Refunding Fraud: The Industrialization of Friendly Fraud

Refunding Fraud: The Industrialization of Friendly Fraud

June 18, 2020

By Karisse Hendrick, Principal, Chargelytics Consulting

In the last year, retailers have been reporting an increase in “Item Not Received” (INR) or “Did Not Receive” (DNR) claims they couldn’t explain. While they have seen some of these claims result in chargebacks, primarily this increase has occurred via customer service interactions resulting in a refund. Since February, coinciding with rising unemployment associated with the Covid-19 pandemic, the problem has increased significantly.

Financial impact to online retailers from this threat is high. Forter, an online fraud prevention provider, recently published a report on refunds and refund abuse. The report found 20 percent of refunds are fraudulent and the company estimates merchants are losing $24 billion annually.

What is it?

Traditional CNP retail fraud—when a criminal uses a stolen account or credit card to buy an item online—results in a fraud-related chargeback once the card holder sees an unfamiliar charge on their bill. Consumers have also in the past turned to friendly fraud—when the legitimate account or card holder disputes a purchase they actually made through their issuing bank by initiating a chargeback.

As a result, chargebacks have become the “gold standard” for merchants to measure losses due to fraud. Refunding fraud, however, is a twist on friendly fraud that has caught merchants off guard, primarily because there are no associated chargebacks, though losses are significant.

Refunding fraud taps into the same base of customers who might have committed malicious friendly fraud and expands it by making it much easier for them. The game-changer is the creation of professional refunders.

Fraud-as-a-service

Refunders allow consumers to benefit from fraud, without having to do the uncomfortable work of calling customer service and lying to a representative. Refunders post their services on non-dark web forums like Telegram or Discord or on social media pages or groups. Each refunder lists companies that they “guarantee” refunds for, specific dollar thresholds and other guidelines consumers must follow to get a refund.

A customer places an order within the stated guidelines with a retailer listed by the refunder and waits for the item to arrive. When it does, they get back in touch with the refunder and gives them the proper documentation. The refunders are experts who know what claims will work best with each company. They know which retailers will respond to a claim that the item never arrived. They know which retailers will only provide a refund if you claim the item was damaged (and not want the product back). Once a refund is provided to the cardholder by the retailer, the customer then pays the refunder 15-30 percent of the order value for their service.

This process has turned traditional fraud on its head and turned friendly fraud from an individual choice to a profession. Fraudsters that specialize in social engineering can perform refund requests on behalf of customers all day long, without having to obtain a stolen credit card or a drop address. According to one refunder who was recently interviewed on a podcast devoted to fraud, a good refunder can make $3,000 to $5,000 a week. If they only “work” Monday-Friday, that’s up to $20,000 a month without ever using a stolen credit card.

A quick search finds refunders guaranteeing refunds as low as $300 to others who say they can get as much as $15,000 per order. And they don’t just target the largest companies. Refunders want to attract and please their customers, so they often list smaller retailers as well, and specialties like outdoor & recreational stores, sporting equipment or beauty companies. While some retailers are more common targets, each refunder’s list varies based on which stores they have amassed the most expertise.

The availability of these services means that the number of INR or DNR claims to customer service departments has skyrocketed over the last year. Add in an economic crisis and more consumers than ever are willing to try this.

And, if you don’t want to pay someone 30 percent of the product’s price to call in your refund for you, there is actually an eBook for sale that will train you on how to commit refund fraud, so you can make the claims yourself.

How do we stop it?

This type of fraud is challenging to identify, even after it’s been committed, primarily because there isn’t a related fraud chargeback. Shipping companies sometimes deliver items to the wrong residence. Items do break in transit. Occasionally, only one shoe is sent in a box. Also, unlike credit card fraud or account takeovers, there are not predictive indicators that a specific customer has bad intentions at the time of purchase, rendering current fraud prevention technology unable to prevent losses due to this method of fraud.

When retailers started to see steep increases in losses due to these claims, I started hosting a bi-weekly call for them to share what they’re seeing and how the companies are responding to these issues. Collaboration has been effective in helping these retailers think of solutions to the issue. Here are some ways to take action:

  • Comb through refunder ads to see if your company is included in any lists. Based on the 20+ boards I’ve seen, I can safely say the majority of midsize to large online retailers are included in at least one advertisement. But, just because you can’t find your company listed doesn’t mean you’re not being targeted. There are also private lists available to customers that have proven their discretion.
  • Track all customer refund requests and reason. Enable customer service agents to select options like “damaged merchandise claim,” “package did not arrive; tracking info states delivered,” “package did not arrive, no confirmation of delivery from shipping partner,” etc. On a monthly basis, pull the report on refund sub-categories. Chances are, patterns will emerge among transaction value (it will be under a pre-set threshold by the refunder), the customer claim and the time period between shipment and phone call.
  • Use the data gathered to propose new policies for refunds such as lowering the dollar value for non-return refunds or limiting the allowable refund reasons. Remember to consider the impact on good customers who may genuinely have not received an item or received a damaged item. Changing some of these guidelines may force refunders to change their guaranteed refund amounts or their claims on the phone, discouraging them from offering refunds on your brand.
  • Work closely with customer service. Explain that the increase in these claims is most likely due to fraud, not bad shipping partners or other issues. Offer to help them learn how to identify social engineering tactics. Suggest an escalation process to have some refund request calls routed to a trained member of the fraud team.
  • Identify repeat offenders. While some retailers currently have this tracking ability, many can only see how many refunds a customer has received by manually going into their account. By having this data accessible for reporting, retailers can identify repeat abusers and consider implementing policies to “fire the customer.” Merchants who have done this have discovered some customers claiming “did not receive” dozens of times. In a case like that, your company may want to send no additional items to those customers.

At this time, there aren’t any preventative systems that can identify this type of fraud during a transaction, according to various retailers who have tried different solutions.

Prior to 2008, friendly fraud didn’t have a name. But, when consumers could no longer afford the creature comforts they had gotten used to, they turned to the chargeback process to fund their vacations, name brand clothing & accessories, electronics and more. The economic distress resulting from the Covid-19 pandemic seems to have spawned a more dangerous cousin. While traditional friendly fraud is still an issue 12 years later, I’m afraid the impact from refunding may be much worse. It’s more difficult to identify, to prevent and there is no representment process to attempt to get your company’s money back.

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