How to Prevent Policy Abuse

Digital commerce has seen incredible growth in recent years, with online purchases accounting for 20.8% of all retail purchases in 2023; more than double the expansion just 5 years ago. This increase led to new opportunities for businesses to scale, but created just as many opportunities for fraudsters to exploit lapses in online security. 

Online businesses, whether e-commerce or subscription based services, need to safeguard themselves against online retail fraud, specifically when it comes to things like policy abuse, which caused nearly $400 billion in losses just from abusive returns, refunds, and exchanges in 2024.

What is Policy Abuse?

Policy abuse is the practice of manipulating store policies for personal and financial gain. A fraudster who practices policy abuse targets businesses focused on customer-first experiences, in order to take advantage of vulnerabilities in the user journey for money, money movement, and merchandise. When merchants avoid adding security measures to reduce friction to better suit their customers, it often opens the business up to payment fraud and account takeover (ATO). 

Policy abusers prey on many different types of store policies. The most popular involve policies such as:

• Returns and refunds
• Free shipping
• Free cancellation
• Price matching

Policy Abuse vs. Promo Abuse

While both promo abuse and policy abuse involve actions that breach established rules set by a business, there are several important differences to understand. Policy abuse entails the exploitation of established rules, regulations, or guidelines set by the e-commerce platform or retailer for personal gain or advantage. Conversely, promo abuse involves the deceptive or unfair exploitation of promotional offers, discounts, coupons, or other marketing incentives provided by the e-commerce platform or retailer. 

This may involve actions such as leveraging multiple accounts to redeem the same promotional offer repeatedly, creating fake accounts for accessing new customer discounts multiple times, sharing promo codes intended for specific customer segments with ineligible individuals, or using automated scripts to generate and redeem promo codes in bulk. Both forms of abuse undermine the integrity of the e-commerce ecosystem, potentially impacting customer trust, profitability, and overall business operations.

How Policy Abuse Is Different from Payment Fraud

Policy abuse happens when legitimate customers exploit company rules or systems for personal gain. This can include excessive returns, repeated use of discounts, or creating multiple accounts to take advantage of promotions.

Payment fraud, on the other hand, occurs when bad actors steal or misuse payment information to complete unauthorized transactions. It is often easier to identify because it involves clear signs of theft, such as mismatched identities or unusual transaction patterns.

The distinction matters because traditional fraud systems are designed to detect direct payment fraud, not subtle forms of abuse that appear as normal behavior. Without visibility into behavioral patterns, businesses may miss these signals entirely, allowing losses to grow quietly over time.

Common Types of Policy Abuse for Internet and Software Businesses

Internet and software businesses are the first to experience this kind of fraud. Digital businesses need to stay vigilant in preventing fraud. This means understanding and anticipating several types of policy abuse. Here are some popular forms of policy abuse that online and omni-channel retailers should be on the lookout for.

1. Account Sharing: Disclosing login information or credentials involves users sharing their account credentials with others. While many consumers think this is harmless, this practice undermines user privacy and security protocols. It poses risks to both the platform and its users by enabling unauthorized access to personal information, payment details, and potentially fraudulent transactions. Account sharing also causes massive financial losses. Streaming services, for example, lose about $2.3 billion annually to account sharing.
2. Loyalty Abuse: Loyalty abuse occurs when customers manipulate rewards, referral bonuses, or point systems to gain unearned benefits. This can include creating multiple fake accounts, repeatedly redeeming welcome or referral offers, or automating point accrual through bots. This behavior inflates program costs, distorts marketing data, and reduces the value of genuine customer engagement. For example, some fraudsters cycle referrals between fake identities to collect continuous discounts or cash rewards, draining revenue and damaging brand trust.
3. Return and Refund Abuse: With this type of policy abuse, customers exploit lenient return policies by returning used, damaged, or different items to receive refunds or exchanges they are not entitled to. This may include returning an item after wearing it or claiming an item was defective when it was not. The National Retail Federation found that in 2023, return fraud contributed $101 billion in overall losses for retailers—and for every $100 in returned merchandise, retailers will lose $13.70 to return fraud.
4. Review Manipulation: Review manipulation involves artificially influencing the ratings and feedback of products or services by posting fake reviews. This practice deceives other consumers and undermines the reliability and authenticity of online reviews, and can put businesses on the receiving end of “review bombs.”

