Challenging first-party fraud in retail: Real solutions in a changing landscape

On 10th September, the British Retail Consortium (BRC) were joined by members from across the retail industry for an event focused on challenging customer fraud, alongside our event partners, Ravelin. A meeting note is below, as well as a link to download the slides from the event.

With recent research from Ravelin showing refund abuse, chargeback fraud and other types of first-party fraud having increased by over 50% in the past 12 months, it was a timely opportunity to bring retailers together to share insight and discuss the evolving risks.

The event opened with an overview of some of the main challenges facing retailers, as well as pointing to the BRC's "First Party Fraud Problem Statement" developed last year.

Nick Lally, Co-Founder and CFO of Ravelin, discussed the range of factors which have all facilitated the significant increase in customer fraud, including improved delivery systems post-pandemic, the emergence of contactless delivery, and the use of social media.

The majority of customer fraud cases (around 70%) are opportunistic in nature, with a small but significant minority of serious repeat offenders.

Ultimately, retailers are facing a constant balancing act between blocking the most egregious actors from making purchases, ensuring those who act opportunistically are targeted through rehabilitation or discouragement, while also ensuring genuine shoppers do not have their experience unnecessarily disrupted.

BRC panel on first party fraud – takeaways

We were joined by Grant Shipway, Senior Operational Risk Manager at River Island, and Chris Hubbard, Global Fraud Director at Just Eat for a for a panel discussion on retailer experiences.

The discussion focused on insight and expertise-sharing on customer fraud, how it impacts retailers, and what's being done to individually and collaboratively tackle it.

1. A wide range of attack vendors, constantly evolving

There is a range of different types of customer fraud, and they impact retailers in different ways. Whereas fashion retailers are dealing with high levels of "wardrobing" (returning goods that have been worn), food delivery retailers are seeing significant problems with refund abuse and missing item claims, for instance. It was noted that, while no one type of fraud is a major priority in itself, in combination the costs become significant.

The nature of fraud is rapidly evolving as technology advances. There is a huge amount of information on social media and the barrier to entry is much lower than other types of fraud. Mostly, people are "relaxed abusers", who will use their own name, although often they might use two or three accounts to take advantage of promo vouchers, for instance.

2. Genuine customers must remain front of mind

When considering options to tackle fraud, genuine customers must be front of mind.

The example of missing items was given: more often than not, someone claiming a small part of a larger package is more likely to be genuine, so cracking down on that may deter genuine customers more than it would deter fraudsters.

Fraud teams also need to work within the whole ecosystem, remembering that the majority of customers are honest.

3. Deterrents and interventions

Without concrete evidence that someone has committed fraud, there is often no real-world consequence, so no genuine deterrent. In many cases, customers are moving between a number of retailers, and in others, they are multi-accounting.

Some techniques have proven to be effective, and these tend to be subsector-specific. For example, adding PIN numbers on takeaway deliveries creates a system where a customer confirms they have received the order, has led to significant falls in undelivered order claims.

4. Next steps for merchants

For those many retailers that deal with complicated value chains, mapping them out and identifying at which points the risks lie is a difficult but important exercise. Machine learning can perhaps help with this.

There is a BRC retailer task group in force which meets regularly for information sharing – as well as stakeholder work with the Home Office and Action Fraud. The task group's current focus is on improving the chargeback process with banks and issuers.

The UK government are showing increased interest in fraud against businesses and there is hope that this will be included in the new fraud strategy, expected before end of year.

Banks are more engaged than they have been previously, with a hope to use recent learnings to change bank and scheme behaviors. Banks could help in creating effective deterrents, such as contacting those committing fraud with a warning that an account could be closed if other repeated and proven cases are detected.

It was argued that government-led initiatives are less effective than industry leaders collaborating with other stakeholders, such as banks. This is the current approach and there is hope for positive developments in the coming month.

Moderated discussions on tackling first-party fraud

BRC members then had the opportunity to share challenges and insights with each other, with the discussion guided by a series of questions.

What are the biggest challenges companies are facing with customer fraud? What kind of customer fraud are you seeing most frequently in retail?

The scale of the problem means there is often a resourcing issue, and a struggle to identify genuine actors versus fraudsters. Availability of information on social media worsens this and also allows fraudsters to get smarter, knowing what they need to say to get their claims through.

AI, while perhaps being part of the solution, also brings with it new challenges, such as with generative imaging that can make a product look damaged.

There is a sense that businesses are playing catch-up, especially considering the speed at which fraud is evolving with advancing technology, with new fraud types ever-emergent.

There are concerns for both staff and customers, whether through a growing number of fraudsters challenging staff in store, or through the risk of measures to tackle fraud.

The most frequent types of fraud retailers are experiencing include: wardrobing, gift card fraud, promo and discount abuse, cashback fraud, chargeback fraud, and refund abuse – although this is not exhaustive.

What strategies in detecting and preventing fraud have been most effective? How can fraud prevention be balanced with a smooth customer experience?

Technology and AI can be useful in identifying fraudsters, with some benefits being seen when integrating AI into existing databases.

Looking at surveys – asking customers for feedback on what went wrong. Genuine undelivered items or refund requests, for example, are more likely to get detailed feedback, whereas fraudsters will tend not to provide that information.

There is a need to tackle the most egregious actors without the risk of a first-time customer having a negative experience. With that in mind, a member suggested that it may be worth relenting for a first-time opportunistic actor, and then keep an eye on their future purchases, rather than stamp down on first-time suspected frauds with the risk of hitting genuine customers.

Other ideas included unique point-of-sale barcodes, making it easier to track items across omnichannel platforms.

To what extent do you collaborate with other companies, industries or authorities to address fraud? How open should businesses be in sharing fraud intelligence?

There is a high level of collaboration with stakeholders in some retailers' own value chains, such as with couriers. However, it was broadly agreed that peer-to-peer collaboration could improve.

Sharing of data between merchants and issuers would also be beneficial and potentially help with the establishment of stronger deterrents.

Social media companies could also be involved – they host a large amount of damaging information, and more should be done to ensure fraud is not being promoted on their platforms.

Retailers are often constrained by regulation or internal contracts which may prevent certain data from being shared – however, there was enthusiasm for more to be done to facilitate more data sharing between retailers in future, to help tackle this problem.

Message from Ravelin & BRC

The BRC and Ravelin thank you all for attending and sharing your invaluable insights and stories. Collaboration was a common thread throughout the day, and the team at Ravelin would be happy to discuss and share advice on tackling your customer fraud challenges.

You can download Nick's presentation on Challenging First-Party Fraud.

Find out more about how Ravelin is helping leading merchants prevent refund abuse here.