Chargeback & Fraud Protection Team
Chargebacks are a familiar headache in the hospitality world. Hotel businesses of all sizes, whether it’s a small inn or a nationwide chain, have good reason to protect against these transaction reversals. Fees, lost revenue and penalties are just the start. Over time, dissatisfied guests, empty hotel rooms and at-risk merchant accounts pose a threat to a hotel’s reputation and profitability.
While hotel owners and managers may be unable to eliminate every chargeback, they can reduce the frequency and damage — if they know what to look for.
How Are Hotels Victims of Fraud?
Globally, the hospitality industry generates an estimated US$3 trillion of revenue per year, and in 2022, the Association of Certified Fraud Examiners estimated that between 5%-6% of this annual revenue is lost to fraud. That amounts to $150 billion in direct loss of revenue.
Forbes reports that, “The hospitality industry is among the top industries targeted by synthetic identity fraudsters due to its large volume of low-value transactions, which can go unnoticed until it is too late.” Synthetic identity is the use of a combination of real and fake information to create a new identity.
Credit card fraud is another risk. A survey from the American Hotel & Lodging Association found that over half of all credit card fraud occurs in the hotel industry.
Account Takeover (ATO) Fraud in the Hospitality Industry
Account takeover (ATO) fraud happens when a fraudster gets access to a digital account. In the case of hotels, reward and loyalty program accounts are a specific target. According to Lexis Nexis, automated bot attacks have skyrocketed in travel and hospitality, with a 239% increase year over year from 2022 to 2023, concentrating on loyalty programs.
Vulnerabilities in these accounts can give fraudsters access to credit cards and other sensitive customer data, and program access allows them to change account details, make fraudulent requests, carry out unauthorized transactions, and perform other illicit activities.
HospitalityTech.com cites this scenario: “Using a hotel loyalty program as an example, the criminal often acquires stolen credit card information in bulk and then uses it to purchase multiple stays. These transactions accrue a massive amount of loyalty points, which the criminal then redeems before the fraud is discovered. Once the cardholder of the stolen information discovers the fraud, they file a chargeback.”
Chargebacks in the Hospitality Industry
Chargebacks were originally created for a good reason: to offer consumers a mechanism to reclaim funds in a dispute with a business. Then fraudsters figured out that they could take advantage of the chargeback process to make money.
For every customer dispute, there’s a reason code. While each credit card issuer has their own reason codes, they all fall into these four categories:
1. Criminal Fraud
When cardholders discover a criminal accessed their credit card data and used it to make fraudulent purchases, the customer may file a chargeback to recoup their funds.
2. Consumer Disputes
Some consumer disputes are legitimate complaints about a stay that doesn’t go as planned. In other cases, the customer is making an honest mistake. For example, if the customer doesn’t recognize the hotel business’s name on their credit card statement or forgets to cancel a reservation, the customer may file a chargeback — even though in both situations, the transaction was perfectly legitimate. Both scenarios are considered “friendly fraud.”
Here are a few other examples of friendly fraud that hotel businesses may see:
- A stay was authorized by another family member, unbeknownst to the customer.
- A customer is confused about the hotel’s cancellation policy.
In any of these cases, those reasons could instead be “excuses” for why the customer doesn’t want to pay and start the chargeback process. That’s what makes this type of fraud so difficult to prevent. Meanwhile, this type of fraud is increasing 15%-20% across all segments, making it quite costly.
Sometimes, however, customers file chargebacks with the dishonest intention of receiving a refund on their stay or a related charge like for room service or items from the minibar. This situation is considered “chargeback fraud.” When a hotel customer disputes the charge, the hotel must bear the costs of cleaning the room and any charges billed to the room on top of any lost revenue.
Friendly fraud, also known as first-party misuse, affects over one-third of merchants globally, ranking this the second most widespread type of fraud. Friendly fraud now accounts for up to 75% of all chargebacks.
It’s difficult, if not impossible, for businesses to determine which customers are making an honest chargeback claim and which ones are trying to defraud the business. In the end, the result is the same: lost revenue and an increased chargeback ratio.
3. Authorization Issues
These chargebacks occur when businesses don’t get the proper authorization for a transaction, don’t submit a valid authorization approval or don’t submit a verifiable authorization.
4. Processing Errors
Sometimes, customers don’t dispute they made a purchase. What they do dispute is whether the business held up their end of the deal. These are considered processing errors.
The most common types of processing errors include:
- A transaction charge was processed more than once.
- A customer cancels a reservation, but the business doesn’t refund the credit card.
- The transaction amount the business submits differs from the amount the cardholder agreed to.