The Impact of Policy Abuse

Policy abuse has a rippling effect on online retailers; the initial financial loss is just the starting point. Every $100 in fraudulent orders results in $207 loss to the business. Financially, retailers suffer losses due to practices like return fraud or chargeback fraud, where they must refund illegitimate returns or chargebacks, reducing revenue and increasing operational costs associated with investigating and resolving cases. 

Additionally, policy abuse damages the retailer’s reputation, especially if the retailer is the victim of review manipulation. This erosion of trust can also result in customer dissatisfaction, as policy changes due to the impact of fraud may confuse and frustrate customers. This reduces their loyalty and retention. Moreover, policy abuse can lead to compliance abuse that violates consumer protection laws or data privacy regulations. This can lead to legal and regulatory issues, including fines, lawsuits, or other penalties for your business. Policy abuse creates a strained relationship between a business and its customers, which will impact the bottom line. It is more important than ever to protect your digital e-commerce business from fraud.

How Policy Abuse Can Look Like Business as Usual

Policy abuse often hides in plain sight. It can appear as normal customer activity, making it difficult for businesses to detect without deeper visibility.

Small but repeated behaviors such as frequent refund requests, repeated use of promotional offers, or multiple accounts linked to the same user may seem harmless at first. Over time, these actions can lead to major revenue losses and indicate organized abuse.

Machine learning helps uncover these hidden patterns by analyzing behavior across users, devices, and transactions. With the right visibility, businesses can separate genuine customers from abusers before the damage grows.

Best Practices for Preventing Policy Abuse

The best way to prevent policy abuse is to proactively prevent it. Preventing policy abuse is crucial for maintaining a fair, ethical, and secure environment—as well as protecting the financial health of your business. 

• Clear Policies: Develop and communicate clear, concise policies that outline acceptable behaviors and expectations for employees, customers, and other stakeholders. Ensure these policies are easily accessible and understandable to all parties involved.
• Implement Monitoring: Regularly conduct audits and monitor activities to detect any potential policy violations or instances of abuse. Implementing robust monitoring systems allows for early detection and intervention, minimizing the impact of policy abuse. 
• Open Communication: Foster open lines of communication between leadership, employees, customers, and other stakeholders. Encourage individuals to raise concerns or questions about policies and provide clarifications promptly. By maintaining transparency and addressing concerns proactively, you can mitigate misunderstandings and prevent potential instances of abuse.
• Technology Safeguards: Adopt advanced fraud prevention tools and technologies to safeguard your e-commerce platform or organization against malicious activities. Stay updated with the latest advancements in digital risk decisioning  to continuously enhance your defenses against evolving threats.

Policy abuse is a major fraud concern for all e-commerce businesses. As fraud becomes more sophisticated, businesses need to be aware of the different types and how to intercede. Remember, the best way to deal with fraud is to stop it before it starts. One of the most effective ways to do this is to adopt anti-fraud technology, like Sift’s AI-powered fraud decisioning solution built to address the specific challenges e-commerce businesses face.

How Sift Helps Prevent Policy Abuse

Sift helps businesses stay ahead of policy abuse by identifying and stopping risky behavior before it leads to financial loss. Its machine learning models are trained to detect subtle abuse signals that traditional fraud systems often overlook and use the largest database in the industry to understand emerging fraud patterns as they occur. By analyzing real-time data across transactions, accounts, and devices, Sift gives businesses a complete picture of customer activity and intent.

Through automated workflows, teams can quickly identify promo, refund, and loyalty fraud without adding unnecessary friction for legitimate users. On the contrary, because Sift has such high accuracy when identifying and flagging fraudulent users or suspicious transactions, businesses that use Sift can stop fraudsters and keep friction low for honest users, spurring growth. 

With Sift, you can block fraudsters before the point of transaction, reduce chargebacks, win disputes, and protect both you and your customers’ finances. Find out more about how you can prevent fraud and improve your e-commerce customer experience.