In recent months, the hospitality industry has seen a noticeable increase in credit card chargebacks. Hotels and resorts are facing disruptions in cash flow and an increase in the workload for staff assigned to handle these disputes. To tackle this growing problem, hospitality companies need to implement effective strategies to prevent chargebacks and mitigate financial losses.
What's Behind Hospitality Chargebacks
Chargebacks in the hospitality and travel industries often arise from issues with customer expectations and payment processes. The complexity of hotel charges, which can include multiple incidentals such as meals, minibar purchases, or late check-out fees, often leaves customers questioning their final bill. Guests may not understand how additional charges were applied or may believe they were overcharged, leading to a dispute.
Third-party booking errors also contribute to chargebacks. When reservations are made through online travel agencies or other third-party platforms, discrepancies in booking details—like incorrect room types or uncommunicated policies—can create confusion for both the guest and the property. This can result in a chargeback if the guest feels misled or if they are charged fees, they were unaware of.
Fraudulent transactions also account for a portion of chargebacks. In some cases, stolen credit cards are used to book hotel stays, leading to disputes once the legitimate cardholder discovers the unauthorized charges.
The hospitality industry’s operations are complex, which complicates chargeback management. Businesses often use multiple Merchant IDs (MIDs) for different parts of their business, such as separate ones for hotel rooms, restaurants and spa services. Managing these separate payment streams and reconciling them with third-party booking platforms like OTAs adds another layer of complexity.
Many hospitality companies also lack chargeback analytics tools, making it difficult to identify patterns in chargebacks and understand why they are happening. Without this information, businesses can only guess at what’s driving disputes, which prevents them from addressing root causes.
Employ Simple Fraud Prevention Tools
Fraud prevention is key to minimizing chargebacks, especially when it comes to online transactions. One useful tool is Address Verification Service, which verifies that the billing address provided by the customer matches the address associated with their credit card. This simple step can prevent many low-effort fraud attempts, as fraudsters often use stolen credit card numbers without having access to the cardholder’s address. To reduce friction during checkout, many businesses will ask the customer only for their postal code rather than their full address.
Another effective tool is 3D Secure, which adds an extra layer of security to online transactions. The card issuer is asked to authenticate the transaction, which in most cases can be done automatically. If needed, the issuer can require the cardholder to authenticate their identity, either through a one-time passcode or by clicking a notification from their bank’s app.
When 3D Secure authentication is completed, the liability for fraudulent transactions shifts to the issuer. For many businesses, 3D Secure adds minimal friction to the transaction process while providing significant protection against fraud.
Shift Chargeback Liability with Chip & PIN
One of the most effective ways to reduce the risk of fraud in online transactions is to convert them to In-person transactions whenever possible. For example, hotels can ask the customer to provide a credit card for incidentals during check-in. By processing a Chip & PIN or Chip & Sign transaction instead of relying on online authorization, the hotel reduces potential fraud losses. As with 3D Secure, EMV chip transactions shift the liability for fraud from the business to the card issuer.
Additionally, it is important to post transactions with a valid authorization code. This means that when a guest is charged, the business obtains approval from the card issuer, ensuring that the transaction is valid at the time of the payment. If the final bill exceeds the original authorized amount, such as when a guest incurs additional charges during their stay, a new authorization should be requested. Processing transactions for a higher amount than what was authorized can often lead to chargebacks.
Ensure Policies Are Clear
Clear communication with guests about payment policies and charges can significantly reduce the likelihood of disputes. Many chargebacks stem from confusion or misunderstandings regarding hotel policies, such as cancellation fees or additional charges for services like room service or parking. By providing clear, upfront explanations of fees and booking terms, businesses can help guests understand what they are paying for and prevent them from disputing charges after the fact.
It is also important to maintain thorough documentation. Businesses should keep detailed records of all transactions and any communication with the guest regarding their booking. This includes confirmation emails, terms of service agreements, and any notes from phone conversations. By retaining these records, hotels can provide the necessary evidence to counter a chargeback if it arises. Detailed documentation of guest interactions, including their agreement to pay for specific services, can make a significant difference when defending against a chargeback.
Check OTA Reservations for Errors
Most hospitality companies rely on OTAs to ensure a steady stream of customers. However, the transfer of information between OTAs and hotels is often incomplete due to differing terminology, incompatible systems or a simple lack of communication. When reservations are made through these third-party platforms, mistakes such as double bookings and incorrect room assignments can occur. These issues often result in customer dissatisfaction and disputes.
To prevent chargebacks related to OTA bookings, hospitality businesses should have a process in place to review each reservation and ensure all relevant information has been properly added to local systems. This extra step can help prevent disputes and improve customer satisfaction.
Use Data Analytics to Identify Issues
Data analytics is a powerful tool for identifying the root causes of chargebacks. By analyzing chargeback data, businesses can detect patterns in disputes and pinpoint where issues are likely to arise. For example, analytics can show if certain types of bookings—such as those made through specific OTAs or originating from certain countries—are more prone to chargebacks. This information can help hospitality businesses adjust their policies or practices to mitigate risk. Over time, these insights can lead to fewer chargebacks and more consistent revenue.
Preventing chargebacks requires more than a one-size-fits-all solution. Each business must continuously evaluate its processes, security measures, and customer interactions to minimize the risk of disputes. Maintaining a focus on proactive chargeback management can help ensure long-term financial stability and operational efficiency, protecting both the business and its customers from the complications of payment disputes.
Tim Tynan serves is the CEO of Chargeback Gurus. Previously, he served as the CEO of Bank of America Merchant Services, one of the largest payments and fintech organizations in the U.S. Download the CBG Travel and Hospitality Industry Report here.