Lenient returns policies, generous promo code offerings and flexible reseller options have long been key to perpetuating successful growth in ecommerce.
But while these good-faith policies have largely helped merchants attract and retain customers in a tough economic environment, widespread reports of their fraudulent misuse are creating a costly problem for brands worldwide.
Part of the issue is that while the risks of payment fraud are well known – with almost all online retailers having developed strategies to curb it – policy abuse is a more complex and challenging risk that is only starting to get the attention it requires.
Many companies still lack the right systems and processes to identify first-party abuse, let alone track it. And when brands do take action, they must strike a delicate balance between cracking down on bad actors and potentially alienating valued customers. Often it feels easier to absorb probable losses than take a stand. But with a quarter of all ecommerce revenue going toward paying for promotions, refunds and returns, retailers are under pressure to act.
According to a WBR Insights survey of more than 300 merchants globally commissioned by Riskified, nine in 10 of those who took part claimed to have experienced significant costs related to the abuse of refund or returns policies. Meanwhile, retail policy abuse now costs the global ecommerce industry some $100bn (£80.4bn) every year.
So, what should retailers do to get a grip on the issue? And could artificial intelligence and automation be the answer to keeping chancers at bay?
Blanket policies are short-term fixes only
Joe Gelman is a policy abuse expert at Riskified, a company that works with blue-chip retailers around the globe to tackle online fraud. He says one of the reasons that policy abuse is so tough to take on is that the perpetrator typically uses a legitimate interaction as a cover for their misdoings.
“It’s tough to tell who the fraudster is, let alone go after them, and the retailer usually struggles to recoup their money,” he says. “In that sense, it is much easier to be the adversary.” The major challenge for ecommerce businesses, he says, is to identify customers who have set up dummy accounts or exploited weaknesses at different points in the transaction process.
But even when serious repeat offenders are caught, replicating that process at scale is challenging as most companies still rely on manual processes. Deploying more manpower to do the job might seem like the right idea, but Gelman warns this may be costly and offer a limited return on investment.
In any case, tips and tools that facilitate policy abuse proliferate on the dark web, enabling fraudsters to stay one step ahead of retailers.
Some ecommerce businesses have resorted to adopting blanket policies that offer short-term relief but degrade the customer experience, which may cost them more in the long run. Take, for example, the growing list of high street retailers that have begun charging customers for online refunds. Other brands have chosen not to act, viewing policy abuse as an unavoidable cost of doing business – although this only emboldens those who benefit from this type of fraud.
“The vast majority of ecommerce companies still view benefits such as free refunds and generous promotions as key to building market share,” says Gelman. “Scrapping these perks simply won’t work in today’s competitive retail landscape, so retailers must find effective strategies to deal with the problem.”
How fraudsters bend the rules for material gain
There are four main types of retail policy abuse, one of the most common being returns abuse. That’s when someone buys a product with the intention of returning it. Some 33% of merchants say they have suffered significant costs as a result, according to the research.
Retail’s big four
Customers that test the limits of policies are likely to do so in one of four ways.
Another form of policy abuse is the “items not received” ploy, which has led to significant costs for 56% of retailers. As the name suggests, this is when a customer falsely claims that an item or parcel is missing, when in fact it’s not, and asks to be refunded.
Misuse of promo codes and loyalty programmes is becoming increasingly common, often in the form of a single shopper setting up multiple loyalty accounts to obtain more than their fair share of points and rewards. Then there is reseller abuse, which is picking up traction relatively indiscriminately across industries, from fashion and technology to event ticketing.
In instances where products are stolen or can’t be resold, firms are directly impacted. Including expenses related to shipping and restocking, most retailers recoup less than 50% of their losses. This dynamic creates frustrating push-pull for retailers trying to protect their profits.
“Of course, there can be strategic costs too,” says Gelman. “With reseller abuse, say, someone may buy up limited edition products in bulk and resell them at a profit, which isn’t technically illegal but can ruin an expensive marketing campaign, jeopardise a retailer’s relationships with brands and suppliers, and keep these sought-after items out of the hands of legitimate customers.”
Inflation and bad customer experience prompt cheating
The cost-of-living crisis has seemingly added fuel to the policy abuse fire, along with other retail crimes such as shoplifting and aggression towards shop workers. Riskified reports that some 40% of merchants said cases of reseller abuse had increased because of rising inflation.
Perhaps unsurprisingly, the start of holiday periods such as Christmas and New Year, when disposable incomes are stretched, can also spark a spike in policy abuse, with 38% of online retailers saying they had noticed the trend. At the same time, 28% said returns abuse was often linked during the holidays to a previous bad customer experience.
Given these findings, ecommerce businesses might be tempted to ditch free refunds or generous promotional campaigns. But with nine in 10 saying that such benefits are vital to bolster sales and remain competitive, that simply isn’t an option.
Instead, retailers must make strategic changes and adopt smarter safeguards against fraud. A good place to start is by fine-tuning customer experiences.
“In a challenging retail environment, merchants may jump at the chance to reduce costs related to the customer experience, cutting staff or halting investments in customer experience initiatives,” Gelman says. “But this approach is likely to backfire and hurt business in the long run.”
Ecommerce firms also need to check that existing processes and approaches to tackling policy abuse are fit for purpose. Focusing on quick wins can provide a baseline of confidence, starting with reviewing customer terms and conditions to identify and close latent loopholes.
Everyone within the organisation needs to be aligned in identifying and addressing policy exploitation, and companies are walking the talk to some degree. The research shows 77% of respondents think the challenges of policy abuse are understood “somewhat well” by other parts of their organisation. Still, only 19% say they are understood “very well”.
“There has long been a vocabulary problem around policy abuse, with departments viewing the issue in siloes and not communicating,” Gelman says. “In marketing it’s called ‘marketing loss’; in sales it might be ‘fake products’, but it needs to be coordinated and seen as one problem.”
Naturally, team members who aren’t aware of specific policies or abuse trends may be less likely to identify and report them. By that logic, cross-departmental alignment helps ensure consistency in how policies are enforced and how violations are addressed, from sales and marketing to finance and logistics.
How AI can identify policy abusers
In many ways, policy abuse is fraud’s enigmatic cousin, sitting precariously on the line between immoral and illegal. Part of what makes first-party abuse such a thorny topic is how hard of a time businesses have identifying it. As it stands, the majority of retailers are only moderately satisfied with their ability to collect the rich customer data they need to detect abuse, including past purchases, returns histories, or when a customer holds multiple accounts. And only 16% say they are “very satisfied”.
But developments in AI and automation could be fundamental to levelling the score.
Rather than relying on cumbersome manual processes, better data intelligence could give retailers the enhanced identification processes they need to expose policy abusers at scale. But almost two-thirds of merchants don’t have automated systems to accurately analyse the broader patterns of behaviour behind an interaction and then address fraud and abuse in real-time. “This technology deficit creates multiple challenges, including gaps in interdepartmental cooperation on fraud and abuse as well as the need to rely on outdated processes to resolve individual instances of abuse,” Gelman explains.
Although striking the balance between giving customers an inch and maintaining the mile is likely to be an ongoing challenge in the ecommerce space, it can be achieved with the right strategy and technology. “Taking the complexity out of fighting policy abuse is key,” says Gelman. “That way, retailers can continue to offer exceptional customer experiences and rewarding promotions, reduce their losses, and retain their competitive edge.”
Click here for Riskified’s Global Benchmarks 2023 to read the findings in full.