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Refund Fraud

What is Refund Fraud? How Can I Protect My Business Against This $27 BILLION Threat?

Revenue loss due to refunds and product returns is an unavoidable part of operating in the retail space. To add insult to injury, though, a shocking percentage of the refund requests sent your way by customers will be cases of refund fraud.

According to a report from Appriss Retail, total merchandise returns accounted for $309 billion in lost sales for retailers in the US alone in 2019. $41 billion of that total came from online returns specifically.

It’s estimated that roughly 9% of total losses—$27 billion, to be exact—were the result of refund abuse. This is a 76% increase over the previous year. In other words, for every $10 in refund request you receive, roughly $1 will be a fraudulent request.

What is Refund Fraud? How Does it Work?

Refund Fraud

[noun]rɪ • fʌnd • frɔd

Refund fraud sometimes referred to as refund theft or a “whitehouse scam,” involves abusing a merchant’s policies to returning goods that are ineligible for the refund to a retailer in exchange for money or other goods.

Refund fraud covers a broad range of possible scenarios. It can refer to any situation in which a bad actor exploits standard logistics, fulfillment, and customer service practices to get a refund without a valid reason.

This refund theft could be organized retail crime (ORC), or just a one-off act by an otherwise-legitimate customer. The goods in question might have been stolen, marked as final sale, or tampered with in some way that would make them ineligible for return. To illustrate, imagine that a customer has two items from the same store. The buyer might swap the price tag on the items to get a refund if one item is eligible for returns but the other is not, or if they can get a much larger refund value for one item compared to the other.

Given how much retailers lose every year to refund abuse, you’d think that stopping these attacks would be a top priority. However, customers often get away with refund fraud for a few reasons:

It’s difficult to identify

It’s difficult to identify

A customer can use any number of excuses to claim a return, and you have no way of verifying if they’re telling the truth.

You don’t want to alienate customers

You don’t want to alienate customers

Your reputation is one of your most important—and sensitive—assets. Angering customers can lead to reputational damage.

It could be worse

It could be worse

If a buyer is committed to getting their money back, they won’t take “no” for an answer. They might file a friendly fraud chargeback if they don’t get their way.

Common Refund Fraud Tactics in the eCommerce Space

We want to be clear here: refund fraud is a problem for both physical and eCommerce retailers. But, since it’s a particularly fast-growing threat in card-not-present channels, let’s focus our attention on eCommerce refund fraud for now.

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There are a lot of different ways that a criminal—or even just a regular customer who doesn’t know any better—can take advantage of your operations to get a fraudulent refund. For instance, a buyer may:

  • Claim that a package never arrived, or that it was swiped by a porch pirate.
  • Insist that the goods weren’t packed properly; maybe they say that the box was empty when it arrived, or that some of the goods were missing.
  • Purchase an item with the intent to use it once or twice, then return it later for a refund.
  • Alter, switch, or otherwise manipulate the price tag on an item to secure a bigger refund.

Refund fraudsters can employ more sophisticated tactics, too. One fast-growing problem is the use of decoy tracking IDs; the fraudster buys a high-ticket-value item, then requests a return, and prints the return shipping label provided. They then attach the label to a piece of junk mail that goes to your mailbox, where it is typically discarded. The buyer can point to the delivery tracking as proof that the merchandise was returned, and that they’re entitled to a refund.

Gift card abuse is another sophisticated tactic by which a fraudster uses a stolen gift card balance to make purchases that can be converted to cash through a refund. And, believe it or not, there’s even a growing market for “refund as a service” scammers: a buyer may work with a professional who knows how to manipulate customer service channels…and who can secure merchandise returns on the buyer’s behalf in exchange for a cut of the profits.

How to Eliminate Refund Fraud Threats

Refund fraud has a lot in common with other difficult-to-address threat sources, such as friendly fraud or affiliate fraud. Like all those other threats to your bottom line, the biggest misconception is that there’s nothing you can really do to stop it. The first step to stop refund abuse is learning how to separate the repeat offenders—the real bad actors who happily abuse your return policies—from your loyal customers.

You can try identifying goods based on unique serial numbers (if applicable), or issuing conditional credits that can only be used on certain items in the same product category as the goods returned. We also recommend flagging customers who submit an abnormally-high number of refund requests within a predetermined period and subjecting these requests to additional scrutiny.

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Tools like AI and machine learning are important assets to analyze customer behavior. These tools let you analyze data in real-time for more informed decisions about returns. Plus, as they generate more data, decisions can be more precise and accurate over time. Other important practices to keep in mind include:

#1. Crafting Reasonable, Realistic Policies

No two purchases are ever the same, which means no two returns are exactly alike, either. You’ll need to develop and implement policies that are clear, yet adaptable to a wide range of potential scenarios and special circumstances including the product category, location, currency, or other conditions.

Expectations should be clearly outlined for the customers. Also, be sure to explain any exceptions that could come up, like nonreturnable and final-sale items.

#2. Make Your Policies Easy to Interpret

More than two-thirds of shoppers will read your return policy before completing a purchase. But, if your customers either can’t find those rules or are unable to understand them, they might as well not exist. You need to spell out:
  • Time limits for returns.
  • Any requests or authorizations must be submitted.
  • Any product-specific information to include (serial numbers, SKU, etc.).
  • Who pays for return shipping.
  • How to return shipping should be conducted.

Also, make these policies easy to find from any page on your site.

#3. Be Flexible

Showing that you can be flexible with customers is a great way to build positive feelings toward your business, collect brand equity, and ensure long-term customer loyalty. This will pay off in the long run by encouraging legitimate customers to keep coming back.

Remember: convenience is one of the top reasons why customers commit friendly fraud. That means if you make your return policy as customer-friendly as possible, you take away a primary incentive to commit friendly fraud. At the same time, you’ll be retraining customer expectations to deter future refund fraud attempts.

#4. Transform Returns into New Opportunities

If leveraged properly, a return may be an opportunity to create new sales and build customer relationships. For example, you can give customers the option to trade a returned item for 10% more than its value in-store credit.

If the customer opts for the store credit, they will probably end up spending more than the credit’s value. The customer walks away satisfied, while you increase your sales rather than losing money to refunds or abuse.

Refund fraud is a serious challenge for you as an online retailer. But, with the right strategies in place, you can eliminate losses and even grow your sales as a result.


FAQs

Q: What is refund fraud and how does it work?

A: Refund fraud, sometimes referred to as refund theft or a “whitehouse scam,” involves abusing a merchant’s policies to return goods that are ineligible for refund in exchange for money or other goods.

Q: Is refund fraud illegal?

A: Statutes vary from one jurisdiction to another; in California, for instance, refund fraud is charged as petty theft under California Penal Code Section 484(a). Similar statutes will outline potential penalties in other localities, states, and countries.

Q: Can I issue a refund to avoid chargeback fraud?

A: Yes. Refunding your buyer can allow you to avoid a more-costly chargeback. Check out our article about chargeback alerts to learn more about this practice.

Q: Can simple policy changes prevent return abuse?

A: Yes. By making your return policies more customer-friendly, and ensuring those policies are easy to find from every page on your site, you can keep refund abuse to a minimum.

Have other refund theft questions? Want to learn more about how refund abuse overlaps with chargebacks and other loss sources? Click below and learn more today.


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