What are refunding services and how to stop them - Kount

Refunding services: Increased popularity likely cause of more returns

Last year, consumers returned, on average, 20.8% of all online purchases, according to an NRF report. Unfortunately, 10.6% of those returns were fraudulent, amounting to some $23.2 billion in losses. Overall, for every $100 in returned merchandise, retailers lost $10.30 to refund fraud.

Refunding services fraud data analyst quote

The report suggests the increase in return activity may be due to an overall increase in online sales. But Kount’s fraud experts say that returns have grown so much over the last 18 months that they’re costing merchants hundreds of millions of dollars — potentially masking an unchecked fraud problem.

According to Kount’s analysis of 150 merchants between 2020 and 2021, total refunds were double or triple the previous year. Additionally, these total refund costs were between 2 and 4.5 times higher — and a bigger drag on profitability — than chargeback fraud rates.

“For the first time, we’re seeing refund costs outpace chargebacks – and by a significant margin,” said Brady Harrison, Senior Data Analyst at Kount. “This tells us that fraud tactics are evolving, and merchants may not be aware of the shift. A lot of merchants would be surprised to find they have a return fraud problem and, very likely, one from a refunding service.”

What is a refunding service, and how does it work?

Refunding services are schemes in which “professional refunders” offer to return items and obtain refunds on behalf of a customer in exchange for a fee. Refunders advertise their services on social media and other digital platforms and favor messaging apps to communicate with customers.

To engage in a refunding service, a customer typically fills out an intake form with order numbers and transaction details. Then, masquerading as the customer, the refunder uses the information to call, chat, or email the company to obtain a refund — usually without returning items.

Refunding service providers can use various techniques to obtain refunds, but most involve some form of social engineering. For example, the refunder may use emotional manipulation or become aggressive to get a customer service agent to initiate a refund.

Refunding services are schemes in which “professional refunders” offer to return items and obtain refunds on behalf of a customer in exchange for a fee.

Customers may hire a refunding service provider to return any variety of goods from electronics and clothes to furniture, groceries, and more. In exchange for refunding services, customers pay the provider either a percentage (usually up to 25%) of the total cost of the refunded amount or a flat fee.

A customer may seek refunding services for different reasons. They may genuinely need to return an item and don’t want to call customer service. In some cases, they may find refunding services easier to manage than asking a company to make exceptions for a return policy.

But more often than not, at least in the experience of Kount’s fraud experts, customers who seek refunding services purchase goods with the intent to commit policy abuse and get the items for free or resell them for a profit.

In addition to offering refunding services, some providers also offer courses and ebooks that coach everyday consumers on how to conduct refund schemes or provide refunding services to others.

These materials suggest consumers place several good orders before and after purchasing a high-dollar item for which they will seek a refund, so the refund request doesn’t raise red flags. This pattern increases the consumer’s likelihood of success and makes the business a target for future schemes.

Fraudsters also sell success lists that reveal what refunding methods work at certain stores. These lists reveal what items were bought, the refund method used, how easy or difficult it was, and if they were successful. Customers can use these lists to replicate similar schemes.

Kount investigated several success lists from 2022 and found that high-dollar items like luxury clothing, jewelry, and even vacuum cleaners were big targets for fraudsters. Electronics were especially common and by far the biggest target.

Most orders included multiple laptops, digital watches, wireless headphones, and smartphones, with refund amounts ranging from a few hundred dollars to over $14,000.

‘Front-end’ schemes out, ‘way-back’ refunding services present high risks, greater rewards

Fraud trends and methods are always evolving, and they do so primarily according to gaps in protection. Wherever there is a lapse, fraud is likely to emerge.

For the past couple of years, “front end” fraud methods have dominated. Customers and fraudsters alike have used popular methods such as saying a package did not arrive, arrived empty, or arrived without certain items.

A digital fraud solution can provide safeguards against refund risks.

Fraudsters and good customers have favored these front-end methods because of their simplicity and high success rate. After all, mistakes in order fulfillment aren’t uncommon.

It’s not unbelievable for a customer to receive an empty package or an order without a certain item. But these tactics make it easy for customers to collect unnecessary refunds.

Growing awareness around these popular methods and merchants’ attempts to stop them have led customers to turn increasingly toward refunding services. While refunders may still use these methods, they also use more sophisticated and difficult-to-detect methods to justify their fees.

