How fraudsters exploit refund policies and how merchants can fight back

Online shopping has made life easier but it also opened doors to fraudsters who abuse refund policies. Since refund policies are crucial for customer satisfaction, scammers target them to cheat the system. 

Understanding refund fraud 

How prepared is your business to combat the growing threat of refund fraud?

Refund fraud is when someone seeks a refund for a product they already have. The goal is to keep the item without paying. This malicious practice exploits a retailer’s return policies, as it lets fraudsters use the system for personal gain. Unfortunately, it is also a growing problem, especially with the rise of ecommerce. 

Fraudsters trick merchants into refunds using fake receipts and disputes. They order a pricey item, claim it never arrived, and demand a refund while keeping the item. This is called refund fraud, and it is costing merchants millions every year. 

Spot refund fraud warning signs 

Recognising the early signs of refund fraud can help you prevent significant losses. Here are the key warning signs to watch for: 

• High return rate for expensive items; 

• Returns of items that appear worn or previously used; 

• Frequent return requests from the same customers; 

• High refund rates from specific geographical areas; 

• Repeated complaints of non-delivery, despite tracking; 

• Requests for partial refunds on large orders; 

• High volume of returns from first-time customers; 

• Returns of items with missing parts or accessories. 

Tighten your refund policies 

A vague or lenient policy invites scammers, so it’s time to tighten up. Firstly, consider defining refund conditions clearly. Require proof of purchase and set a strict timeline of around 30 days for returns. Secondly, include rules to prevent refund abuse. For example, if you sell electronics, your policy might say that only unopened items can be returned for a full refund. For opened items, offer store credit instead. This discourages serial returners who may be gaming your system. 

Track data on sales, returns, and refunds 

It’s nearly impossible to fight refund fraud without data. Thus, you should collect data on every sale, return, and refund. Store it in a centralised system and analyse this data regularly to spot trends. Look for spikes in refund requests after major sales or unusual return rates for specific products. For example, if an item’s return rate is unusually high, investigate this. A flaw may exist in the product, or fraudsters may be targeting it. 

Implement customer verification 

Refund fraudsters often use stolen identities or fake accounts to request refunds. To counter this, strengthen your customer verification process. Use MFA for customer accounts, especially during refunds. Require customers to verify their identity via SMS or email before a refund, as it would cross-check customer data against a global database of known fraudsters. This adds security and makes it harder for fraudulent refunds to go unnoticed. 

Track the refund rate closely 

Knowing your numbers is key to detecting refund fraud. Set a baseline refund rate based on your historical data and industry standards. If your current refund rate exceeds this baseline, something might be wrong. Investigate the cause, whether it’s a product issue, a policy gap, or potential fraud. For example, if your policy expects a 5% refund rate but you’re seeing 10%, consider identifying the root cause early – that can save you significant losses down the line. 

Monitor the entire user journey 

Fraudsters are becoming more sophisticated, so relying on a single data point won’t cut it. Instead, you need a complete view of the customer journey to stop refund fraud. Collect and analyse data from the entire customer journey, from the first click to the purchase and possible refund. Watch for inconsistent behaviour which might include mismatched shipping and billing addresses, frequent changes in contact info, or multiple accounts from the same IP address. Cross-referencing these data points helps you spot fraud patterns. 

Set up return merchandise authorisation processes 

An RMA process can cut refund fraud as it ensures that refunds are not issued until products are returned. Require customers to obtain an RMA number before returning any product, and tie this number to their original order to track the return process. After receiving and inspecting the product, you can issue a refund. If a customer claims they never got a package, ask them to complete an affidavit before issuing a refund. This not only deters fraudulent claims but also provides documentation in case of disputes. 

Educate your customer service team 

Your customer service team is on the front lines for refunds. Teach them to spot and deal with suspicious refund requests. Finally, look for customers who often request refunds or get defensive when questioned about their returns. Give them a checklist of steps to verify before approving any refunds. 

Three key takeaways to safeguard your business 

1. Tighten your refund policies. Clear, strict rules reduce fraud risk. 

2. Use data and tools. Track patterns across the entire user journey. 

3. Train your team. Teach staff to spot and stop refund fraud early. 

This editorial piece was first published in The Paypers' Fraud Prevention in Ecommerce Report 2024-2025, the ultimate source of knowledge that taps into the ever-evolving fraud realm and helps ecommerce specialists protect their businesses with the latest fraud prevention strategies.  

About Brian Davis

Brian builds fraud teams from scratch. He likes to call it organising the chaos. Now he gets to be an extension of fraud teams and help them build their strategy to scale fraud to align with their companies’ lofty goals. His internal goal is to help the community to find their voices and be seen as the true experts they are. Fraudsters work together, so it only makes sense we do too!