As online shopping has grown, the world of retail has undergone a profound transformation. Shoppers are now just a few clicks away from their desired products, and retailers have adapted by offering policies aimed at enhancing customer satisfaction.
However, when customers abuse return policies or incentives, this burdens retailers with costly, time-consuming returns and threatens revenue. According to the latest data released by Riskified, this issue has become a significant concern for retailers worldwide.
Lenient return policies and generous promo code offerings have been instrumental in the growth of e-commerce, but Riskified's research shows that the abuse of these policies has caused huge losses to retailers. This article will discuss the current state of policy abuse, the motivations that lead customers to abuse retail policies, and how retailers can address these issues.
The Current State of Policy Abuse
According to Riskified, most retailers (93%) consider generous refund and return policies to be crucial for engaging and retaining customers. But nine out of 10 retailers have faced significant losses due to fraud and abuse of these policies.
Popular forms of policy abuse include returns abuse, when customers exploit a retailer's return policy, returning used goods, counterfeit products, or in some cases, not sending any product back; item not received (INR), in which customers falsely claim not having received a package while demanding a refund, and promotion or loyalty abuse, characterized by fraudulent customer actions aimed at taking advantage of promotional offers or loyalty programs.
While many customers who take advantage of return policies do so within the bounds of these policies, more serious forms of abuse come from "serial fraudsters" who systematically exploit promotions, return policies, and loyalty programs, causing significant losses for retailers. Riskified estimates that retailers globally spend $1.58 trillion on policies to acquire new customers and retain their existing ones, but that up to 5% of overall sales are direct losses due to policy abuse.
What Motivates Customers to Abuse Merchant Policies?
Abuse of policies is motivated by a variety of factors, including economic stress during times of inflation and the excitement of peak shopping seasons like Black Friday and Cyber Monday. For example, 40% of merchants reported an increase in reseller abuse due to inflation and 41% reported a spike in INR abuse at the start of the holiday season.
Emotional factors such as prior bad customer experiences with a retailer can also motivate policy abuse. It’s also worth pointing to social media networks, where people often brag about the ways in which they’re able to do things like stack promotional codes or get products at low cost or even no cost. Their viewers are encouraged to adopt these tactics as there aren’t usually tangible consequences.
The rise of abuse during summer shopping seasons and the post-Q4 holiday shopping season has been alarming for retailers. Products received as returns are often wasted because merchants struggle to restock them. In fact, Riskified found that two-thirds of retailers can recoup less than half of the total value of a returned item.
How Merchants Can Address Policy Abuse
Effective solutions for combating policy abuse require alignment within organizations. All departments, from marketing to finance to loss prevention, must be aware of policies and procedures to prevent abuse and commit to upholding them. Unfortunately, only a minority of organizations (19%) report a high level of understanding and alignment across departments regarding policy abuse.
Automation driven by AI algorithms and digital identity intelligence solutions are crucial tools for successfully identifying and addressing fraud and abuse in real time. Currently, most retailers lack automated systems for this purpose, but the majority of those without such systems express interest in implementing them.
Data transparency and more detailed customer data such as information about past purchases or return history is essential for retailers to detect potential instances of fraud and abuse.
Retailers should also analyze their existing policy programs to ensure they’re aligned with customer experience and retention goals and eliminate potential loopholes that customers might exploit. Finally, organizations should ensure they are allocating dedicated resources to combat policy abuse, for example, ensuring teams or departments are engaging with technology to monitor returns and analyze customer data.
In conclusion, while lenient return policies and promotions have fueled the growth of e-commerce, policy abuse continues to be a major issue. Retailers must take proactive steps to ensure they stay ahead in the battle against policy abuse and maintain a thriving retail ecosystem.
— Eyal Elazar, Policy Abuse Expert at Riskified