physically present at the merchant to verify their own identities, including payments over the phone, within an email thread, over a text message exchange or, most commonly, via an online portal.

The more CNP transactions you have, the greater your chances of incurring more chargeback disputes. While undoubtedly some chargebacks will be legitimate – for instance, a guest cancels for whatever reason and disagrees with a hotel’s cancellation policy – there is a remarkable amount of fraud occurring nowadays, for which the merchant ends up paying.

For this, we must delineate between genuine fraud – where a cardholder’s full information is stolen then utilized for unauthorized transactions – versus ‘friendly fraud’. The latter describes what is, in essence, a double dip. A customer pays for something and renders that something (in this case, your guestroom) complete, then complains to their bank that they didn’t in fact use or purchase that something and demands a refund.

Lurking Chargeback Costs
If the quandaries of online food delivery apps during the lockdowns of 2020 can presage anything for the forthcoming travel recovery, it’s that we are about to be hit by a likewise surge of friendly fraud chargeback disputes. Just ask any restaurateur about the number of ‘missing items’, ‘dishes in poor condition’ or ‘entire lost orders’ automatically deducted from their ledgers each month by the app makers to get a sense of the scale of the nightmare in store for us.

Some guests (but certainly not the majority who are in fact honest customers) will stay with us, dine at our restaurants and use our facilities, then do an about-face and claim that they didn’t request those services or perform those actions. You might lose thousands of dollars each month due to these types of friendly fraud.

But it’s not just the refunded dollar amount or the double dip as represented by the loss of inventory – be it room nights that could’ve been sold to honest customers or merchandise from your gift shop that was ‘never delivered’. It’s all the other pesky expenses associated with managing these disputes, together multiplying to upwards of three times the cost of the goods or service itself.

These costs, obvious or otherwise, can include:

  • Refund of total customer spend
  • Lost inventory
  • Time spent by your team to coordinate dispute response efforts (‘representment’ in credit card processing vernacular)
  • Special fees for chargebacks for the credit card processor’s administration time
  • Increasing interchange rates or processing fees for each transaction as your business is deemed higher risk by the credit card processor
  • Adoption of a far too lenient cancellation policy to avoid these chargebacks which guests then take advantage of by booking and cancelling at the last minute

Technological Solutions
With payments moving purely online, and with mobile check-in and check-out very much here to stay, hotels need a bulletproof means of securing all CNP transactions, namely via the encryption of all credit card data from all parties except the cardholders themselves. By doing this, we are giving an end-to-end electronic record that proves ‘beyond a reasonable doubt’ that no member of the hotel team was complicit in swindling the guest.

Vendors abound to help with this. We caution, though, that you must evaluate suppliers on how exactly they are able to facilitate payment scenarios whereby only the guest ever has full visibility of the credit card, even as that information is shuffled from the payment gateway into accounting ledgers and into the PMS. Many solutions fail to offer a 360-degree encryption or tokenization of this sensitive data, thus resulting in a lower PCI compliance score and greatly reducing the chances of fully verifying that the guest authorized each payment.

Moreover, this pursuit of a 360-degree lack of visibility becomes all the more critical when dealing with a remote work situation. No doubt we all want to put the pandemic behind us and get our teams back together in the office, but some aspects of working from home are here for good, particularly if there is an outbreak of some new coronavirus variant in Q4 2021 or in 2022 that the vaccine doesn’t protect against. For these cases, you may have to shift to systems where your teams can facilitate payments to the property from their respective home offices without ever seeing or recording a guest’s entire credit card information.

While you may never be able to fully eliminate friendly fraud because credit card processors are predisposed to side with the issuing bank and the cardholder, by deploying the right software to bolster the cybersecurity of your guests’ credit card data, you stand a good chance at minimizing chargebacks so that you aren’t hemorrhaging costs and can retain profitability as fast as possible. It’s a straightforward problem to solve and one that should be addressed before the deluge of guests reaches your doors.

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Hotel Mogel Consulting Limited

3600 Yonge Street, PH 36
Toronto, ON M4N 3R8
Phone: +1.647.284.9791

Larry Mogelonsky

The world’s most published writer in hospitality, Larry Mogelonsky is the managing director of Hotel Mogel Consulting Limited. His experience encompasses hotel properties around the world, both branded and independent, and ranging from luxury and boutique to select-service. Larry also sits on several boards for companies focused on hotel technology. He is a much sought after public speaker. His published work includes five books: “Are You an Ostrich or a Llama?” (2012), “Llamas Rule” (2013), “Hotel Llama” (2015) and “The Llama is Inn” (2017)..and “The Hotel Mogel” (2019).

Larry Mogelonsky