‘Policy Abuse?’ It’s Just Fraud by a Different Name

If there’s a way to make a few bucks on the side, pull a fast one, or game the system, you know there’s always someone prepared to try their luck. Even when retailers offer generous money-off promos or discounts, there’s always someone who wants more.

So called "policy abuse" — i.e., when a retailer’s refund and returns policy is exploited for gain — may be seen by some as something benign carried out by genuine customers who may have stumbled across a loophole. However, it’s also popular among career criminals on the look-out for their next scam.

Either way, the cost to businesses is eye-watering.

Policy Abuse is Fraud! It Shouldn't Be Dismissed as Just Another ‘Cost of Doing Business’

According to research published last year by the National Retail Federation (NRF), total returns accounted for more than $400 billion in lost sales for U.S. retailers in 2020. The research found that almost 18 percent of all online retail sales were returned in 2020, and of those, around 8 percent were fraudulent. One retailer told us recently that “refund abuse is the most expensive ‘fraud’ that we have.”

'When is a Sale Not a Sale? When it’s Refund Fraud!'

It goes without saying, genuine refunds are part and parcel of the retail process. Fair and proper refund policies are the hallmark of trusted retailers helping to build brand loyalty; counterfeit sales that generate fraudulent returns are not.

The costs involved in terms of shipping, low product resale values, and damaged reputation can stack up and make a sizeable dent in profits. And if promo abuse bots are wiping out your discounted stock to be sold elsewhere, it’s possible your genuine, loyal customers could miss out.

Related story: How to Tackle Fraudulent Returns

The Environmental Argument for Clamping Down on Dodgy Refunds

Business leaders might think that tackling promo and refund abuse means increasing friction and risking customer churn. But there's also a powerful environmental argument to be made. Some estimates suggest that 17 billion items are returned every year globally, accounting for around 4.7 million metric tons of CO2 emissions annually. Worse, around a quarter of returned items end up in landfill. Unnecessary and fraudulent returns aren’t just bad for business, they’re bad for the environment, too.

There's a Difference Between Good Customers and the Not-so-Good

Generous promos and easy refunds are essential tools for any marketers looking to increase sales. However, if a customer only places an order when there’s a discount, do you really want to hold onto them? It’s possible you may be attracting the wrong type of customer. Instead, forward-thinking marketing departments are using personalized messaging, targeted coupons, and other techniques to build relationships.

Refund Fraud — Do the Math

If you’re still in any doubt, look at your own refund figures and see how they stack up against industry averages. Work out the financial impact of cutting this type of fraud — even by a few percent — to see what impact it could make to your bottom line.

If you come to the realization that this is an issue that needs to be addressed in your business, then think about employing a bespoke fraud detection model created specifically for identifying promo and refund abuse.

Using link analysis, you can quickly spot multi-accounting customers, sign-up bonus abusers and referral farmers, and deal with them differently depending on the level of threat. You can block prolific fraudsters and temporarily increase friction for policy abusers that are otherwise good customers. In other words, by treating policy abuse seriously, you can weed out bad customers, cut costs, and enhance the customer experience for genuine shoppers.

Mairtin O’Riada is the co-founder and CIO of Ravelin, a company that provides sophisticated technology and dedicated support to help retailers prevent evolving fraud threats.