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Refund abuse: Why is it on the rise and how do we stop it?

Today, we look at refund and returns abuse 101: the why, the who, the how, and the how often – as well as at what merchants can do to significantly reduce it without alienating good customers.

21 February 2024

Refund abuse: Why is it on the rise and how do we stop it?

The way consumers think about refunds and returns seems to have shifted. And with it, the popularity and consequences of refund abuse.

Competitive behavior researcher Thomas S. Robertson exclaimed that today, “we’re finding that the purchase decision that you think is made in-store may actually be made at home” – meaning that’s where the shopper decides to keep or return the item, long after they have brought it home.

Though this may spell convenience for consumers, it takes a toll on merchants’ bottom line. And it's fraud teams who have to deal with it.

In this article, we dive deep into refund abuse and return fraud, and explore strategies to thwart it.

Not all refund abuse is the same – it can range from accidentally false requests to organized fraud.

What is refund abuse?

Also known as returns abuse, refund abuse is when a customer requests and receives a refund for a purchase they claim was incomplete or unsatisfactory. In essence, they are taking advantage of the merchant’s returns policy and goodwill in order to benefit.

Refund abuse can be opportunistic or premeditated – both can become a huge problem for merchants.

We should also note that although they might both result in a consumer receiving their money back for a purchase, refunds and chargebacks are different. Deceitful chargebacks, where the cardholder is misrepresenting the transaction are not the same as deceitful refund requests, and the two are prevented in very different ways.

What is a malicious refund?

It’s a refund request by a customer who is misrepresenting the truth in order to obtain money, store credit or free items. It’s sometimes accompanied by the return of an item, though not always.

Handling refund requests is part and parcel of being a merchant. Average ecommerce return rates are estimated at 16.5%, with $231 billion in merchandise returned in the US alone in 2023.

But the prevalence and relative ease of returns in an online economy opens the door to abuse and fraud, especially so when merchants haven’t given this any strategic thought.

Is return fraud the same as refund fraud?

Although they overlap often, they’re not exactly the same. Return fraud is any fraudulent activity that involves returning an item, and refund fraud is any fraudulent activity involving a refund request.

It is entirely possible for a fraudulent scheme built around requesting refunds to not involve any returns, and vice versa. For example, an opportunistic first-party can claim that they never received an item they actually received, and request a refund of their purchase.

On the other hand, someone might claim to not have received their item in order to have a duplicate sent to them, intending to resell both but having only paid for one. In this latter case, return fraud is being committed despite the scheme involving no refund at all.

Triggers for consumer fraud
Source: Ravelin Consumer Fraud Survey 2023

How does refund abuse work?

A very simple example is someone who buys an item, breaks it and then returns it for their money back, claiming it was broken when they received it in the first place.

There are several ways to go about committing refund fraud. However, the steps in general for intentional, non-opportunistic refund abuse include:

  1. The fraudster identifies the merchant to take advantage of and investigates their refund policy.

  2. Either online or in person, the fraudster purchases the item that will be refunded.

  3. The fraudster returns – or pretends to return – the item for a refund, giving a believable reason.

  4. The refund is processed by the merchant and normally accepted, as it is seemingly legitimate.

  5. The fraudster makes a profit, as they have tampered with the item, not returned it, never paid for it in the first place, and so on.

  6. For the merchant, this results in a loss of stock, money or both.

In terms of pretending to return the original item, fraudsters and abusers can be quite creative. “We once even received potatoes from Australia instead of the purchased items," says fraud manager and researcher Nelda Biltauere, who was expecting a shipment of clothes to be returned to the UK warehouse of Boohoo.

Types of return fraud and refund abuse

Fraud and abuse linked to returns and refunds can take several forms, including bricking, fake returns, arbitrage and more. Specifically, here are some types:

  • Wardrobing: Referring to consumers buying items specifically to wear them once and return them for their money back, wardrobing is more common in high-end apparel merchants.

  • Item-not-received fraud: The shopper simply claims they never received the item(s), asking the seller for their money back, or the item to be sent again (in which case, they end up with two).

  • Empty boxing: The shopper will return an empty box, or a box filled with unrelated items, in the hopes that they receive their refund before this is discovered.

  • Bricking: Common in consumer electronics and gadgets, this is when someone “bricks” a device by damaging the software or hardware irrevocably and makes it unresponsive – then returning it for their money back without disclosing the damage.

