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The Definitive Hospitality Chargeback Fraud Guide

Understand your risks for chargeback fraud, plus how to reduce it

What's Covered
  • Why customers dispute legitimate transactions
  • What you can do to get ahead of disputes
  • The costs of not minimizing your chargeback risk
  • How to prepare for chargebacks so you can minimize their impact

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Why do customers initiate a chargeback for a legitimate transaction?

With the rise of online bookings and purchasing, many transactions occur without your customer or their physical card present. Card-not-present transactions are more susceptible to disputes, leading to a higher incidence of chargebacks.

Customers need to fully understand your booking process and the services, terms, and pricing they're agreeing to. Lack of clear communication regarding policies, fees, and additional charges can create confusion and dissatisfaction. Aside from chargeback fraud, this can also lead to "friendly fraud," where the customer initiates a chargeback because they genuinely believe the transaction is illegitimate/fraudulent.

Disputes are common for customers who disagree with your cancellation or no-show policies, and card issuers don't feel as strongly as you do about following the policies.

Most commonly, customers dispute a charge simply because they were unhappy with your services. The smallest inconvenience could prompt them to expect their money back, and because their card issuer is more likely to side with them than you are, they initiate a chargeback instead of requesting a refund or some other kind of compensation.

If the billing descriptor on the customer's credit card statement is unclear or differs from your business' name, they may not recognize the charge and quickly opt to dispute it.

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Ways to Get Ahead of Chargeback Fraud

Process Card-Not-Present Transactions Correctly

It’s inefficient, insecure, and much more costly to handle card-not-present (CNP) transactions the same way as card-present transactions. Plus, it can keep you from getting paid. Invest in a secure payment processing system for all areas of your business so you can to protect every customer and make it much easier to prove the legitimacy of transactions when a dispute arises.

Solutions like Sertifi make it far easier to collect, store, and access evidence you need to prove a transaction was legitimate. Check out this related blog post to learn more about what counts and how we can help you meet card network requirements.

Charge a minimum or full amount immediately. If the transaction’s being made with a stolen card, the true cardholder will get a notification of the charge, which will prompt them to contact you.

Ensure your billing statements are clear and accurate, and providing detailed information about the transaction avoids confusion. Custom-branded communications around transactions also help assure customers the information they're receiving is in fact coming from you.

Invest in Customer Communications

If a chargeback does occur, best practice is to reach out to your customer first so you can help prevent a full chargeback. Even they're disgruntled, you may be able to appease them through other means (partial refund, future discounts, etc.).

Routinely review your existing policies, update accordingly, and make sure updates are made anywhere your customers have access to existing policies. There should be no confusion when a customer is booking services or leaving your property or venue. They should know exactly who an invoice is from, what it is for, and what they owe.

Always make time to check in with your customers to find how their visit is when they’re in the middle of it. You can get their feedback both in person and from your website and other systems, giving them multiple ways to provide feedback so you can get ahead of potential disputes.

As you’re building a fraud prevention SOP, talk with your customer-facing teams about what they’d consider patterns. What have they experienced in the past that ended up turning into a chargeback?

Why These Recommendations Are So Important

The most direct cost is the loss of revenue from the disputed transaction.

Managing chargebacks requires a lot of time and resources, taking attention away from taking care of other customers and revenue-generating activities.

Credit card companies often charge fees for processing chargebacks, which can range from $20 to $100 or more per dispute.

If you experience a high volume of chargebacks, you may be classified as high-risk by payment processors, leading to increased processing fees.

Responding to Chargebacks


Since customers can initiate a chargeback for any reason, legitimate or not, they're impossible to eliminate completely. Being prepared to respond quickly can help you reduce their impact.

To dispute a chargeback, you have the option to submit a representment case, in which you share evidence that proves the transaction was approved by the cardholder and completed properly. The representment gets sent to your acquiring bank, the entity who connects you to the card network that assisted in processing the transaction (learn more about the processing players here).

There are a couple best practices you can follow to prepare you for evidence gathering:

  1. While time consuming, maintain a thorough record of all your customers.
  2. Contact your customer and hear the reason for the chargeback from them directly. Sometimes a small overcharge or incorrect line item could cause them to ask for a complete refund from their bank, so you may be able to resolve it and issue a smaller refund directly.
  3. Get familiar with chargeback reason codes so you can understand the type of cardholder dispute you’re dealing with. This in turn helps you determine which evidence to compile.

Chargeback reason codes vary by the credit card company.

For example, Visa organizes their chargeback codes by categories. Here are codes within their "fraud" category:

  • Reason Code: 10.1
  • Reason: EMV Liability Shift Counterfeit Fraud
  • Reason Code: 10.2
  • Reason: EMV Liability Shift Non-Counterfeit

Here are some examples for Discover:

  • Reason Code:UA01 
  • Reason: Fraud Card Present Environment 
  • Reason Code: UA02 
  • Reason: Card-Not-Present Environment 

Here’s the list of items that’ll help you build a strong case: 

  1. A rebuttal letter summarizing all the evidence you’re submitting.  
  2. A copy of the transaction receipt or order form.
  3. Copies of communications made with the customer who filed the chargeback.
  4. Evidence that proves the transaction was approved and authorized by the customer, e.g., a signed document that describes the product or service being purchased.
  5. Proof that you have cardholder verification enabled, e.g., via 3-D Secure.
  6. A copy of your refund policy (which should also be easy to find on your website and shared with customers before a transaction is made).

You need to be prompt about filing a representment case, so it’s important you have the right processes and technology in place to collect the evidence quickly. 

When the case is received, the acquiring bank sends your representment to the issuing bank, who issued the card used in the transaction. The issuing bank then may accept or reject your evidence.

  1. If accepted, the issuing bank alerts the cardholder their chargeback has been reversed, and you receive the funds as accepted.
     
  2. If rejected, and the acquiring bank agrees with rejection, the acquiring bank initiates a refund to the cardholder.
     
  3. If rejected, and the acquiring bank disagrees with the rejection, the issuing bank must conduct its own investigation and make the final chargeback decision.
     

The short story is that it’s a lengthy process that you have very little control over. Ultimately, it’s easiest for the issuing and acquiring banks to side with the cardholder and reject your case, so that’s typically how the process plays out.

It’s worth disputing a chargeback if it relates to fraudulent activity. However, every hotel is different and not all properties have the bandwidth to devote to fighting chargebacks. With every chargeback filed, there’s a risk for lost revenue, so you need to ask yourself if it’s worth eating that cost.

While it’s smart to be prepared to fight chargebacks, it’s even more important to invest in a fraud prevention strategy. That’ll help you minimize your risk of chargebacks altogether. Secure processes and technology can help you stay ahead of chargebacks.

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