Returns are commonplace in the retail and ecommerce industry, but they can put you at risk for refunding fraud – which can be costly.
Because refunds don’t come with a chargeback, refund fraud can be difficult to detect. But there are ways to prevent it — and that knowledge is key to helping you keep your hard-earned revenue.
What is Refund Fraud?
Refunding fraud is about getting refunds without returning goods. For example, a customer buys an item, requests a refund once they get it, then makes a false claim that prevents them from sending the item back to you.
And this trend is on the rise. According to the National Retail Federation, refund and return fraud has skyrocketed 43% year over year.
Ecommerce Return Fraud vs. Refund Fraud: What’s the Difference?
Return fraud is about taking advantage of customer-friendly return policies. For example, a customer buys an item, uses it once, then returns it. Or the customer might try to return an item after your stated time limit.
Return fraud is closely related to refund fraud, but there are a few differences between the two.
|REFUND FRAUD||RETURN FRAUD|
|MERCHANDISE||The goal is to keep the merchandise and get a refund.||The goal is to return an item that has been used or manipulated.|
|REVENUE LOSS||You lose the merchandise and the revenue from the initial sale.||You lose the revenue from the initial sale but may potentially be able to resell the item.|
|HOW IT HAPPENS||False claims are made to avoid returing the merchandise.||Return policies are abused, ignored, or manipulated.|
Each form of fraud can wreak havoc on your sales. But fortunately, a lot of prevention tactics can solve both fraud schemes simultaneously.
How to Prevent Return and Refund Fraud
Stopping return and refund fraud is about taking a proactive stance with preventative tactics. You need to have controls in place before an incident happens. So if you do experience one of these schemes, the policies and procedures you set can help you fight back against invalid returns and refunds.
Write Easy-to-Understand Policies
Customers and criminals often commit return and refund fraud by abusing loopholes in company policies. If you’re having issues with return or refund abuse, consider updating your policies.
Straightforward, effective policies make it difficult for customers to argue with. Make sure your policies are visible and easy to understand.
- Write clearly and concisely. Use straightforward language so that your customers can easily understand how your return and refund policies work.
- Set clear expectations. Lay out the steps of the return and refund processes. Make it known what is expected of the customer and how you respond to requests. If items are inspected when they’re returned, let customers know this up front to curb return abuse like product swapping.
- Tighten controls around certain goods. Lax return policies can build customer confidence. But they can also incentivize abuse. Consider tightening policies around merchandise that are more likely to be returned or stolen. For instance, set shorter return windows for electronics and jewelry. Or increase security controls to dissuade fraudulent activity.
- Make policies easy to find. Make your return and refund policies easy to find on your homepage. Also consider including links to your policies on product description pages and checkout pages. Then send a link or reminder of your policies in order confirmation emails.
Educate Customer Service and Logistics Personnel on Refund Fraud
Customer service reps and logistics personnel are often one of the biggest attack vectors when it comes to refund fraud. Most methods actually rely on staff errors to work.
To combat refund fraud, it’s essential that you train both your customer service reps and logistics team regularly on order fulfillment and refund processes — at least quarterly. If you already do this, consider revisiting your training to make sure it accounts for new and emerging refund fraud schemes.
Below are some tips to consider when evaluating your training.
- Verify your order fulfillment process. Make sure your teams know how to package merchandise correctly to avoid the risk of damaged items. Give customers an accurate delivery estimate. And give your fulfillment team a way to report low inventory so that customers don’t wind up purchasing an item you can’t fulfill.
- Make sure customer service teams know which items do and don’t qualify for a refund or return. Having clear return and refund policies help customers and your employees. Your customer service teams should have clear guidelines and procedures for handling returns — including lists of items that qualify for returns, refunds, or store credit only and items that are non-refundable.
- Be on the lookout for refunding services. A refunding service is a fraud scheme where a professional refunder offers to obtain refunds on behalf of a customer for a fee. This scheme is massively popular and can devastate a business’s bottom line.
