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From policy abuse to friendly fraud: Retailers face billions in revenue loss

By Angela Gonzalez-Rodriguez

29 Jan 2022

Business |ANALYSIS

Image:online fraud. Credits:Pxhere

As consumers and brands alike settle into the new ways of commerce, businesses have been facing a rising volume of fraudulent activities. From account takeover to policy abuse, to chargeback and friendly fraud, retailers are looking for ways to mitigate different types of fraud costing them billions in revenue annually.

Whenever a customer asks their card-issuing bank to reverse a transaction, a chargeback takes place. As Shopify highlights, it’s quite easy for customers to initiate a chargeback, so retailers are bound to experience a request at some point or another, what is costing merchants 0.47 percent of their total revenue each year. Quantifying the hefty cost of online fraud

Just in the United States alone, there was a 178 percent rise in malicious e-commerce fraud websites from October to December of 2021, according to a recent research by Check Point. Those fraudulent sites were often used to steal credit card’s data from legitimate cardholders, which were later used to buy products and services from authentic businesses, creating a substantial amount of chargebacks. The latter cost business an estimated 2.60-3.20 times the price of the products lost.

Meanwhile, the majority of online retailers have suffered at least one type of policy abuse in the past year, according to PYMNTS. Businesses may lose as much as 2.2 percent of their annual revenues to these types of fraudulent claims. The largest retailers were frequent targets of policy abuse. Retailers earning more than 1 billion dollars in annual revenue lost 2.4 percent of their annual revenue to these false claims.

Friendly fraud is on the rise

“Friendly fraud is probably trending because just how easy it is to raise that dispute with the banks with the probability that the bank is going to look out for my interest. Nowadays, I can log into my phone and I'm two clicks away from pushing a dispute button. And the bank doesn't even challenge the reason why I'm disputing the transaction. They just put the burden onto the merchant to be able to respond to that chargeback,” explains David Jimenez, chief revenue officer at Chargeback911.

The company’s ‘2021 Chargeback Field Report’ quantifies the growth of friendly fraud as a year-over-year 21 percent increase noted by the average merchant between 2018 and 2021. Noteworthy, that was in addition to the 25 percent increase in chargeback issuances due to COVID-19.

Deterring policy abuse can save retailers up to 89 billions of dollars

As Scott Buchanan, chief marketing officer at Forter, pointed out during an interview with FashionUnited at NRF Big Show, account takeover and policy abuse will keep rising in 2022. Both types of fraud have been on the rise over the past couple of years. “Policy abuses are increasing, in part because that pandemic is having us all shop more from the comforts of home,” explains Buchanan. “Apparel companies are trying to find ways to differentiate their company in their offerings from their competitors and flexible policies including flexible return policies are good way to do so,” he adds.

Per a recent research by PYMNTS and Forter, policy abuse by customers costs retailers in the United States more than 89 billion dollars annually. Ranging from false item-not-received (INR) claims to returns of items for a full refund after the customer has used the item but claims it was damaged, customer policy abuse is costly, persistent and challenging to track.

Leveraging technology to stop fraud from denting profits

So, how to compete on the customer experience without risking to be targeted by fraudsters? Forter’s CMO points out that technology can help to effectively identify repeat abusers. “Distinguishing those instances where a customer wants to return an item or when a product wasn’t legitimately received by them, even though it shows delivered in your systems, from somebody who is returning products over and over or is claiming that items have not been received many, many times is critical for apparel companies. If you're using technology to track identities across time, you can identify those serial abusers.”

Another effective way to tackle this rising type of fraud is adjusting policies in real time for those individuals, advises Buchanan. “If you have somebody who is serially abusing your return policies you could change the terms is part of their digital commerce experience so that when they buy something, it's final sale, that there are no returns available to that individual, or somebody who repeatedly claims that they're not receiving items can purchase from you, but they have to sign on delivery. So you remove the risk of them claiming again that that item has not been received. Through effective use of technology, you can identify those individuals, and you can adjust your store policies for that individual in the moment.”

“If your loss ratio in chargebacks is 1 percent and your loss ratio on turned away business or fraud as a result of fraud is one two 3 percent You're losing 4 percent of your business in any given year. And you're trying to grow your business double digits in a retail environment,” summarises Chargeback911’s chief revenue officer. “If in COVID times, growing the business became a challenge for many retailers to get to double digits, much of them stayed in that single digit range. That is when a good controller or CFO should be looking at that one to 4 percent range of fraud and chargebacks and figure out how they can optimize that.”

In the case of chargebacks, existing technology can help lift success rate catching fraudulent instances over 50 percent. What means that out of every 100 chargebacks a retailer submits, 50 of them can be assessed and recovered rapidly. New technology is allowing retailers and their partners process vast amounts of data in near real time, which means an opportunity to increase that success rate as high as sometimes 75 to 90 percent, says Jimenez. “And if I if that if I can recover that percentage of business back that revenue back to the merchant. The cost of the services are negligible in the grand scheme of things you've just recovered, you know, a big number for the retailer,” concludes the chargeback expert.

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