Refunding Services Introduce New Risk for Merchants

Morgan Ackley | Thursday, March 23rd, 2023 | 10 minutes

If you research refunding services, you’ll likely come across websites with flashy text advertising professional refunders. Or you may find a blog article that walks customers through how to get a refund for an item without returning it.

While these websites may look like spam, they’re legitimate, and the threat these services pose to you as a merchant can be costly. With this new threat on the rise, you need a strategy to combat revenue and inventory loss.

What is a refunding service?

A refunding service is a fraud scheme where a professional refunder offers to obtain refunds on behalf of a customer for a fee. Refunders typically advertise their services on social media or other digital platforms and communicate with customers through messaging apps.

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. And the customer pays the provider either a percentage (usually up to 25%) of the total cost of the refunded amount or a flat fee.

Refunding service providers 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.

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.

How refunding services are increasing risk for merchants

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.”

For the past couple of years, customers and fraudsters alike have used popular methods such as saying a package did not arrive, arrived empty, or arrived without certain items. Growing awareness around these popular methods and merchants’ attempts to stop them have led customers to turn toward refunding services.

Professional refunders have diverse and extensive experience, so they have a unique understanding of what does and doesn’t work. And they can use those insights to test newer, more sophisticated tactics and difficult-to-detect methods.

As a result, the success of those methods has made these services increasingly popular. In fact, 30% of consumers in a recent survey on social engineering trends said they’d hired a refunding service in the last 12 months.

Additionally, 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.

“We’re seeing a lot of refunding services charge low, flat rates like $5 or $10 per return, instead of a percentage. This could indicate that the market for these services is saturated, and providers are now competing on price,” said Harrison.

Many companies don’t have a lot of technical controls around online refunds, which means merchants need to understand how to identify and respond to these threats.

How to protect your business from refund services

Fraud is ever-evolving, and many threats can feel scary, intimidating, and complicated to solve. But the threat of refunding services doesn’t have to be.

The key is data analysis.

“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.”

And that data analysis happens in two parts.

First, review your data before the request comes in so you know how to act.

It’s important to understand that you don’t have to issue a refund just because a request is made. If a request doesn’t comply with your policies, you have every right to deny the refund. Set KPIs and thresholds so you can make informed decisions about what should and shouldn’t be refunded.

But before you decide whether or not you should issue a refund, you’ll want to consider a few things.

  • The customer lifetime value (CLV) – Look at how much revenue you have earned from the customer requesting a refund. If the CLV is low, denying their refund request may not be harmful to your business.
  • The transaction amount – High-dollar amounts can be a sign that a customer is attempting to commit policy abuse or a professional refunder is at play. And if the fraud attempt is for a high-dollar transaction, you have much more to lose.
  • Your current chargeback-to-transaction ratio – A determined customer may opt for a chargeback if their refund request is denied. If your chargeback activity is safely below card brand thresholds, you might want to risk the chargeback and then fight it. If you win, you keep your revenue.
  • The current status of your business’s online reputation – Angry customers often leave poor reviews. How impactful would a bad review be to your business?

The second layer of data analysis should happen after refunds are issued. Your strategy might look something like this.

  • Assign reason codes to each refund request you receive.
  • Look for trends and patterns that could indicate fraud.
  • Identify underlying issues.
  • Update business processes and policies to address those underlying issues.
  • Feed those insights into front-end fraud screening.
  • Discontinue doing business with high-risk customers.

By analyzing data, you can identify underlying threats and solve problems at their source. You can replace hunches and guesses with data-driven decisions. And at Kount, we collect the data you need to make better decisions so you ultimately have less fraud and more revenue.

If you'd like help managing refund fraud, reach out to our team of experts today for more information.

Learn about refund fraud solutions

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Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.


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