Lead Stories

Fighting Fraud Through Technology

Solving Bad Debt In The Back Half Of 2021 Is Key For Hotel Profitability

By Larry and Adam Mogelonsky | June 25, 2021

While the clear winner for ‘good problems to have’ during the post-pandemic travel recovery is staffing up in anticipation of having of huge week-over-week occupancy increases, there’s another troubling issue lurking in the midst. Hotels are being abused with an inordinate bump in friendly fraud cases and last-minute cancellations, leading to a swell in chargeback disputes and subsequent ‘bad debt’ or ‘negative revenues’ that can be tens of thousands on a P&L.

So, deal with your staffing issues. Then make reducing chargeback losses a key objective for the remainder of the calendar year.

First ask, why now? Why are chargebacks coming to a head in Q2 2021? As with everything this year, the pandemic is the culprit. It re-engineered our operations and our customers’ brains to favor card-not-present (CNP) transactions over in-person credit card verification. While most guests remain honest, there are those who have taken advantage of the ‘loophole’ where processors like Visa or Mastercard are predisposed to favor the cardholder over the merchant in a dispute.

As a catch-all 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 strain akin to the Delta 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.

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. However, 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 straight-forward problem to solve and one that should be addressed before the deluge of guests reaches your doors.

Larry and Adam Mogelonsky

Together, Adam and Larry Mogelonsky represent one of the world’s most published writing teams in hospitality, with over a decade’s worth of material online. As the partners of Hotel Mogel Consulting Ltd., a Toronto-based consulting practice, Larry focuses on asset management, sales and operations while Adam specializes in hotel technology and marketing. Their experience encompasses properties around the world, both branded and independent, and ranging from luxury and boutique to select-service. Their work includes seven books: “In Vino Veritas: A Guide for Hoteliers and Restaurateurs to Sell More Wine” (2022), “More Hotel Mogel” (2020), “The Hotel Mogel” (2018), “The Llama is Inn” (2017), “Hotel Llama” (2015), “Llamas Rule” (2013) and “Are You an Ostrich or a Llama?” (2012). You can reach them at adam@hotelmogel.com to discuss hotel business challenges or to book speaking engagements.

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