Fighting the soaring cost of policy abuse in ecommerce

Online shoppers demand generous policies on issues such as returns, but these facilitate mounting abuse and fraud. Merchants need to act
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With online retailing becoming ever more competitive, merchants have changed their policies in areas such as returns and refunds to become more shopper-friendly. These drive customer growth and retention – but are also fueling mounting abuse.

Some abuse is from genuine consumers engaged in so-called “light fraud”, such as returning clothing after wearing it once, known as “wardrobing”, or creating a new email to benefit from a referral bonus.

But online retailers are also increasingly targeted by career fraudsters and criminal gangs who may perpetuate abuse on a much larger scale, lodging bogus item-not-received (INR) claims on multiple expensive items or shipping empty boxes back for a refund.

Resellers may also capitalise. They use multiple accounts to scoop up the supply of limited-availability items or abuse discount codes to flip high-demand goods for a profit. This damages customer experience and leaves a retailer potentially competing with its own discounted stock.

The problem is made more acute by opportunistic customers and fraudsters networking online, swapping intelligence on tactics and easy targets. They may identify retailers that, for instance, are not effectively reconciling returns with card chargebacks, making it easy to receive two refunds for one returned item, known as “double dipping”.

Joe Gelman, a product marketing manager at Riskified, a leader in ecommerce fraud and risk intelligence, comments: “The inventiveness is endless.”

This inventiveness is reflected in the data. The National Retail Foundation projected that in 2022 some $22.8bn would be lost to fraudulent online returns in the US alone.

A survey by Riskified in November found that 45% of online shoppers admitted some kind of return fraud or policy abuse. Many rationalise their behaviour: 27% said they only do it with large retailers, and 14% felt “owed” because of a poor customer experience.

The only way to really deal with policy abuse is to get to the root of the problem

As well as the immense financial cost, policy abuse causes many other problems, such as skewing key performance indicators. For example, a trial promotion may appear to have brought 1,000 new customers, but in reality it may be a tight ring of resellers using multiple one-time accounts. Based on the apparent success, a merchant could launch a new promotion-based strategy that compounds their losses.

There is also the wasted time and expense of handling and investigating claims and cases, plus the risk that a good customer may accidentally be categorised as an abuser. This could cost the retailer not only that customer but likely their friends and family too.

However, retailers cannot simply rewind to the more restrictive policies of a decade ago. A study by Appinio in 2022 found that 80% of UK online shoppers regard free returns – a policy that facilitates wardrobing – as very important. In Germany, 72% of online shoppers said free returns were very important, much higher than, say, the 38% who cited next-day delivery.

The largest ecommerce giants have reset customer expectations at an elevated level, raising competitive pressure on all other online vendors. Although some high-profile clothing retailers have introduced more restrictive returns policies, for most merchants a package of no-quibble refunds, free or discounted returns, and promotional codes are essential elements of their offering.

The problem for merchants is that consumers and fraudsters can both evade detection by setting up multiple accounts. Most shoppers have a wallet or purse full of credit cards and can set up a new email in minutes; this makes creating multiple accounts straightforward and means merchants struggle, for instance, to prevent consumers from enjoying repeated introductory discounts.

Basic checks are even less effective against resellers and professional fraudsters, who may also use proxy servers or other techniques to ensure their army of accounts have different IP addresses. They may use other methods to hide their tracks, such as changing keyboard or language settings between creating accounts.

Gelman says: “The only way to really deal with policy abuse is to get to the root of the problem. And that’s figuring out where all of these patterns are originating from and going back to the source.”

Riskified’s Policy Protect implements this to put the merchant back in control. Gelman explains that the platform runs through every account, determining all possible connected pairs, then mapping out how each of these pairs overlap and interconnect. A further process deploys proprietary machine learning to identify clusters of accounts that are, in reality, controlled by a single source. This immense data-processing exercise uses not only the merchant’s data but the vast pool on the Riskified platform (processed in accordance with all relevant legislation).

Once the platform has identified the real patterns behind multiple accounts, the merchant can start making informed decisions through an automated dashboard. For instance, it can ensure one-time codes are used once per customer, reducing promotional costs. At the other end of the scale, it helps merchants identify the patterns of item-not-received and empty-box returns that are characteristic of systematic abusers, patterns that may be much harder to spot at the level of individual accounts.

Gelman says that most online retailers will, at present, have no idea of their losses from the various forms of abuse and fraud until they have this level of visibility. For instance, a UK activewear brand which worked with Riskified discovered that 15% of all returns were abusive.

More generally, some merchants have been able to detect 95% of resellers and reduce promotional costs by up to 70% by thwarting misuse of coupons and codes, while still offering them to genuine customers.

Gelman says online merchants must act now to escape their difficult position. “There is a real urgency and pain on policy abuse,” he says. “Merchants are watching their margins and struggling to compete. But they can’t pull back these policies because consumers demand them.”

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