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 of 5 years ago. This increase led to new opportunities for businesses to scale—while creating just as many opportunities for fraudsters to exploit lapses in online security.
Online businesses, whether it is 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 more than $100 billion in losses for online retailers in 2023.
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 and mine for money and merchandise. For example, when merchants avoid adding security measures to reduce friction, opening 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.
Popular 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.
- 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.
- Return/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.
- Payment Fraud: Payment fraud is policy fraud aimed at manipulating payment systems, such as using stolen credit card information or initiating chargebacks for legitimate transactions. This type of abuse jeopardizes the financial security of both the e-commerce platform and its users, leading to financial losses and damaging the brand’s reputation.
- 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.
Best Practices for Preventing Policy Abuse
The best way to deal with 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.
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.