- Train customer service teams on how to identify social engineering attacks. Social engineering is about manipulating people to give away refunds, goods and services, or confidential information. And customer service teams are a prime target for social engineering schemes. Train your employees on these schemes to help them combat manipulative customers and prevent refund abuse.
Identify High-Risk Goods and Services
Some goods attract fraudsters more than others. But how do you go about finding those high-risk goods — and how do you prevent them from becoming targets for fraud?
Follow these steps:
- Assign reason codes to each return and refund. Make sure your returned merchandise is always labeled with a reason code. And for any refunds issued, whether the merchandise is returned or not, make sure you keep track of the reasons for issuing those refunds.
- Look for patterns. Certain items may be returned more often than other items. Maybe there’s an item that customers often make false claims about to get a refund. If you notice an unexpected dip in revenue or an increase in returns, start looking for patterns in your return and refund reason codes.
- Remove inventory or change how customers get certain items. When you find patterns, you can either remove the problem items from your inventory or change the way customers can purchase certain items. For example, you can make some items exclusive to customers that open an online account with you — and reduce the risk of a fraudster trying to get the goods for free.
Consider the Likelihood of Chargebacks
Before accepting a return or issuing a refund, consider the likelihood of a chargeback.
Just because a return request is made doesn’t mean you have to issue a refund — even if it’s from a good customer. If a request violates your policies, you are well within your rights to deny the refund.
Remember, not all denied refund requests result in a chargeback. So sometimes it may be better to risk a chargeback than comply with a refund or return request — but it depends on your business.
If a customer is denied a refund, instead of opting for a chargeback, they may just decide to not do business with you anymore. While that might be scary, it may be better for your business than issuing a refund or return.
Keep in mind that if you deny a customer a refund and do receive a chargeback, you can fight it — and win. And if you win, you get to keep the revenue.
Before making the choice to risk a chargeback, think about:
- The customer lifetime value (CLV). If the CLV is low for a customer, denying them a refund might not impact your business as much as you’d think.
- The transaction amount. High-dollar amounts can actually be a sign that a customer or professional refunder is attempting refund abuse – and in that case, you may have much more to lose by issuing a refund.
- Your current chargeback-to-transaction ratio. If your chargeback activity is safely below card brand thresholds, you might want to risk the chargeback and then fight it.
- The current status of your business’s online reputation. How impactful would a bad review be to your business? If it wouldn’t be detrimental, you might want to risk denying the customer’s request.
Encourage Returns Instead of Refunds
If you don’t want to risk chargebacks, consider encouraging customers to return items if they don’t work out.
This might seem like a costly suggestion. Because with shipping and logistics fees, returnless refunds may seem like the better, hassle-free option. But they can drain your revenue. You lose the merchandise and the total revenue from the sale. You don’t get to resell the merchandise to other customers and recoup some of your losses.
Instead, entice customers to return items. Consider providing a return shipping label with a product if you know there is a chance it might not fit the customer’s needs — like shoes or clothing.
Add Refund Data Into Your Pre-Sale Transaction Screening Process
You may have every preventative measure in place, but refund fraud can still happen. When it does, it might be best to discontinue doing business with those customers altogether.
If someone requests a refund and you think it’s fraudulent, add that data into your front-end fraud screening so you can decline purchases from that person in the future.
Or maybe you have customers that are prone to abusing policies. Again, if they’re conducting fraudulent activity, you have a lot more to lose doing business with them than just the dollar amount on a transaction.
Get Help for Refunding Fraud From the Experts
You can spend countless hours trying to solve refund and return fraud abuse yourself — or you can get an expert to help you.
Kount is a trust and safety platform that gives businesses the confidence to safely interact with a variety of consumers globally. Our complete strategy solves all types of fraud, including return fraud.
- Detect potentially risky transactions and stop them from happening.
- Block fraudsters and opportunistic customers from stealing from you again.
- Fight chargebacks that happen after denying fraudulent refund requests.
Check this video to learn more about what Kount can do for you.