Delivery App Fraud: The New Dine-and-Dash Hurting Restaurants

The pandemic has been great for order volumes on third-party delivery apps like Uber Eats and Grubhub, but those apps have also introduced new opportunities for scamming that are taking a toll on restaurants. 

The Los Angeles Times recently reported the story of Spoon by H, a Los Angeles Korean restaurant that had to close after repeated instances of fraud on third-party delivery apps. According to the restaurant’s owner, Yoonjin Hwang, customers repeatedly reported food items as fraudulently ordered or not delivered and demanded their money back. Hwang took to photographing orders and keeping records, but she said no matter how much evidence she provided Tock, the third-party delivery app her restaurant used, the app never ruled in her favor. 

“We lost orders, time, precious ingredients, and the problems accumulated to the point where we just couldn’t stay in business anymore,” she told the LA Times. “We’re losing money to these issues, despite all the evidence we provide.”

In one instance, Hwang recalled helping a man load a $700 order into his car only to have the cardholder deny ever placing the order. Despite Hwang’s appeals, that order was refunded by the app, and she was out on the food costs, labor and sale. 

Tock, and other apps like it, advertise themselves as supporting local restaurants, but restaurants are increasingly pushing back on these claims. 

‘Friendly Fraud’ Impacts Restaurants

The report on Hwang comes as online orders have surged during the pandemic, with third-party delivery apps facilitating most of the boom. 

According to Payments Source, these instances of “friendly fraud,” or customers disputing a legitimate transaction, have grown on the apps, where the third party complicates the transaction and can confuse customers. 

More transactions lead to more claims, overwhelming call centers and creating backlogs. In addition to pandemic-related trends, transactions have become more abstract due to the rise of digital and in-app payment platforms. These options send transaction data through an additional party, putting an extra layer between the cardholder and the merchant. This can lead to confusion as customers review their statements, often resulting in friendly fraud (when a purchaser disputes a legitimate charge). Shoppers may not recognize a transaction that’s been bundled by an alternate digital storefront or realize a family member has used their card.

Third-party delivery apps enjoyed tremendous sales growth during the pandemic, but many have yet to become profitable. Over that same time period, 110,000 restaurants, or 17% of the industry, have closed down.