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How Retailers Can Fight Back: Preventing Refund Fraud

COVID-19 lockdowns kept millions of global consumers at home, causing online sales to explode. Whilst this was good news for digital retailers, the rise in ecommerce activity drew parallels with an increased risk of online fraud, which in the UK grew by a third last year. Read to learn more. 

September 5, 2022

3 min read

Catz Thompson

The COVID-19 pandemic was remarkable for ecommerce. The temporary closure of brick-and-mortar stores kept millions of global consumers in lockdown at home, in turn causing online sales to explode.

A United Nations report found that the share of online transactions across all retail sales grew by three percentage points to 19% during the first year of the pandemic, underlining the “dramatic” rise of ecommerce.

Whilst this was good news for big large and small digital retailers alike, the rise in ecommerce activity drew parallels with an increased risk of online fraud, which in the UK grew by a third in that same time frame.

Illegitimate activities can take many forms in digital sales, ranging from account takeover to credit card scams.

And while all of them can be incredibly complex to sort out, refund fraud, also known as refund abuse, can be a particularly difficult one for merchants to deal with as it is harder to determine if the warehouse got the order wrong or if they are actually dealing with a bad buyer. This leaves retailers looking for effective and scalable fraud prevention tools.

A threat to legitimate customers

Refund fraud occurs when a consumer exploits a merchant’s refund policy for their personal benefit. As opposed to chargebacks where a cardholder queries a transaction they do not recognise with a bank, refund fraud happens between the merchant and the customer.

A typical example of this type of ecommerce fraud takes place when a customer purchases a product and then claims they never received it or that one or more items were missing. They then request a refund to keep their money and the item, which they may go on to resell.

Rogue customers acting on their own may be behind refund fraud, but there are also professional organizations dedicated to these activities.

Refund fraud can turn into a headache for merchants very quickly, not only because of the financial losses associated with it, but also because it can be very difficult to detect, and excuses given by fraudsters can be impossible to verify.

This means that differentiating between shady transactions and legitimate refund requests can be can be extremely challenging sometimes, thus increasing the risk of antagonizing real customers. 

The biggest challenge merchants face is finding a way to reduce refund fraud without hurting their relationships with legitimate customers who are using their refund policies without any ulterior motives.

How can online traders prevent refund fraud?

1.    Reassess and refine your refund policy.

Make sure your refunds policy is written clearly and in an easy-to-follow, straightforward language, so you minimize the room for grey areas and loopholes.

State the returns or refund period and fees and ask customers for product information when requesting a refund, such as SKUs or serial numbers. List exceptions to your policy in as much detail as possible. 

2.   Strike a balance.

Bear in mind that customers value a flexible refund and returns policy — it might even be among the reasons a consumer chooses to shop with you rather than the competition.

66% of online shoppers read the return policy before making a purchase, so don't make your policy so restrictive that you scare potential and legitimate buyers away. 

3.   Optimize deliveries.

Send updates to your customers to let them know when their parcel is out for delivery and when it has been delivered. Asking couriers to take a picture of the delivered package is also a good idea. 

4.   Streamline your refunds process.

Using an online-only approach instead of human-driven channels such as phone is a good idea to keep refunds straightforward and to streamline your refunds process.

For example, having customers fill out a refund form could be a good option to help your business keep track of all requests, making it easier to detect trends and pick up on unusual activity. 

5.  Use the right tools.

At THG Ingenuity we know just how important it is to protect your business from online fraud — and the negative financial and reputational loss it can bring about. To help online merchants fight illegitimate customers, we developed our proprietary end-to-end fraud detection solution.

Thanks to its bespoke machine learning models, device intelligence, and a global database, THG Ingenuity's fraud detection solution can help you catch known fraudsters and protect your ecommerce business from fraudulent activity and refund fraud, while keeping your legitimate customers’ data safe. 

The SaaS platform was designed to grow with your brand, so you can rest assured that you’ll be able to scale your business globally while keeping your operations and customers safe.

Contact us to protect your business today.

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