“We’ve been seeing a vast increase in refund issues on the way back versus on the way out, which has historically always been the reverse,” said Harrison. “We’re also seeing a lot of refunding services charge low, flat rates like $5 or $10 per return, instead of a percentage. Both of these things could indicate that the market for these services is saturated, and providers are now competing on price.”

Refunding services open the door to more complicated “way back” schemes. In these instances, a customer must send back an item before a business processes a refund, but something happens to the package in transit.

Usually, the package shows that the customer returned the item to the business, but the business can’t locate the item. Such is the case with fake tracking ID (FTID) scams, wherein fraudsters manipulate shipping labels to make it seem like they sent back an item but didn’t. For fraudsters, the risk is higher, but so are the rewards.

One refunding service claims to handle over 40 refunds per day and to have refunded over $1 million for 700 clients. The refunder has seen the industry grow “rapidly” over the past decade and says that refunding services will only grow more due to the massive increase in orders they receive.

How digital fraud solutions can stop refund abuse before it starts

Refunding services are appealing because they don’t carry the same criminal risks as traditional credit card fraud, yet they’re still — if not more — lucrative. In most cases, fraudsters just need a few order details and the listening ear of a customer service representative.

Because of this, refunding services are very popular and hard to detect. Many companies don’t have a lot of technical controls around online refunds, which makes refunding services even more difficult to identify.

“If you haven’t investigated your refunds before or in a while, you should absolutely look at them,” said Harrison. “A doubled, tripled, or quadrupled increase out of nowhere doesn’t just happen because of supply chain issues. If you have high return rates or costs, you may likely have a fraud problem.”

Begin by tracking every refund reason with a code and see if any trends emerge. From there, you should put additional protocols in place to safeguard your business.

A digital fraud and chargeback prevention solution can automatically provide those safeguards. For example, it can determine each customer’s level of identity trust before you authorize their purchase. A digital solution with customizable policies can also allow you to decline purchases over a certain quantity amount or risk threshold.

Kount’s Assess fraud solutions determine if a site visitor is who they say they are so that it can stop digital payments fraud upfront. They also assess a customer’s history of chargebacks and risk in a retail environment. Overall, you can minimize the risk of bad actors purchasing goods with the intent to refund and resell while seizing opportunities to up-sell or cross-sell to good customers.