  • Price arbitrage: The scammer returns a similar item that is lower in price, but requests and receives a refund for its higher-value lookalike.

  • Receipt fraud: Less common online than in person, this is when the fraudster will try to tamper with the original receipt in order to receive back more money than they paid for when they bought the item or service.

  • Fake return: An umbrella term used whenever the item(s) returned are, for any reason, not the items purchased, or have been tampered with. Empty boxing is a type of fake return.

  • Shoplifted returns: Only affecting those merchants that have brick-and-mortar outlets, this type of refund abuse sees shoplifters steal items to then return them (using the online or in-store process) for store credit or even cash. They might claim to have lost the original receipt, or they might falsify it.

  • Money laundering: Normally only applicable to big-ticket items, sometimes refunds are used to enable money laundering, with the criminal buying items and requesting a refund, thus getting the funds back – which now seem cleaned.

  • Dry ice returns: Quite the creative scheme, this type of refund fraud sees fraudsters return boxes filled with dry ice. They’re originally heavy, when the return is picked up, but the contents evaporate before they reach the warehouse. It’s so difficult to disprove this that the merchant often has to issue a refund.

  • Refund fraud-as-a-service: In addition to easy-to-find social and forum posts explaining to newbies how to conduct refund fraud, there are fraud rings who can be hired to conduct refund fraud, taking a share of the generated money as payment. These brazen criminals have even released “menus” for their services, with rates and caveats, as you can see from the screenshot below.

Refund Fraud as a Service price list from a fraud ring
This is how criminals who sell refund fraud as a service advertise – part of the price list for the services of a return fraudster group, complete with their fees and timeframes.

How serious is return fraud?

By all accounts, return and refund fraud is both serious and costly for merchants, and the economy. A report by the NRF identified that the total return rate for 2023 in the USA was 14.5% – jumping up to 17.6% for online purchases in particular.

Of course, not all of those were fraudulent. However, return abuse was enough to cause $101 billion in overall losses to returns abuse for US retailers in a single year.

Refund abuse cost retailers 60% of the price of the returned item, despite the item often being recovered.

The consequences of refund abuse

The consequences of refund abuse and return fraud for the merchant include loss of merchandise, reduced profit, wasted shipping and handling costs, operational and fulfillment costs both monetary and in work hours, and more.

Don’t forget the cost of investigation, as well as the risk of denying refunds to legitimate customers, who are very unlikely to want to shop with you again. Indeed, many businesses would rather just turn a blind eye to abuse in the fear of upsetting good customers with high lifetime value (LTV).

For fraudsters who commit it, be they opportunistic consumers or professional criminals, being caught in the act can result in heavy fines and penalties, as well as being blacklisted from the store.

In extreme cases, this can even happen when it is unclear whether fraud has been committed, but returns have been excessive in volume. In 2018, a man was banned from shopping at John Lewis after buying and returning a total of 12 expensive television sets.

popular first-party fraud types
Source: Ravelin Consumer Fraud Survey 2023

Why is refund abuse on the rise?

The key reasons why refund and returns abuse is on everyone’s lips include recent boosts to ecommerce, the cost of living crisis, merchants loosening their policies to avoid chargeback requests, and the democratization of fraud, with techniques easier to learn and adopt than ever.

Ravelin’s recent Consumer Fraud Survey asked more than 6200 online shoppers who admit to committing first-party fraud for their reasons, and the following emerged as the top triggers of this behavior:

  1. The cost of living crisis – 51% and 65% in the UK

  2. The Covid pandemic – 29% of those who commit abuse

  3. Being made unemployed – 18%

Of course, there are reasons on the merchant’s side as well. Increased awareness of how smooth returns policies impact customer retention can sometimes lead merchants to go overboard, making returns too generous and easy to take advantage of.

We should also mention that today, consumers are more aware of chargebacks, where they turn to the card issuing banks to demand money back from merchants. As the cost of a chargeback is even higher than the cost of a refund, some merchants are encouraging and issuing refunds as the lesser of two evils – though it doesn’t have to be this way.

Finally, sub-par consumer satisfaction with delivery and courier services invites requests for refunds for mishandling and sub-par deliveries. In the UK, for example, 65% of respondents to a recent Ofcom poll said they have had delivery issues in the previous six months. With actual mishaps occurring frequently, it’s not far-fetched for a customer to claim they’ve experienced something similar with their own order.

refund abuse dashboard
Detailed refund recommendation analytics on the Ravelin Dashboard.

