Every dollar counts in the new normal.

That’s because, even with all the cuts made during the pandemic, the costs of ramping operations back up with all the new safety requirements — while also servicing debt — are making hotels an increasingly difficult business to keep out of the red. Driving occupancy and maximizing total revenue per guest are the two top objectives we look at for properties nowadays, but there’s a hidden profit killer that you must also consider – charge-back disputes.

If you need to, you can look up the definition for this term and learn the nitty gritty of credit card payment processing on your time. What’s critical to grasp is that COVID-19 has acted as a catalyst for hotels by forcing nearly all guest transactions through electronic or other card-not-present (CNP) channels. As a catchall term, CNP denotes every instance where the customer is not physically present 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 charge-back disputes. While undoubtedly some charge-backs 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 and then used 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.

If the quandaries of online food delivery apps during the lockdowns of 2020 can signal anything for the forthcoming travel recovery, it’s that we are about to be hit by a surge of friendly fraud charge-back 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 — or ‘representment’ in credit card processing vernacular;
• special fees for charge-backs 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; and
• adoption of a far-too-lenient cancellation policy to avoid these charge-backs, which guests then take advantage of by booking and canceling at the last minute.

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 COVID-19 variant in the fourth quarter of 2021 or in 2022 that the vaccines don’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.

While 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, by deploying the right software to bolster the cybersecurity of your guests’ credit card data, you stand a good chance at minimizing charge-backs so that you aren’t hemorrhaging costs and can retain profitability as fast as possible. It’s a straightforward problem to solve and one that should be addressed before the deluge of guests reaches your doors.

Larry and Adam Mogelonsky are partners of Hotel Mogel Consulting Limited, a Toronto-based consulting practice. Larry focuses on asset management, sales and operations while Adam specializes in hotel technology and marketing.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.