Refund Fraud: An Update

Refund Fraud: An Update

April 22, 2021

By Karisse Hendrick, Principal, Chargelytics Consulting

The impact of refund fraud has only increased in the months since we first discovered this frightening new fraud trend. While refunders began by targeting the largest brands in the world, they have turned their attention toward smaller businesses as well. The companies most often targeted for this type of attack are retailers with physical goods, delivery companies, and restaurants offering curbside or to-go order pickups.

Refund fraud differs from traditional payment fraud in several ways:

  • For the most part, everything at the time of transaction appears legitimate. The actual fraud occurs post-transaction, after the goods have transferred ownership from the business to the customer.
  • While some consumers commit this fraud on their own, an entire ecosystem has been created to support those who wish to take advantage of these “great deals” without actually having to go through the process.
  • Professional “refunders” offer their services and advanced knowledge of each merchant to obtain a refund for the customer without the items being returned. They typically charge 10-40 percent of the value of the transaction.
  • Refunders encourage their customers to not target the same merchant more than once a year, making it especially challenging for merchants to anticipate the tactic.
  • While the majority of refund requests without a merchandise return may be fraudulent, there are still many customers who will legitimately be owed a refund when stating that an item was not received or arrived damaged. This is especially true as the effects of the Covid-19 pandemic linger. Social distancing initiatives in warehouses and with shipping carriers, significant volume increases in orders, and the continued popularity of “porch piracy” are all contributing factors to muddy the waters when looking at these refund requests.

Increasingly Creative

While claiming that an item was not received (often referred to as DNR, DNA or INR claims by merchants) remains the most popular way to initiate these refund requests, in part because it’s near impossible to prove, refunders have continued to be creative when merchants begin to implement additional policies to make this claim harder to make. Other methods of refunding include:

  • Boxing: returning an empty box or items of little-to-no value with the legitimate return label to the warehouse, then calling customer service to request an immediate refund once the package has been received by the warehouse, but prior to it being opened.
  • Damaged claim: Claiming an item was damaged in transit, especially damage that could compromise the safety of the merchant’s warehouse staff (e.g., a leaky battery or broken glass).
  • Fake TID: “Fake tracking identification” is a method used by more advanced refunders, especially for high-dollar claims (possibly up to $25,000 depending on the merchant). Refunders have also found ways to manipulate return shipping labels to appear to have been sent to a retailer’s warehouse (without the goods that were purchased included). This gives the refunder an opportunity to contact the company’s customer service, provide the tracking number and receive a refund prior to the warehouse realizing the package never arrived, which can take several days.

How Merchants are Responding

Merchants are only beginning to understand the genius of this type of attack. It enables bad actors to almost completely circumvent the majority of pre-transaction fraud prevention solutions CNP companies have come to rely on to identify and prevent fraud. That, in turn, requires merchants to think outside-the-box and focus more on process and policy adaptions, rather than technology solutions.

As an industry consultant, I have had the privilege of facilitating bi-weekly calls over the past year with top retailers, often large targets of professional refunder groups. Recently, I asked the members of this group to share their advice with other digital sellers looking to reduce the losses caused by refunding fraud. Here are some of the most popular suggestions:

Understand the problem:

  • Customer service departments are the “front lines” of most refund requests, so it only makes sense to start there. Ask customer service leaders about a systematic method of measuring the problem. One step that has led to progress for some retailers is to add a reason code for refunds without merchandise returns. Common reason codes include “Did not arrive,” “empty box at delivery,” “damaged item,” “returned to warehouse,” etc. This allows for reporting to be pulled regularly to identify patterns over time.
  • Host an open conversation with customer service agents about refund fraud and ask for their thoughts and observations. Some leaders report learning a lot from these conversations, such as reports of noticing callers using a script, different area codes calling in for a refund request than is listed for the customer, and other observations of “suspicious” behavior. Additionally, once customer service agents know there is an issue with non-merchandise return refunds being exploited, they will observe more suspicious activity in the future, and may be inclined to report it to the fraud department. Similar conversations with fulfillment employees can also be productive.
  • If you work for a relatively well-known brand or chain of locations, search your company name in prominent social media platforms (Twitter, Instagram, Facebook, Reddit, etc.) and messaging apps (Telegram, Discord, WhatsApp, etc.). While the threads that discuss the actual methods used to manipulate policies will be in private, invite-only groups, refunders often post lists of brands with maximum dollar thresholds, item count restrictions, and other useful information in adds to consumers, alerting them to various parameters of an order that they will “guarantee” for a refund.

Communicate issues with leadership:

  • Once you have implemented methods to track and understand these issues, you will have data to provide leadership. This will help them understand the problem—to see it as a pattern of abuse and not, as is often the first assumption, a supply chain issue.
  • Although there are not yet public, industry benchmarking data on these issues, some large merchants have reported this issue having a cost of 3x their total fraud chargebacks. Others have said refund accounts for 30-50 percent of their non-merchandise returned refunds.
  • It is also important to communicate to leadership that this is a brand integrity issue, in addition to a financial one. When consumers learn that other people were successful in getting an expensive item for the equivalent of 80 percent off by hiring a professional refunder, there will be a percentage of customers that will chase that “good deal.” Additionally, reducing your company’s risk of being a target for this type of fraud will also greatly reduce hold times for customer service—these requests can bog down a customer support team quite a bit.

Implement new processes and/or policies:

While every change you consider should be based on data and conversations with other departments within your company, there are several process and/or policy adaptations that have been helpful in discouraging this behavior without negatively impacting customers who may need a refund for a legitimate reason.

  • Perform an end-to-end policy audit in conjunction with customer service, warehouse and fraud prevention employees. Several companies reported finding loopholes that some customers had identified, but the company hadn’t. (e.g., allowing refunds based on “did not receive” claims to be issued within a few days of the package being delivered or several weeks after the package was delivered or within less than 24 hours of an item showing delivered at the warehouse as a return).
  • Continue to have customer service accept the refund requests but implement a 24-48 hour approval window for a “review” to be performed by the fraud department. Having an analyst with fraud-behavior training review these orders can provide additional context for a decision to be made. But, almost more importantly, any kind of delay in processing refunds to these customers becomes a deterrent in targeting a specific company. Depending on volume of these requests, some merchants have implemented policies to have customers fill out a form online instead of contacting customer service.
  • Consider updating terms of service to require exchanges only in cases of items not being received or returned with no items in a box. The majority of customers looking to exploit refund policies will only make purchases if they know they will be reimbursed with a credit on their original payment method. Once they learn they can only have the same item sent again, or receive a store credit/gift card, this may discourage the behavior and/or refunders from listing your company as an option for their services. Likewise, customers who made a purchase because they wanted the item will often be happy with having an item replaced or receiving store credit.

This issue will continue to target online businesses, as well as to evolve with time. But, how your company responds or tolerates these exploits will determine if your company is continually a target for refund fraud, or if the company can discourage bad actors from targeting your services as a way to get items for free.

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