In the past year, retailers have reported a rise in unexplained "Item Not Received" (INR) or "Did Not Receive" (DNR) claims. While some of these claims result in chargebacks, many more result in refunds granted through customer service interactions. The problem has increased significantly since February, possibly due to the economic impact of the Covid-19 pandemic. The financial impact of this threat on online retailers is significant, with estimates of over $24 billion in annual losses due to fraudulent refunds. Traditional CNP retail fraud involves the use of stolen credit card information to make online purchases. This results in chargebacks when the legitimate cardholder notices an unfamiliar charge on their statement. Friendly fraud, on the other hand, occurs when the legitimate cardholder disputes a purchase they actually made by initiating a chargeback. As a result, chargebacks have become the primary way for merchants to measure losses due to fraud.
Refunding fraud is a variation on friendly fraud that is more difficult for merchants to detect, as it does not result in chargebacks. It involves professional refunders who take advantage of customers who may have previously committed friendly fraud, making it easier for them to obtain refunds for purchases they actually made. This type of fraud can cause significant losses for merchants.
Fraud-as-a-Service
Refunding fraud is a new type of scam that allows consumers to obtain refunds for purchases they actually made, without having to lie to customer service representatives. Professional refunders offer their services on social media or forums, listing the companies they can guarantee refunds from and the guidelines customers must follow to get a refund. The customer places an order with a retailer listed by the refunder, waits for the item to arrive, and then contacts the refunder with the necessary documentation. The refunder uses their expertise to make the most effective refund claim, such as claiming the item never arrived or was damaged. Once the refund is provided by the retailer, the customer pays the refunder a percentage of the order value. This type of fraud is becoming increasingly common and can be highly profitable for refunders, who can make up to $20,000 per month without using stolen credit card information.
How do we stop it? One way that retailers can protect themselves against refund fraud is by tracking customer refund requests and the reasons for those requests. By analyzing this data, retailers can identify patterns that may indicate fraudulent activity, such as a high number of refunds for a specific dollar threshold or a short time period between shipment and refund request. Retailers can then use this information to implement new policies for refunds, such as lowering the dollar value for non-return refunds or limiting the allowable reasons for refunds. Additionally, retailers can work closely with their customer service teams to educate them on the potential for refund fraud and provide them with tools to identify and prevent it. With this, it's important to track repeat offenders and consider implementing policies to prevent them from making further purchases.
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