Online sales spiked during the 2017 holiday season, and according to projections from Deloitte, holiday e-commerce spend in 2018 will rise 17 percent to 22 percent, breaking records once again. However, as sales continue to grow, so does a troubling new threat — the serial returner.
Flexible return policies are no longer the exception, they're the rule. However, this trend also creates an opportunity for fraudsters to misuse merchant policies both online and in-store, which significantly decreases profits. The National Retail Federation (NRF) estimated that the U.S. retail industry lost $22.8 billion from return abuse and fraud in 2017, accounting for 6.5 percent of total annual returns. The problem gets even worse around the holidays. In fact, return abuse spiked 119 percent during the fourth quarter last year, according to the Forter Fraud Attack Index.
Understandably, retailers want to crack down on customers who return used goods for a full refund, costing them billions of dollars a year in lost revenue and operational costs. However, e-commerce merchants must strike a balance between managing appropriate returns and stopping serial abusers, while also maintaining positive return experiences for legitimate customers sending back unwanted items.
For many retailers, customer loyalty can be attributed, in part, to generous return policies. But now that three-quarters of online merchants have experienced some kind of return abuse, even some of the biggest retailers have been forced to revise their policies.
Costco allows its members to return items at any time if they're not satisfied. While there's no limit to the number of returns a customer can make, it has been reported that memberships for customers have been canceled after exceeding a certain number of returns. Similarly, L.L.Bean once had a “100 percent satisfaction guarantee” return policy that was revised in February 2018 to a one-year limit instead.
Even retail giant Amazon.com is becoming stricter with the tracking of its customers’ return habits following a series of return abuse incidents, including an Indiana couple that admitted to stealing more than $1.2 million using the company’s returns system. As a result, Amazon has begun issuing email statements to select customers indicating how many items they’ve returned over the last 12 months and requesting explanations for the returns. Amazon also banned customers who they believed purchased items and then returned them in exchange for payment or rewards, falsely inflating the reviews of third-party sellers.
These policy changes reflect the financial burden this growing abuse places on retailers, but excessive caution has also resulted in collateral damage — e.g., inadvertently turning away good customers. And to make matters worse, restricting return policies often negatively impacts company reputation.
Minimizing the Damage
Retailers that amend their return policies have good intentions — they want to rid their ecosystem of abusers and avoid costly returns, which require workers to spend valuable time assessing the quality of merchandise and restocking items.
However, by and large, merchants don't have the sophistication to recognize the hidden connections between individual users and accounts on their sites. Simple rules-based systems aren't able to distinguish the finite nuances in patterns and behaviors between good customers returning merchandise and policy abusers attempting to exploit the system. This has created problems for merchants that have amended their policies, aiming to rid their site of abusers. Instead they inadvertently cast their net too wide, turning away legitimate shoppers as well. Once they’re accused of possible fraud and their attempted transactions are denied, loyal customers often switch to competitors.
Merchants require an accurate method of blocking sophisticated users who may even go so far as to set up multiple accounts and leverage alternative payment methods to hide their identities.
Finding the Solution
So, how can companies minimize the damage to their business while allowing good customers to continue to experience the excellent, frictionless shopping experience they have come to expect?
In order to simultaneously prevent returns abuse and preserve a seamless customer experience, the right solution must be applied. Not all fraud prevention providers will be able to help minimize return abuse on a retailer’s site without creating any added friction. The best strategy for preventing fraud and sophisticated return abuse combines the efforts of human and machine and focuses on a user’s identity during every stage of the customer journey, as opposed to solely concentrating on the data collected at checkout.
For example, the most effective e-commerce fraud prevention solutions have teams of experts feeding complex data into machine learning systems. The machine learning models are so sophisticated that they're able to use thousands of data points, including behavioral biometrics, to differentiate between spoofed locations, devices or identities and ensure that retailers know what’s really going on with their specific client and customer ecosystems. Protecting against abuse at every stage of the customer lifecycle is critical as well.
Therefore, in order to prepare for the influx of legitimate as well as fraudulent returns that are expected this holiday season, e-commerce merchants should assess their current return policy to ensure that it’s neither too strict nor too lenient. In addition, they should make sure they’re using a fraud prevention solution that accurately blocks customers from committing abusive returns both before and after the order is made. The right return abuse practices will enable merchants to grow their businesses securely without jeopardizing customer experience, which is critical during the busiest online shopping period of the year.
Michael Reitblat is CEO of Forter, a fraud prevention solution provider.
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Michael Reitblat founded e-commerce fraud prevention company Forter in 2013. Forter currently works with Fortune 100 retailers, top travel companies, and digital disruptors. In the past 12 months alone, Forter has raised $50M in funding, tripled its customer base processed more than $55 billion transactions and been recognized on the 2018 Forbes Fintech 50 list, Fast Company’s 2018 Most Innovative Companies list, and CB Insights’ Fintech 250 list.
Michael began his career in Israeli military intelligence where he was trained to prevent fraudulent, criminal activities. Following his military service, Michael played a key role in building the first company to specialize in online payment fraud, Fraud Sciences. After the business was acquired by PayPal, he helped to develop the successful fraud prevention system that the payments giant used for many years. In addition to leading Forter, Michael is currently an investor, adviser, and board member of several cutting-edge technology companies. He also works with NGOs to help establish digital payment accessibility in developing countries.