Separating Legitimate and Bogus Refund Claims

“It never turned up!” Separating Legitimate and Bogus Refund Claims

Stuart Mann - “It never turned up!” Separating Legitimate and Bogus Refund Claims

Stuart Mann

Sep 14, 2023

Retail eCommerce sales are forecast to grow from USD 5.7 trillion in 2022 to USD 8.1 trillion in 2026 (1), fuelling a rise in returns and, with it, a new wave of returns fraud.

In the previous blog in this series, we talked about returns abuse and wardrobing. In this article, we’ll discuss refund fraud and the growing problem of unjustified item-not-received claims.

Refund fraud is a growing problem for retailers just when they can least afford it. Pandemic lockdowns have been followed by high inflation, rising interest rates and an enduring cost-of-living crisis. In these circumstances, merchants need to protect every pound/euro/dollar etc but are being undermined by the criminal exploitation of their refund and return policies.

‘Item-not-received’ refund fraud is an easy claim to make

In item-not-received (‘INR’) fraud, consumers purchase an item and take delivery of it, before claiming it never showed up and demanding a refund.

The rise in eCommerce correlates with a rise in returns fraud. The US-based National Retail Federation (NRF) estimates that 10.7% of online returns are fraudulent (2). Various criminal activities contribute to that figure, but item-not-received claims are a significant issue, not least because they are easy to attempt and difficult to detect.

Three types of offenders are typically involved in item-not-received refund fraud:

  • Individual occasional offenders, who believe that an unmerited refund every now and then is acceptable. As the cost-of-living crisis continues, more consumers may be tempted to engage in this kind of ad hoc activity.
  • Professional refunders who offer a refund-as-a-service model, using their learnt skills to undertake refund abuse. These skilled individuals – often members of criminal gangs – handle the refund on behalf of the consumer, including talking to customer service teams, in return for a percentage of payout and then use the cash for other nefarious activities.
  • Professional fraudsters who commit refund fraud regularly and entirely for their own gain, rather than as a paid service for others. These individuals will attempt to “double-dip” where they will ask for the product to be resent and claim the 2nd item was not received either. They will often sell these items on 3rd party websites at a lower price than the retail price, thus monetising these products.

Refund fraud or legitimate claim?

This kind of fraud is notoriously difficult to distinguish from a legitimate complaint. As online commerce has grown, so has opportunist theft and it’s true that some items are stolen or lost before reaching the actual consumer.

It’s not uncommon for parcels to be swiped from doorsteps or outhouses or to get lost in the complex logistics network that exists between a merchant’s warehouse and a customer’s home. Fraudsters are using these factors to their advantage.

To make matters worse, fraudsters are often well-versed in individual merchants’ returns policies and know exactly what to say to customer service agents. They are often experts at avoiding signing for deliveries and may know how many refund claims will trigger a red flag – staying just on the right side of suspicion. And merchants who try to stem the problem with tougher returns policies are more likely to put off legitimate consumers.

Letting fraud pass is unsustainable.

Due to the difficulties in identifying and solving the returns problem, merchants may let this kind of theft pass, often building a percentage of item-not-delivered losses into financial forecasts.  But US retailers alone lost $84.9 billion in fraudulent returns in 2022 (3), of which item-not-delivered claims were a significant part. Merchants are now realising they can’t afford to dismiss this level of loss.

So, what can they do? Enhanced training of customer service teams or improved returns policies can help, but a more effective strategy is stopping refund fraud at its source. Here, powerful data analysis can be employed to separate consumers from criminals.

Accertify’s C.A.R.E Returns Abuse Protection program includes machine learning, user behaviour analytics, and device intelligence to help merchants distinguish between legitimate and fraudulent refund requests. Accertify monitors and analyses a user’s device, connection, location, and behaviour to detect inconsistencies between the original purchase and the refund request. It can analyse purchase and refund histories at scale to root out repeat offenders.

Retailers can then add different layers of decisioning, from allowing the refund; to denying the refund; to opting to offer an in-store credit; to not resending another item if the first one is missing. C.A.R.E can also retrieve historic refund data at the time of the next transaction and flag any known issues, which could enable a retailer to choose a courier who verifies the delivery has been made.

Refund fraudsters think they’re all but invisible online, and too many merchants agree. But employing Accertify’s powerful algorithms can make their motives and methods abundantly clear.

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  1. https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/
  2. https://cdn.nrf.com/sites/default/files/2022-12/AR3021-Customer%20Returns%20in%20the%20Retail%20Industry_2022_Final.pdf
  3. https://cdn.nrf.com/sites/default/files/2022-12/AR3021-Customer%20Returns%20in%20the%20Retail%20Industry_2022_Final.pdf