Blog / Fraud analytics

Are merchants facing a criminal customer crisis?

There’s a new fraud threat on the rise – and it’s your customers. First-party fraud is infamously tricky to catch and a huge revenue risk. How can you detect and deter criminal behavior in your customer base?

29 August 2023

Are merchants facing a criminal customer crisis?

Professional fraudsters aren’t the only ones looking to capitalize on ecommerce growth. Your genuine customers are looking to get in on the action too. Our survey of global fraud trends revealed that 40% of merchants have seen an increase in friendly fraud. And over 50% say the same for promotion and refund/returns abuse.

But cracking down on fraudulent customers is a bit more complicated. Yes, you need to catch these “criminal customers” to protect your business. But how do you do this without losing reformable individuals as genuine customers while also deterring others from doing the same?

What’s driving criminal customers? (and why they’re a problem)

First-party fraud is essentially fraud committed by an individual using their own identity and credentials. This behavior could be accidental, opportunistic or malicious. So this may be genuine customers exploiting loopholes to save a buck or intentionally looking to make fraudulent gains.

So, why is this a growing problem?

  • The cost of living crisis: Rising energy costs and inflation have put customers under pressure to cut costs for basic needs. Faced with this situation, many are easily tempted by money-saving tips – even if they aren’t entirely above board.

  • Access to fraudy information: Social media has become a breeding ground for fraud. The viral “Tesco method” on TikTok is just one example. Easy access to this sort of Information normalizes fraud, and desperate customers can easily be incentivized to take risks.

  • More opportunities: Promotions, Buy Now Pay Later, contactless delivery, and other steps to make buying easier create vulnerabilities that criminal customers can exploit.

Almost 1 in 13 admit to having been involved in fraud over the last year in the UK alone. What’s more, if it works once, customers are likely to do it again.

Ravelin - Criminal Customers

How criminal customers commit fraud

Understanding the different tactics customers might use is the first step to identifying criminal customers and stopping them. So what does first-party fraud look like in practice?

Friendly fraud

Friendly fraud is when a customer requests a chargeback directly from the bank, rather than seeking a refund from you. This can happen because they are confused about how to claim a refund, have buyer’s remorse, or just don’t recognize a charge on their bank account. Equally, it could have been done on purpose.

More than 75% of customers admit to filing chargebacks strictly out of convenience. Either way, 40% of those who commit this type of fraud will try again within 60 days.

This is bad. You have to pay the refund and a fee from the payment provider. And if your chargeback ratio gets too high, you risk higher fees or having your accounts disabled. Chargebacks are projected to cost financial institutions and merchants more than $117 billion in 2023.

Refund/returns abuse

Refund/returns abuse is when a customer uses your refund policy to the extent that it becomes unprofitable. On the other end of the spectrum, refund/returns fraud is outright malicious fraud for profit. Tactics can include:

  • Wardrobing: When a customer returns an item after using it e.g., returning a new dress or suit after wearing it to a wedding.

  • Fake returns: When a customer returns a different item, generally of inferior quality. They collect the refund and keep the product.

  • DNA (Did Not Arrive): When a customer falsely claims an order never arrived or was damaged. This is the most common form of refund abuse and is made easy by contactless delivery.

As many as 56% of merchants say refund/return abuse has increased. Fraudulent returns already cost US merchants a whopping $23.2 billion. Remember, on average, a return costs you nearly 60% of the item's original value.

Promotion abuse

Promotion abuse covers different ways customers can take advantage of your promotional offers. Generally, this involves creating multiple accounts to access the same promotion more than once. This could be a signup or referral bonus, or voucher redemption.

Most of the time, customers don’t even think they’re doing something wrong. They just think they’re being creative. The trouble is promotion abuse often looks like growth. On the surface, you have happy loyal customers and an influx of new customers.

In fact, 42% of merchants actively accept promotion abuse as a cost of doing business. However, not only do these false promotions damage your bottom line, they skew customer acquisition costs and marketing metrics.

How to stay ahead of criminal customers

Stopping criminal customers largely involves taking actions to make first-party fraud harder and identifying repeat offenders. Let’s break this down.

  1. Set return thresholds: Select a number based on your industry standards. And then flag accounts that go over this threshold for further investigation or a returns ban.

  2. Build a case for disputes: When it comes to friendly fraud, remember that you can dispute chargebacks. Customer data allows you to track repeat behavior, and demonstrate customer involvement in the purchase and delivery process.

  3. Track connections with graph networks: Link analysis will allow you to monitor accounts and visualize connections between them. For example, if multiple new accounts appear with the same email address, device, or phone number, you could be looking at a serial promo abuser.

  4. Make committing fraud harder and more obvious: Small barriers may be enough to stop opportunistic criminal customers. Of course, this needs to be done without damaging genuine customer experiences and losing conversions. But simply making your refund policy clear, having an easy-to-contact customer service team and sending order updates will help.

Ravelin - Criminal Customer

Every criminal customer is unique, your solution needs to be too

There isn’t one solution to solving the criminal customer crisis. Opportunistic or misled individuals need to be handled very differently from malicious bad actors. However, in all cases, you are dealing with genuine customers who may also be legitimately buying your goods or services — so, you need to progress carefully.

Fundamentally, stopping criminal customers isn’t that different from fraud prevention as a whole. You need a solution that helps you fight fraud without damaging customer journeys. Effective use of customer data will help you do just that.

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