How to prevent intentional friendly fraud and policy abuse fraud
In cases of friendly fraud (or first-party fraud), good customers contact their banks to dispute charges they don’t recognize or didn’t mean to make. And it’s a big problem for businesses.
Over half of businesses say their chargeback rate has increased since March 2020, according to Kount’s 2020 chargeback risk statistics. And 18% say friendly fraud in their business’s top chargeback source.
For the most part, customers perpetuate accidental friendly fraud when they don’t recognize purchases. But not every case of friendly fraud stems from a misunderstanding. Good customers and fraudsters alike can also commit intentional friendly fraud and, by extension, policy abuse.
What is intentional friendly fraud?
Intentional friendly fraud is a type of friendly fraud in which good customers or bad actors subvert business policies to get money back on goods and services. For example, they may contact banks, claiming a product never arrived or arrived damaged. If the bank sides with them, the customer gets their money back, and the business gets a chargeback.
But customers and bad actors may also reach out to businesses directly. In these cases, they may practice intimidation or social engineering to bully customer support agents into issuing refunds. In the end, the customers get goods for free, and businesses lose revenue and inventory.
Intentional friendly fraud is prevalent among businesses that have lax or flexible return or refund policies. For example, let’s say a business doesn’t limit the number of times someone can request a refund. That makes it easy for bad actors to abuse policies and commit friendly fraud.
What is policy abuse fraud?
Policy abuse fraud happens when customers or bad actors defraud businesses by taking advantage of flexible return or refund policies. Although, policy abuse may also result from weak account creation or referral policies.
For example, let’s say a business has a flexible return policy in the hopes of staying competitive and fostering trust and loyalty among customers. While customer-centric policies are great for business, policy abuse can be detrimental to sales, gross margins, and profitability.
Unfortunately, even average consumers aren’t above policy abuse and friendly fraud. 39% of consumers surveyed as part of Kount’s “Holiday E-Commerce Guide” said they’re comfortable returning something they’ve worn or used, even if it wasn’t defective. In addition, 36% said they typically return five or more items for refunds after the holidays.
Retailers lost $7.7 billion to online return fraud in 2020
The widespread surge in digital purchasing has made businesses no strangers to refunds and returns. Consumers returned $102 billion in online sales in 2020, according to the National Retail Federation’s “Customer Returns in the Retail Industry” report. That total equates to an average of 18% of all online sales in 2020. And of those returns, $7.7 billion were fraudulent.
Overall retail sales in 2020 saw $428 billion in returns — an average of 10.6% of total sales. Of those, an average of 5.9% (or $25.3 billion) in returns were fraudulent. Meanwhile, non-receipted return fraud — a clear sign of policy abuse — accounted for an average of 16.6% of returns. Receipted return fraud accounted for an average of 3.6% of returns.
The survey, completed in partnership with Appriss Retail, found that for every $1 billion in sales, the average retailer incurs $106 million in merchandise returns. And for every $100 in returned merchandise accepted, retailers lose $5.90 to return fraud.
The average return rate was 10.6% for retailers in 10 categories. Auto parts saw the highest return rate (19.4%), followed by apparel (12.2%). Home improvement and housewares tied for the third-highest return rate (11.5%).
3 ways to prevent intentional friendly fraud and policy abuse fraud
When added together over time, these types of fraud can have a significant financial impact. So follow these three steps to prevent intentional friendly fraud and policy abuse.
1. Evaluate refund and return policies
The first step is to take a look at your refund and return policies. Are they too lax or flexible? Put yourself in the shoes of an opportunistic bad actor. If you find the language too vague or confusing, adjust those policies to close the gaps.
Then ask yourself if you’re communicating those policies well enough to customers. Do you include policies on your purchase confirmations or the customer support page of your website? If a bad actor wants to dispute a purchase, you can bet they’ll claim your policies are unclear or hard to find.
2. Train customer support agents on social engineering
Next, take the time to train your customer support teams on social engineering tactics that make policy abuse possible. Bad actors who offer refunds as a service may pose as customers and attempt to appeal to service agents emotionally or become angry when they request refunds.
It’s important to remember that fraud analysts aren’t the only people who need to beware of intentional friendly fraud. Playing out different customer scenarios and how to respond can give your support agents confidence in identifying cases of policy abuse fraud.
3. Invest in a friendly fraud solution
Finally, the best and fastest way to stop intentional friendly fraud and policy abuse is to invest in a friendly fraud solution. While a digital fraud prevention solution can prevent criminal fraud pre-authorization, a friendly fraud solution can help you deflect disputes and stop chargebacks post-authorization.
A friendly fraud solution can give you access to post-authorization tools from major card brands in one dashboard. For example, let’s say a customer or bad actor initiates a dispute with their bank, asking for a refund. You can quickly — in some cases, automatically — relay transaction details to the bank that can stop the chargeback.
You can also use the solution to pinpoint areas for improvement in your business policies. And it’s not just beneficial in stopping intentional friendly fraud. Let’s say you approve a refund to a good customer, and the funds aren’t returned immediately.
Now, let’s say the customer goes to the bank, claiming you haven’t delivered the refund. Once you get that dispute alert, you can quickly notify the bank of the refund in progress to avoid the double-refund and the chargeback. Overall, the right friendly fraud solution can help you save sales, resolve disputes, and improve business policies.