How to prevent refund fraud

Action steps for merchants looking to minimize refund and returns fraud include reviewing their refund policies, setting out efficient refund processes and deploying refund fraud prevention solutions.

By equipping your customer service team with clear workflows to deal with refund requests, as well as delineating the exact requirements to consider a refund request acceptable, you are bound to mitigate against some cases of fraudulent refund attempts.

What you can do about this will depend on the size, type and capacity of your team and operations. For example, for some enterprise merchants, it is virtually impossible to check all returned boxes to ensure the items are inside.

Best practice, however, suggests doing at least some spot checks or, even better, investigating returns by those customers that are more likely to attempt abuse.

This brings us to the more tech-savvy way to prevent refund fraud: refund fraud prevention tools and software. These can be standalone or integrated into a fraud prevention stack.

How Ravelin handles refund fraud

Let’s look at Ravelin’s returns and refund fraud prevention solution as an example. Available as a standalone solution or as part of fraud prevention enterprise suite, it helps ecommerce and ecommerce-enabled companies manage their refund abuse concerns.

Providing granular reporting and leveraging machine learning, Ravelin’s Refund Fraud product is built on the following principles:

  • Not every refund abuser should be banned forever. There are opportunistic customers as well as professional fraudsters. The former are best rehabilitated and discouraged from attempting abuse, while the latter ought to be blocked and banned from interacting with the business.

  • Each company is unique. Even within the same sector, the fraud and abuse landscape differs from merchant to merchant, and it’s their own data that should inform their strategy.

  • Machine learning helps solve fraud at scale. Ravelin combines whitebox machine learning with human intelligence in the form of rulesets and transparency, to get the best of both worlds while reducing time demands on fraud teams.

  • Links between customers ought to be investigated. One of the best ways to catch fraud rings and demonstrate their impact and breadth, Ravelin’s Connect graph network uses link analysis to identify hidden links between user accounts, working in tandem with the Refund Fraud solution.

  • False positives happen, but we can learn from them. It’s all but impossible to rule out false positives out there in the real world. However, the machine learning algorithms can monitor all instances of manual overruling by human analysts, and identify patterns in order to minimize false positives as much as possible.

  • Data is power. Granular reporting allows fraud managers to understand their fraud landscape and trends better, while data fed into machine learning models fine-tunes results and remains easy to interpret by humans.

Taking the above into consideration, Ravelin’s solution harnesses the power of advanced rule engines, machine learning and detailed network analysis to offer proactive actions.

refund abuse analytics ravelin demo
Demo/sample customer data on the Ravelin dashboard – note the Refunds tab at the top and user-set Refund abuse prevent rule at the bottom of the screen.

We recommend a four-step approach to identifying problem areas:

  1. Set the threshold of acceptable refund rates for legitimate customers – this changes from business to business and industry to industry.

  2. Assess customers whose refund rate is higher than the threshold.

  3. Categorize customers into wide categories, such as accidental, opportunistic, fraudulent, etc.

  4. Revise our target based on the genuine customers you see above the threshold.

  5. Repeat the above until we reach a balance the business is happy with.

The goal is to discourage abuse, blocking fraudsters and keeping genuine customers happy. Depending on your risk tolerance, you can choose to apply friction to refund requests, rehabilitate opportunistic abusers, or increase awareness of your refund policies and acceptable practices.

Ravelin’s Chief Product Officer, Mark Barlow, has given a webinar on battling refund abuse, where you can find more details. For technical details about the integration of Ravelin's Refund Abuse product, including requesting recommendations and testing your integration, see our Developer Docs section on Refund Abuse.

Key takeaways: How to fight refund abuse

It might not be the most glamorous type of fraud, but refund abuse is on everyone’s lips in 2024 – and for good reason. Across sectors of online commercial activity from retail to ticketing, marketplaces and digital goods, refund and returns abuse are consistent pain points that merchants cannot afford to ignore.

Having in place clear policies and processes is a fairly simple step that merchants hit by the rise in refund fraud can implement right away to cut some of their losses. For those for whom refund abuse is a persistent pain point, there are refund fraud prevention solutions on the market, with Ravelin’s particular product making use of machine learning and distinguishing between consumer fraudsters and professionals, in order to help respond in the optimal manner to each.

To discuss your refund abuse concerns or the solutions that Ravelin can offer, book a chat with our team of fraud experts today.

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