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.
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 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 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:
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.
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:
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.
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.
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:
Within those broader categories, certain chargeback scenarios are common in the hospitality industry:
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.
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.
A fraudster may make a reservation simply to test the validity of a stolen credit card before making fraudulent purchases elsewhere.
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.
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.
If a guest feels they’ve been overcharged for a stay based on a previously agreed-to rate, they may seek a refund.
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.
Whether a chargeback is due to friendly or chargeback fraud, the result is the same: Hotels are on the hook for:
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.
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:
Internal controls can shield employee and customer accounts from account takeover attempts that lead to chargebacks:
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.