Within those broader categories, certain chargeback scenarios are common in the hospitality industry:
5. Failure to Cancel
A customer neglects to cancel their reservation according to the hotel’s cancellation policy, but they feel they shouldn’t be responsible for the charge because they didn’t use the room.
6. Claims of an Unsatisfactory Experience
A customer stays at the hotel for the term of their reservation but makes the (fraudulent or legitimate) claim there was something negative about their stay that justifies compensation.
7. Testing Card Limits
A fraudster may make a reservation simply to test the validity of a stolen credit card before making fraudulent purchases elsewhere.
8. Not Recognizing the Business Name
The business name of the hotel that displays on customer statements may differ from that of the hotel itself, leading to a chargeback when the customer sees an unfamiliar charge.
9. Unexpected Charges
There may be times when hotel guests see unexpected charges on their cards — like for booking deposits or post-visit minibar adjustments — that cause them to file chargebacks.
10. Disagreement Over Billed Amount
If a guest feels they’ve been overcharged for a stay based on a previously agreed-to rate, they may seek a refund.
11. Disputes Over Damages
A hotel may assess charges for property that they believe a guest damaged or stole during a stay. If the guest disagrees with those charges, they’ll seek a refund.
How Chargebacks Hurt Hotel Businesses
Whether a chargeback is due to friendly or chargeback fraud, the result is the same: Hotels are on the hook for:
- The lost revenue they would’ve earned on the stay
- The lost opportunity to fill the empty room with a paying customer
- Expensive chargeback fees and penalties
- The potential loss of their business accounts if their chargeback ratios are too high
- Reputational damage
With 65% of merchants reporting an increase in chargeback fraud in 2022, the risk of loss is high. And if that weren’t bad enough, consumers who file a chargeback are more likely to do it again – 40% will try it again within 60 days.
Unfortunately, fraudsters take advantage of a chargeback system that favors buyers over sellers. If businesses want to defend themselves against a chargeback, they must collect significant amounts of data — like proof of who owns the credit card, who placed the order and who received the products.
For this reason, businesses often simply accept fraudulent chargebacks rather than having to expend the time, money and effort necessary to challenge chargeback disputes successfully.
How the Hospitality Industry Can Protect Itself Against Fraud
The high volume of transactions and personally identifiable information (PII) makes the hospitality industry a prime target for fraudsters. ACFE’s 2022 Report to the Nations reports that businesses in the hospitality industry experienced a median loss of $55,000 before being detected. That makes it more important than ever for hotels to take proactive steps to prevent fraud and chargebacks.
Here are some tips to help hotels protect against chargebacks:
- Use an address verification service to confirm the mailing address of the cardholder matches the billing address of the credit card.
- Provide easy-to-find billing, cancellation and refund policies throughout company websites, on booking pages and in all correspondence so guests know what charges to expect on their credit cards.
- Check credit cards being used to book reservations against credit card issuers’ electronic Card Recovery Bulletins, which list lost, stolen, counterfeit and other problematic credit cards.
- Implement 3-D Secure solutions (like Verified by Visa or Mastercard SecureCode) to add an extra layer of identity verification to the reservation process.
- Try to resolve customer complaints before they escalate to chargebacks. Refunds are easier to manage and less expensive than chargebacks.
Internal controls can shield employee and customer accounts from account takeover attempts that lead to chargebacks:
- Implement tokenization, encryption or both on payment data to comply with PCI-DSS requirements. Customer and employee account authentication data, customer loyalty point balances and other customer data should be protected this way as well, in transit and at rest.
- Strengthen your login credential requirements for employees, customers and vendors with access to your internal systems.
- Support your IT department with tools that automate fraud detection.
- Update your transactional fraud prevention strategy with a combination of artificial intelligence and machine learning that can detect both blatant and subtle order discrepancies that can indicate account takeover fraud.
How the Right Fraud Solution Can Reduce Chargeback Costs
When you’re running a successful business, you want to focus on growth — not on fighting chargebacks. But with fraud in the hospitality industry showing no signs of slowing down, that’s exactly what many hotel managers and owners must do. Disputing chargebacks costs your business valuable time, money and resources — and it risks damage to your reputation and the termination of merchant accounts.
With the right fraud protection solution in place, businesses in the hospitality industry can have the peace of mind that comes from knowing they are protected from evolving fraud patterns and from chargeback fees and penalties arising from fraudulent transactions.
Even businesses that do everything right will occasionally find themselves the victim of fraud and chargebacks. That’s why they need help to prevent and manage chargebacks. At ClearSale, if we approve a transaction that turns out to be fraudulent and results in a chargeback, we’ll pay the entire amount of the chargeback — guaranteed.
If you want the peace of mind that comes with knowing your business is covered no matter what happens, contact a ClearSale analyst today.
