E-commerce retailers face a trend impacting their summer sales profit margins as more shoppers buy into abusing transaction policies to commit friendly fraud.
The shift to dishonest buying behaviors is significant. In a recent Consumer Pulse Survey, nearly 70% of merchants in the U.S. and U.K. told fraud and risk intelligence firm Riskified that they experienced increased fraudulent returns, misuse of promotion codes and discounts, and other types of policy abuses. This summer’s higher volume surpassed last year’s occurrences, including the December holiday season.
Riskified surveyed 2,000 consumers across the U.S. and the U.K. who were committing or would consider committing policy abuse. Researchers reported that 24% of American consumers were more likely to commit dishonest shopping acts during the summer due to increased expenses and financial pressures.
The same polling of U.K. shoppers showed nearly one in five (18%) were more likely to engage in summertime policy abuse behaviors. Citing increased financial pressures, just under half (49%) agreed they would likely engage in other forms of fraudulent shopping as well.
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Understanding and Combating Policy Abuse
According to Riskified, lenient return policies and product promotions have become the gold standard for merchants who want to acquire loyal customers. However, these same strategies have opened them up to rampant policy abuse. The data showed that policy abuse costs merchants more than last year’s higher chargeback losses.
Policy abuse — including refunds and returns, reseller purchases, promotion, and coupon fraud — tends to surge in the summer. However, according to Riskified’s policy abuse expert Joe Gelman, the reason for that uptick has remained a mystery until now.
To combat the shift in consumer shopping practices, merchants must use data throughout the customer journey to build a holistic picture of good and bad customers. These sources include order management systems, return merchandise authorization systems, customer service ticketing systems, and CRM platforms.
“This lets them create a detailed picture of each purchaser and adjust the friction level to preserve a positive experience for desirable customers, discourage friendly fraud, and block the worst offenders,” Gelman told the E-Commerce Times.
Seeking Why, Balancing Options
A primary goal of the survey was to understand why shoppers gravitate to what some in the marketing field refer to as friendly fraud. Previous industry studies showed that 52% of U.S. shoppers spend more money in the summer than during cooler parts of the year.
Summer is the most likely season for dishonest buying behavior. Rates nearly double from the winter season.
Among the top reasons for committing policy abuse in the summer is buying more items to meet activities but wanting to pay less. For some, summer costs for travel, special events, and vacations are motivators.
Consumer attitude shifts are inherently seasonal and based on the product industry. Gelman suggests that this can sometimes become a bit like sociology.
“You look at the trends you see in a season and try to think what is going on in the culture, the business environment, or the consumer mindset causing this. These shifts do happen,” he said.
This summer saw a huge peak, he noted. The latest findings provided more insight into behavioral changes shoppers began displaying last summer.
Research Insights on Policy Abuse
One of the top forms of buying abuse involves coupons and promotions. Email makes it easy to commit.
In the U.S., 58% of consumers admitted using multiple email addresses to reuse coupons or discounts. In the U.K., 48% admitted to doing the same.
Researchers found that men are more likely to commit policy abuse than women (65% of men compared to 45% of women). In this regard, 56% of both groups bought items to resell them at higher prices.
Deception often played a direct role. For instance, 47% falsely claimed that an item purchased online was never delivered to receive a refund or replacement.
Younger consumers of both sexes and men committed the most policy abuse. Incidents frequently involved “wardrobing” — buying clothing to wear once to return it afterward; this abuse was perpetrated by 53% of respondents aged 18-24 and 63% of respondents aged 35-44.
In all cases, guilt had little influence in deterring dishonest antics. Even though 54% of consumers admitted feeling guilty, they still committed policy abuse.
For many shoppers, it was a matter of either innocent web activity or stealing without consequences. With policy misuse — or is it really abuse? — the lines of legality became blurred.
People see crime on the street differently than digital shopping theft. According to Gelman, less principle and friction are involved when it happens online.
“You don’t even need to leave your chair. It feels like you are further removed from the consequences, like when you take something off the shelf at a retail store, you see it was on the shelf, and now it’s not,” he said.
Challenges Tackling Consumer Fraud
Policy abuse causes merchants significant financial losses. At the same time, allowing shoppers some favorable leeway on return windows and issuing unchallenged refunds are essential to retaining good customers, especially during highly competitive shopping seasons. To get the balance right, you need to understand the sources of abuse to calibrate an effective and appropriate response, reasoned Gelman.
“The Holy Grail here is to find a way to tell the good customers from the bad actors and do it in an automated way. Because these businesses get so many orders and claims, it is unrealistic,” he said.
If offenders are low-risk or still have the potential for lifetime buying value, you could give a warning or apply some light friction. Otherwise, Gelman suggested that sellers can block risky repeat offenders from further transactions.
“In both the U.S. and U.K., pursuing theft charges against customers is difficult and mostly not done,” Gelman noted.
AI Detection Offers Limited Countermeasures
Like other e-commerce platforms, Riskified has used AI to find fraudsters with some success. However, according to Gelman, many merchants are hesitant to rely on AI for automated security tasks.
“There is potential there, and some places are exploring it when it comes to evaluating [possibly fraudulent] claims,” he added.
Riskified uses an AI algorithm that connects all the data supporting questionable transactions. For instance, it finds customers who bought numerous orders and sent most back as returns.
“Policy abuse is a growing trend where people start getting comfortable with doing this, and that is worrying merchants because they created this monster for themselves,” he quipped. “Consumers figured out they can get away with it.”
Gelman predicted that offenders will have to decide whether to justify transaction policies based on the bad economy just to feed their families. Retailers must decide the merits of toughening and enforcing policies or risk losing customers.