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April 21, 2022
Refunding services: Increased popularity likely cause of more returns
Last year, consumers returned, on average, 20.8% of all online purchases, according to an NRF report. Unfortunately, 10.6% of those returns were fraudulent, amounting to some $23.2 billion in losses. Overall, for every $100 in returned merchandise, retailers lost $10.30 to refund fraud. The report suggests the increase in return activity may be due to an overall increase in online sales. But Kount’s fraud experts say that returns have grown so much over the last 18 months that they’re costing merchants hundreds of millions of dollars — potentially masking an unchecked fraud problem. According to Kount’s analysis of 150 merchants between 2020 and 2021, total refunds were double or triple the previous year. Additionally, these total refund costs were between 2 and 4.5 times higher — and a bigger drag on profitability — than chargeback fraud rates. “For the first time, we're seeing refund costs outpace chargebacks – and by a significant margin,” said Brady Harrison, Senior Data Analyst at Kount. “This tells us that fraud tactics are evolving, and merchants may not be aware of the shift. A lot of merchants would be surprised to find they have a return fraud problem and, very likely, one from a refunding service.” What is a refunding service, and how does it work? Refunding services are schemes in which “professional refunders” offer to return items and obtain refunds on behalf of a customer in exchange for a fee. Refunders advertise their services on social media and other digital platforms and favor messaging apps to communicate with customers. To engage in a refunding service, a customer typically fills out an intake form with order numbers and transaction details. Then, masquerading as the customer, the refunder uses the information to call, chat, or email the company to obtain a refund — usually without returning items. Refunding service providers can use various techniques to obtain refunds, but most involve some form of social engineering. For example, the refunder may use emotional manipulation or become aggressive to get a customer service agent to initiate a refund. Customers may hire a refunding service provider to return any variety of goods from electronics and clothes to furniture, groceries, and more. In exchange for refunding services, customers pay the provider either a percentage (usually up to 25%) of the total cost of the refunded amount or a flat fee. A customer may seek refunding services for different reasons. They may genuinely need to return an item and don’t want to call customer service. In some cases, they may find refunding services easier to manage than asking a company to make exceptions for a return policy. But more often than not, at least in the experience of Kount’s fraud experts, customers who seek refunding services purchase goods with the intent to commit policy abuse and get the items for free or resell them for a profit. In addition to offering refunding services, some providers also offer courses and ebooks that coach everyday consumers on how to conduct refund schemes or provide refunding services to others. These materials suggest consumers place several good orders before and after purchasing a high-dollar item for which they will seek a refund, so the refund request doesn’t raise red flags. This pattern increases the consumer’s likelihood of success and makes the business a target for future schemes. Fraudsters also sell success lists that reveal what refunding methods work at certain stores. These lists reveal what items were bought, the refund method used, how easy or difficult it was, and if they were successful. Customers can use these lists to replicate similar schemes. Kount investigated several success lists from 2022 and found that high-dollar items like luxury clothing, jewelry, and even vacuum cleaners were big targets for fraudsters. Electronics were especially common and by far the biggest target. Most orders included multiple laptops, digital watches, wireless headphones, and smartphones, with refund amounts ranging from a few hundred dollars to over $14,000. ‘Front-end’ schemes out, ‘way-back’ refunding services present high risks, greater rewards Fraud trends and methods are always evolving, and they do so primarily according to gaps in protection. Wherever there is a lapse, fraud is likely to emerge. For the past couple of years, “front end” fraud methods have dominated. Customers and fraudsters alike have used popular methods such as saying a package did not arrive, arrived empty, or arrived without certain items. Fraudsters and good customers have favored these front-end methods because of their simplicity and high success rate. After all, mistakes in order fulfillment aren’t uncommon. It’s not unbelievable for a customer to receive an empty package or an order without a certain item. But these tactics make it easy for customers to collect unnecessary refunds. Growing awareness around these popular methods and merchants’ attempts to stop them have led customers to turn increasingly toward refunding services. While refunders may still use these methods, they also use more sophisticated and difficult-to-detect methods to justify their fees. “We’ve been seeing a vast increase in refund issues on the way back versus on the way out, which has historically always been the reverse,” said Harrison. “We’re also seeing a lot of refunding services charge low, flat rates like $5 or $10 per return, instead of a percentage. Both of these things could indicate that the market for these services is saturated, and providers are now competing on price.” Refunding services open the door to more complicated “way back” schemes. In these instances, a customer must send back an item before a business processes a refund, but something happens to the package in transit. Usually, the package shows that the customer returned the item to the business, but the business can’t locate the item. Such is the case with fake tracking ID (FTID) scams, wherein fraudsters manipulate shipping labels to make it seem like they sent back an item but didn’t. For fraudsters, the risk is higher, but so are the rewards. One refunding service claims to handle over 40 refunds per day and to have refunded over $1 million for 700 clients. The refunder has seen the industry grow "rapidly" over the past decade and says that refunding services will only grow more due to the massive increase in orders they receive. How digital fraud solutions can stop refund abuse before it starts Refunding services are appealing because they don’t carry the same criminal risks as traditional credit card fraud, yet they’re still — if not more — lucrative. In most cases, fraudsters just need a few order details and the listening ear of a customer service representative. Because of this, refunding services are very popular and hard to detect. Many companies don’t have a lot of technical controls around online refunds, which makes refunding services even more difficult to identify. “If you haven’t investigated your refunds before or in a while, you should absolutely look at them,” said Harrison. “A doubled, tripled, or quadrupled increase out of nowhere doesn’t just happen because of supply chain issues. If you have high return rates or costs, you may likely have a fraud problem.” Begin by tracking every refund reason with a code and see if any trends emerge. From there, you should put additional protocols in place to safeguard your business. A digital fraud and chargeback prevention solution can automatically provide those safeguards. For example, it can determine each customer’s level of identity trust before you authorize their purchase. A digital solution with customizable policies can also allow you to decline purchases over a certain quantity amount or risk threshold. Kount’s Assess fraud solutions determine if a site visitor is who they say they are so that it can stop digital payments fraud upfront. They also assess a customer’s history of chargebacks and risk in a retail environment. Overall, you can minimize the risk of bad actors purchasing goods with the intent to refund and resell while seizing opportunities to up-sell or cross-sell to good customers.
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