Study: Online retailers lose $1B annually due to refund scams, other policy abuses

Consumer misuse of return policies, coupon and loyalty programs is taking a toll on retailers’ profits.

Nearly all (90%) of online retailers believe policy abuse by consumers is a significant problem for their bottom lines, according to a global study by e-commerce fraud and risk intelligence company Riskified. The behaviors include excessive returns, refund scams (such as claiming an item was not received or returning empty boxes), abusing coupon codes and loyalty program rewards, and reselling limited-inventory items.

Policy abuse can cost some merchants even more than traditional fraud chargebacks, resulting in over $100 billion in losses for e-commerce merchants worldwide, the report said.

The study found that while lenient return policies and promotion programs are driving lost profits, most merchants feel they must maintain their approach. Indeed, 93% of retailers said it is “somewhat important” or “very important” for their companies to offer generous refund and return policies to win new customers and retain loyal ones.  And 90% of respondents said they are reliant on promotions to drive sales and remain competitive.

Other key findings from the Riskified’s “Policy Abuse and Its Impact on Merchants: Global Benchmarks 2023” report  are below.

•Policy abuse “peaks” at certain times of year. Seventy-percent  of online merchants experienced a rise in all forms of policy abuse during the summer shopping season, and two-thirds (67%) saw more policy abuse during the post-holiday returns season.

•Two-thirds of retailers (67%) said they can recoup less than half of the total value of a returned item. 

•Nine out of 10 online retailers said they face significant costs due to policy abuse.

•Losses from policy abuse have increased year-over-year.  More than half (57%) of merchants faced increased costs from INR (item-not-received) abuse between 2021 and 2022, compared to a 45% year-over-year increase for reseller abuse, a 38% year-over-year increase for promotional code and loyalty program abuse, and 37% year-over year increase for returns abuse.

Policy abuse is a unique problem for merchants to tackle because, unlike traditional fraud, it can be committed by people who are otherwise good customers, and in most cases it requires no special skills or access to stolen credentials or accounts, the report noted.  An analysis of Riskified client data, for example, shows that on average 20% of all refund claims are abusive. 

Merchants are also burdened by the operational impacts of processing refunds and returns, most of which are handled manually. 

Sixty-two percent  of merchants said they do not currently have automated systems (including machine learning) to accurately identify and address policy abuse.  Also, 65% of respondents use a manual review process for the majority of refund and return claims. It takes most retailers (68%) three to four days to process a refund or return.

“Although a wonderful experience for good consumers, a growing spectrum of hidden policy abusers have tipped the scales — deeply hurting merchant profitability,”  said Jeff Otto, CMO, Riskified. “The key to solving this challenge is resolving the true identity of the consumer, extending trust and frictionless experiences to good customers, while curbing the abusers, and stopping the fraudsters.”

According to Riskified’s data, the motivation for committing policy abuse is due to a mix of economic factors (such as inflation or entering a holiday period during which consumers have stretched disposable income) and emotional factors (such as a bad customer experience with a retailer).