Selling products and services to customers exposes businesses to the risks of refund fraud. With the rapid growth of e-commerce and the adoption of more flexible return policies, companies across various industries are now vulnerable to this threat. In 2023, 13.7% of returns were fraudulent, which equates to losses of $101 billion. Combating this challenge is crucial for businesses that want to safeguard their financial health. Read on to understand the breakdown of refund fraud by industry and discover what you can do to protect your business.
What is refund fraud?
Refund fraud occurs when someone exploits a company’s policies to obtain a refund for an item they intended to keep. Among its many forms, this can involve falsely claiming an item to be defective, or returning an item that’s different from the one purchased. Without taking steps to stop refund fraud, significant financial losses can accumulate over time.
How does refund fraud work?
The refund fraud process typically starts with the person meticulously examining a company’s return and refund policies to identify loopholes that can be exploited. Then they make a purchase and will later attempt to claim a refund under false pretenses.
For example, consider a customer who purchases a new jacket online. It arrives in perfect condition. The customer then repackages an older jacket and sends it back to your business, claiming that their order arrived in a damaged state. If your employees process returns based on policy without conducting additional reviews, they may provide a refund that the scammer does not rightfully deserve.
Both fraudsters and customers use various tactics to profit by stealing items or misrepresenting circumstances. Customers who have their refund request denied frequently dispute charges via chargebacks, ultimately keeping the merchandise and receiving a refund from their bank.
A recent study looked at the various types of return fraud and found that nearly half of businesses reported “wardrobing“, which involves returns of merchandise that appeared to be used but undamaged. Another 37% dealt with returns purchased with stolen payment methods.
Refund Fraud by Industry
Although often considered to only pose a threat to retail businesses, modern return fraud impacts many industries. Let’s take a closer look at the different methods fraudsters and customers use across a range of sectors.
Retail
In retail, scammers have a broad range of strategies at their disposal to abuse return and refund policies. Some fraudsters may create or purchase counterfeit goods that are made to look like more expensive brand-name items and then attempt to return them to the legitimate merchant. In addition to fraudsters returning damaged items, or lesser quality counterfeit versions, some customers may attempt to initiate chargebacks on items they ordered in order to get a refund by claiming it was an unauthorized charge, also known as first-party fraud. With more businesses offering flexible return windows and lowering verification requirements, the barrier to entry for scammers is falling, making it easier to commit return fraud.
Travel and transportation
Various companies in the travel industry provide refund and replacement policies for things like lost luggage or room damage. Customers can make exaggerated or invented claims in order to unfairly benefit from these policies. Another common tactic involves the customer purchasing a membership with a travel company and earning rewards, only to dispute their original membership payment to receive a refund and redeem the rewards points. These fraudulent claims can cost travel industry companies thousands of dollars annually.
Food delivery
Refund fraud occurs at an alarming rate in the food delivery sector. One of the most common ways scammers avoid paying for their meals is by simply waiting for the food to be delivered and then requesting a refund or filing a chargeback claim stating that the transaction was unauthorized, damaged, or didn’t arrive. Other scams include making false claims about the quality of the food or stating that a paid-for item was missing from their order.
Electronics
The electronics industry is also exposed to various refund fraud scams. As with other sectors, customers may purchase a product, use it for a time, and then return it or substitute it with a used item. Another example is “bricking.” Bricking is a scam in which a customer legitimately purchases a working electronic item only to remove all its valuable parts. They then put the device back together and return it without vital parts, requesting a refund. Without careful vetting, many businesses will simply issue a refund upon receiving a non-functional product, and the fraudster can then resell the stolen parts at a profit. It’s also typical for scammers to use fake proofs of purchase or receipts from other stores to get cash refunds on electronic devices.
Subscription services
Some customers will sign up for a free trial with the intention of canceling the subscription before the free trial ends. Despite being fully notified of the time limit, they will continue using the service past the free trial period and then request a refund for the charge. They may also use a service for some amount of time and then claim it didn’t work to get their refund.
Five Ways to Combat Refund Fraud
Refund fraud can have major financial consequences for your business. In just one instance, a scammer was able to steal $300K in high-end products from Amazon by exploiting a return fraud scheme like those discussed above. Fortunately, there are measures you can take to effectively protect your business by detecting and stopping refund abuse before it impacts your bottom line.
- Leverage unified data insights: You need a complete view of your data to help stop these kinds of attacks. Siloed sources of truth can give fraudsters and scammers ample space to slip through the cracks. Combining chargeback data with refund data, payment transactions, and account activity can give you a more holistic view of your customers. You can then use this data to assess your vulnerabilities, build risk profiles, and spot fraudulent patterns.
- Implement automated risk decisioning: Manual reviews are costly, slow, and often inaccurate. Modern businesses require a more advanced solution to their fraud problem. By leveraging machine learning models, automated fraud decisioning engines are capable of rapidly assessing risk with a high degree of accuracy. This enables real-time approval of legitimate returns and refunds while blocking fraudulent attempts based on surfaced signals and insights. You can use Sift Workflows to block unwanted risks, improve your acceptance rate for legitimate refunds, and automate transactions efficiently.
- Apply dynamic friction measures: Adding increased security measures doesn’t have to slow down the customer onboarding experience. Using the right technology, businesses can adopt a strategy of dynamic friction by tailoring authentication requirements to each user’s level of risk. Low-friction experiences can be provided to trusted customers, while higher-risk users will undergo additional verification steps like multi-factor authentication (MFA).
- Monitor for evolving fraud tactics: It’s not enough to focus only on authenticating users and developing mitigation strategies for today’s fraud attacks. Fraud evolves and is already embracing new technologies such as generative AI and deepfakes. It’s essential to continuously track user data and behaviors across channels with transaction monitoring to spot anomalies that could indicate new fraud schemes like wardrobing, cross-retailer abuse, or account takeover.
- Encourage collaboration: In order to effectively fight fraud, organizations also need to encourage collaboration across teams and departments, including fraud prevention, finance, logistics, and customer service. Policies should be well-defined and clearly communicated so that all members understand how to detect and stop refund fraud.
Why Sift is the Best Partner for You to Fight Refund Fraud
To shore up your refund and return management security, you need a partner on your side with the tools and experience to support you. That’s where Sift comes in.
The Sift Platform addresses fraud and abuse across the entire customer journey, empowering you to combat all forms of fraud, from the simple to the sophisticated. With a global data network analyzing over 1 trillion events per year, Sift offers dynamic friction capabilities, automated decisioning, and identity-level insights to secure all user interactions.
Curious about how Sift can help your business? Schedule a personalized demo today.