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Refund abuse vs. friendly fraud: why you need to know the difference
Refund abuse and friendly fraud are different, but the terms sometimes overlap. How can you tackle problems you don’t fully understand? Let’s clear up the confusion.
The pandemic ecommerce boom is driving returns through the roof. In January 2021 returns were well above pre-pandemic levels, as the US saw around $70bn worth, and the UK’s Royal Mail expected a 63% increase in parcels sent back on ‘Takeback Monday.’
One side effect of this returns spike is that refund abuse and friendly fraud are on the rise. Our Fraud and Payments Survey 2020 found that 41% of merchants saw an increase in friendly fraud in the past year, and a whopping 51% saw an increase in refund abuse - these numbers are set to grow.
Refund abuse and friendly fraud are different, but the terms sometimes overlap or get confused online. But how can you tackle problems you don’t fully understand? Let’s clear up the confusion.
Why the confusion?
There are some similarities between refund abuse and friendly fraud, as they both involve the customer receiving the funds that they previously paid for an item.
Many customers don’t understand the difference between getting a standard refund from a merchant and getting money back from the bank via a chargeback, with 81% of customers admitting to filing a chargeback out of convenience.
What is refund abuse?
Refund abuse (aka. returns abuse) occurs when a customer uses the returns policy of a merchant so much that it becomes unprofitable. Returns are a financial strain for many retailers, costing them on average nearly 60% of the item's original sales price. Customers may also abuse refunds by faking returns, returning forgeries, or reselling merchandise.
Every business experiences refund abuse differently. Some industries can expect more genuine refunds than others, making the threshold for ‘what counts as refund abuse’ difficult to determine.
Food delivery services may experience refund abuse in the form of claims that are difficult to disprove like ‘my food was cold,’ whilst fashion industries can encounter ‘wardrobing’, as customers return clothes after wearing them, often damaged, dirty or unfit for resale.
What is friendly fraud?
Friendly fraud occurs when a customer makes a purchase with their own credit card, and then requests a chargeback instead of contacting the merchant for a refund. Put simply, friendly fraud is abuse of the chargeback process by cardholders.
It can occur by mistake. Some well-intentioned customers misunderstand merchant return policies or wrongly assume that a chargeback is simply a different way of getting their money back (similar to a regular return). Others can intentionally abuse the chargeback system to get something for free.
It’s called ‘friendly’ fraud because the customer makes claims that are believable and seemingly honest.
The main difference: are chargebacks involved?
Whether chargebacks are involved or not is the main difference between friendly fraud and refund abuse - friendly fraud involves a chargeback and refund abuse does not.
Refund abuse goes through the merchant’s refund policies, friendly fraud bypasses the merchant and goes straight to the banks.
Chargebacks involve the forced retrieval of funds from the merchant by the issuing bank, which are then given back to the customer.
How are they managed differently?
Refund abuse and friendly fraud require different approaches. Data Scientist at Ravelin, Tom Linney, summarises the ideal goal for managing refund abuse: “you want to block fraudsters, keep genuine customers, and reform bad behavior.”
How to manage refund abuse
To discourage customers from committing refund abuse sometimes a simple warning email is effective. To tackle more serious refund abuse, Ravelin can help identify serial returners and their linked accounts through network analysis. This enables you to set limits on the number of refunds per customer, or prevent certain customers from requesting a refund for a period of time.
Ravelin Sales Engineer, Elliot Thiry, says: “refund abuse doesn't have to be a problem, there are ways to mitigate it. You don't have to accept it as the cost of doing business.”
How to manage friendly fraud
Friendly fraud chargebacks can result in bank-imposed restrictions and fines. If a merchant’s chargeback-to-transaction ratio gets too high, it even risks having accounts disabled. Managing chargeback disputes is labour intensive, admin-heavy and often takes months.
It’s harder to recognise friendly fraud at the point of transaction, so prevention is key. Merchants need to have robust fraud detection in place to pick this activity up. It’s also important to have clear a return policy and fast customer services to discourage customers from filing chargebacks and help build stronger dispute cases.
But, as easier refunds open the door to refund abuse, you have to strike a difficult balance between preventing friendly fraud and keeping a lid on serial refunding, as Tom Linney explains:
“Friendly chargebacks normally arise when refunds are not easily available to the customer, so merchants make it easy for customers to return orders. However, this can encourage genuine customers to abuse the system or fraudulent customers to break it.”
You don’t have to accept refund abuse as a cost of doing business
Whilst refund abuse and friendly fraud can be confusing and daunting issues, getting the definitions clear is the first step toward managing them effectively. To learn more about how network analysis can help you identify and manage refund abuse, watch our webinar here.