What Is Refund Fraud and How Can You Detect It?

Among the many challenges e-commerce businesses face, none are as problematic as the issue of fraudsters. Companies have to be on alert and have different strategies for fighting fraud. One of the most common ways fraud is committed is through illegitimate returns. Recent reports show that the rate of online returns was to reach 10% by 2022. Many online shoppers now know how easy it is to deceive online businesses and bypass any inspection process they may have. In fact, there are hundreds of materials online and guides that show how to get additional refunds from online stores.

What Is Refund Fraud?

Return fraud is a way of stealing from businesses by bypassing the company’s return policies. A person who does this act is said to be committing friendly fraud. This is because a legitimate purchase was made but in a deceptive way. The person committing such fraud intends to profit from the business by stealing. Most return fraud cases involve using stolen credit cards, or the person may claim not to have received the delivery.

It is usual for businesses to accept returns from buyers as it builds trust. The benefit is that it encourages customer loyalty so they can always come back to do business and promotes a long-term relationship. Return policies may be suitable for businesses, but it also becomes a problem with the rise in return fraud. In this article, we will be looking at how to identify, prevent and possibly fight this kind of fraud.

How Does Refund Fraud Work?

It is important you understand how this type of fraud is committed. Return fraud can occur in many instances, and it is one of the most common forms of fraud practiced today. The theft can occur as an organized crime targeting eCommerce stores, or it could be a one-time affair from a good customer. Let’s look at this scenario, a customer receives two items from the same store and then swaps the price tag, so they get a larger refund for one of the items instead of the actual value of the item returned. Even though many online stores lose a lot from these friendly frauds, you would be surprised that they haven’t found a foolproof way to stop these attacks. Refund fraud is difficult to combat because it is not easy to identify it, as most customers have several reasons for returning items. There is no way retail stores can verify if the customer is not truthful. Also, too much scrutiny on the customer may cause the customers to feel alienated, and it might affect the business’s reputation.

Common Refund Fraud Strategies to Remember

There are many ways this friendly fraud can be committed. Every time, fraudsters improve on their tactics and strategies when perpetuating this offense. Here are some of them:

Free Renting:

This is common in online clothing stores but also in other establishments. Customers will buy an item to use only once and return it to the store. Some people don’t consider this a crime, and surprisingly, most shoppers have been guilty of this act.

Sabotaging Seller:

This usually occurs among competitors in a business. Some will go to the extent of placing orders on all the items sold by their competitors only to return them back at a much later date with the intention of exhausting their inventory. In some cases, they may even return counterfeit items claiming that it was delivered to them. The business can suffer from this as it may close their business or get their account suspended.

Seizing Opportunity:

Sometimes refund fraud may turn out not to be pre-planned. It may be that the customer decided to return the item for an in-genuine reason without intending to defraud the seller. This can happen if the buyer just changes their mind about buying the item or for some other reason. It occurs most times when the customer gets a late delivery and decides to request a refund.

Deliberate Fraud:

This action is intended and the person committing the return fraud set on to scam the business. They may be trying to get the item for free and usually do this by opening different accounts. The person purchases items and returns empty packages while making away with the original items to resell somewhere else.

Eliminating Refund Fraud Risks

Combating refund fraud is not always a successful mission. The seller can do very little and, in most cases, just report the buyer so others can be aware of their fraudulent activities. They can also make a report to police authorities and delivery services. It is not always possible to confront these fraudsters, especially if they are tactical thieves. However, some businesses have devised methods to eliminate return fraud.

Some do this by blocking buyers with negative feedback scores and who reside in risky locations. However, some have an internal fraud detection system that manually checks customers’ returns reports. This way, it can detect if there are any suspected fraudulent activities. The only pitfall with this method is that even when the system has detected it, the crime has already been committed.

E-commerce stores can protect their business by:

• Asking customers to produce their ID and contact details when making returns.
• Offering gift receipts or credit receipts instead of cash for refunds.
• Analyze buyers’ digital footprints to detect fraud.
• Updating return policies to include comparing the original weight of the item to the returned item.
• Employing a fraud detection system that can easily prevent return fraud.

Final Thoughts

As cases of return fraud increase, businesses need to stand up against these attacks. This fraud can be prevented with the help of modern tools of detection that quickly point out suspicious shoppers. Even if these fraudsters create multiple accounts using stolen credit cards, the system should be able to trace the digital footprint to identify these risky customers.