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Restaurant Tipping Limits and Chargebacks: A Guide for Business Owners

4 Mins read

Tipping is often a customary practice in the restaurant industry and is a way for customers to express their appreciation for exceptional service. They are also commonly used to supplement employee income. In the U.S., adding a tip to a paper receipt where the restaurant manually adjusts the tip after the sale is still common practice in many bars, restaurants and nightclubs.

However, many business owners have been unaware that some credit card issuers impose a cap on tips exceeding 20% gratuity of the total bill, leaving business owners at risk.

For example, a customer may have a $30 bill, and they then leave a $10 tip. The restaurant will pay the server their $10 tip, but then a few weeks later, the owner might get a dispute, likely unknown to the customer, for $4 – because that is over the card issuer’s 20% tip cap, resulting in the merchant losing $4. This relatively unknown problem ultimately leaves many customers and business owners questioning where that money is going and why.

We see it all the time on social media with celebrities leaving extravagant tips, such as a $1,000 gratuity on a $100 meal. One can only imagine the profound impact on the restaurant, witnessing their server receive a life-changing tip, only to discover later that $980 of the tip was embroiled in a dispute with the bank. Despite the customer’s clear intention to leave such a generous gratuity, the bank’s intervention raises questions about the autonomy and validity of tipping practices in the modern age.

As a restaurant owner, staying informed about tipping regulations and managing chargebacks is crucial for ensuring a seamless and profitable operation. By collaborating with a reputable payment processor and implementing effective strategies to mitigate chargebacks, business owners can maintain customer satisfaction, protect their revenue and develop a more positive relationship with their payment processor.

Understanding Tipping Limits

Tipping limits refer to the maximum percentage or amount that can be adjusted after authorization for a credit card transaction. There are a few reasons why credit card issuers may cap tips, including protecting against fraud and avoiding misuse of credit cards. By imposing these limits, they can aim to control excessive fraudulent charges from being added to transactions.

One of the biggest challenges tipping limits present for business owners is the loss in revenue. When a customer leaves a tip over the gratuity limit, it can trigger a chargeback to the customer, which in turn, can create significant financial implications for business owners. The card issuer may not allow disputes, resulting in the business owner losing out on money and being required to pay additional fees and penalties in the process. If frequent chargebacks occur, the business owner can lose money without knowing where it is actually going or if the customer is even receiving it back.

Mitigating Risk and Finding the Best Payment Processor

Collaborating with a reputable payment processor is an important factor for business owners to consider to safeguard their business’s financial stability further. While that may not always be an easy task, choosing a payment processor that offers features tailored to the specific industry vertical could be something to look for to help mitigate chargebacks.

While there are very few actions that business owners can take to combat chargebacks, one practice in particular that can curb the issue is tipping at the time of sale. This occurs when a customer leaves a tip or additional payment directly at the time of a transaction.

In recent years, the practice of tipping at the time of sale has expanded beyond traditional restaurant settings. Many businesses now offer customers the option to provide tips directly at the point of transaction. For restaurants, using this tactic can significantly reduce chargeback risk while also increasing the overall tip amount from customers.

Using a tipping option at the time of sale can raise overall tip amounts due to various psychological and practical factors. The convenience of immediately adding a tip eliminates the need for customers to calculate later, increasing the likelihood of tipping. Social norms also play a role, as having a clear tipping option reinforces the expectation to tip, even if initially unplanned. Default tipping percentages, often preset in POS systems, can sway people to opt for those defaults, leading to higher tips. Peer pressure and visual cues further amplify the tendency to leave larger tips, working in the restaurant’s favor and, more importantly, eliminating potential bank chargebacks.

Implementing tipping at the time of sale can also help merchants validate the quality of service while allowing them to record and track tips through their POS system. It would also eliminate the need for merchants to manually adjust the tip amount, leading to fewer errors, as the customer is in control of selecting the tip amount. Additionally, if there is an error, the customer cannot blame the merchant for adjusting it incorrectly, as they are the ones who made the mistake.

Furthermore, for customers who may not be familiar with what is expected in terms of tipping, the POS device can provide guidance and help ensure that an appropriate tip is left. Using these devices for tipping also ensures that the authorization and settlement amounts are always the same. This prevents chargeback transactions where the settlement amount exceeds the issuing bank’s adjustment limit.

Though point-of-sale tipping isn’t an “end all, be all” solution, it’s important for business owners to maintain detailed records of transactions, including receipts, customer signatures and any communication related to chargebacks. If a merchant ever needs to dispute a chargeback, they can use these materials as evidence during the process.

If a payment processor isn’t regularly communicating with a business to support them by staying updated on industry trends, regulatory changes and best practices for mitigating chargebacks, it may be a good indicator to consider finding a new payment processor to do business with.

Looking ahead

Understanding tipping limits and implementing strategies to mitigate chargebacks is vital for business owners. By working closely with payment processors and establishing transparent communication channels, merchants can better combat and manage chargebacks, build trust with customers and establish their business as a reliable company that values both its customers and its business integrity.

Dustin Magaziner is the CEO of PayBright.

Restaurant tipping stock image by Andrey_Popov/Shutterstock

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