# Protecting Your Hotel Business From Chargebacks > Hotel chargebacks drain billions from hospitality each year. Learn the four reason-code types and how to reduce disputes, friendly fraud, and ATO. TL;DR Hotels lose revenue to chargebacks through criminal card fraud, account takeover of loyalty programs, and friendly fraud, where customers dispute legitimate charges. The Association of Certified Fraud Examiners estimated that 5% to 6% of the hospitality industry's roughly US$3 trillion in annual revenue is lost to fraud, about $150 billion. Hotels cannot eliminate every chargeback, but they can cut the frequency and damage by recognizing the four reason-code categories (criminal fraud, consumer disputes, authorization issues, and processing errors) and the hospitality-specific scenarios behind them. **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](https://www.autohost.ai/fraud-trends-in-the-hospitality-industry-and-how-to-combat-them/) in direct loss of revenue. [Forbes](https://www.forbes.com/sites/forbestechcouncil/2023/05/10/how-to-protect-the-hospitality-industry-from-the-growing-fraud-threat/?sh=6a9c31447c7d) 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](https://www.todayshotelier.com/2019/07/31/the-hospitality-industry-faces-significant-risks-from-card-fraudstersbut-theres-hope/) 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](https://hospitalitytech.com/3-steps-protect-your-hotels-loyalty-program-ato-attacks-and-online-fraud) 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](https://hospitalitytech.com/hotel-loyalty-program-fraud-rapidly-growing-trend-among-identity-thieves) 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](/blog/understanding-credit-card-chargeback-reason-codes). 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](/blog/visas-friendly-fraud-rule-what-you-need-to-know).” 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](https://www.verifi.com/wp-content/uploads/2023/03/2023-Verifi-Payments-Fraud-Report.pdf), ranking this the second most widespread type of fraud. Friendly fraud now accounts for up to 75% of all [chargebacks](https://usa.visa.com/visa-everywhere/blog/bdp/2022/06/15/what-every-merchant-1655330664445.html). 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](https://www.businesswire.com/news/home/20220714005031/en/Merchants-Report-Increase-in-Chargebacks-but-Little-Success-in-Combatting-Them-According-to-the-2022-Chargebacks911-Field-Report) 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](https://www.withum.com/resources/2022-acfe-report-to-the-nations-fraud-trends-and-key-takeaways) 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](https://www.clear.sale/fraud-protection/guaranteed-chargeback-insurance) — 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](https://www2.clear.sale/contact)**.** **** ## Frequently Asked Questions ### How much does fraud cost the hospitality industry each year? The hospitality industry generates an estimated US$3 trillion in revenue per year, and the Association of Certified Fraud Examiners estimated in 2022 that 5% to 6% of that annual revenue is lost to fraud. That works out to about $150 billion in direct revenue loss. ### What is account takeover (ATO) fraud in hotels? Account takeover fraud happens when a fraudster gains access to a digital account, and in hotels, reward and loyalty program accounts are a specific target. Once inside, fraudsters can reach saved credit cards and customer data, change account details, and carry out unauthorized transactions. Lexis Nexis reported a 239% year-over-year increase in automated bot attacks on travel and hospitality from 2022 to 2023, concentrated on loyalty programs. ### What are the four categories of chargeback reason codes? Every credit card issuer uses its own reason codes, but they fall into four categories: criminal fraud, consumer disputes, authorization issues, and processing errors. Criminal fraud and consumer disputes involve the cardholder questioning a charge, while authorization issues and processing errors stem from how the business handled the transaction. ### What is friendly fraud and why is it hard to stop? Friendly fraud, also called first-party misuse, is when a customer files a chargeback on a legitimate transaction, whether by honest mistake or with the intent to get a refund they are not owed. It is hard to prevent because businesses cannot easily tell an honest claim from a dishonest one, and either way the result is lost revenue and a higher chargeback ratio. Friendly fraud affects over one-third of merchants globally and now accounts for up to 75% of all chargebacks. ### How do loyalty programs become a target for hotel fraud? Criminals often buy stolen credit card information in bulk and use it to purchase multiple hotel stays, which accrue large amounts of loyalty points. They redeem those points before the fraud is discovered, and once the real cardholder spots the unauthorized charges, they file a chargeback. The hotel is left absorbing the loss. ### What are common chargeback scenarios specific to hotels? Hotels frequently see failure-to-cancel disputes, where a guest skips the cancellation policy but feels they should not pay for a room they did not use, and claims of an unsatisfactory experience. Processing errors are also common, such as a charge processed more than once, a canceled reservation that is never refunded, or a billed amount that differs from what the guest agreed to. --- Source: [https://www.clear.sale/blog/protecting-your-hotel-business-from-chargebacks](https://www.clear.sale/blog/protecting-your-hotel-business-from-chargebacks)