Retailers are facing a challenging economic period, with a volatile economy projected to cause a reduction in consumer spending. To remain competitive, many retailers may offer coupons, discounts, lenient return policies and other incentives that could win them loyal customers—but also make them vulnerable to policy abuse.
For CFOs, helping their companies manage fraud is not new. However, CFOs must be prepared to take a new approach because of policy abuse’s widespread effects across the business. Legal, customer service, shipping and fulfillment, and other departments are all impacted by policy abuse in ways that are unique from other forms of fraud. Increasingly, CFOs must check in and collaborate on fraud prevention strategies with various lines of business to best protect the company’s revenue, reputation and customer trust.
The growing problem of policy abuse is becoming an issue that CFOs and others tasked with retail and ecommerce companies’ financial health cannot ignore. According to a report released by the National Retail Federation, consumers returned an estimated $816 billion in merchandise in 2022. And for every $100 in returned merchandise accepted, retailers lose $10.40 to return fraud.
Moreover, policy abuse can erode trust between retailers and customers, leading to lower retention rates and higher acquisition costs.
Defining Policy Abuse
Policy abuse can impact all types of online retail (e.g., fashion, furniture, ticketing and travel) and can take many forms, including return abuse, coupon or promotion abuse, reseller or limit abuse, and item not received (INR) abuse.
· Return Abuse: This happens when customers exploit merchandise return policies by, for example, returning worn or damaged goods, claiming that a product was defective to qualify for a free return, or falsely claiming that a product was damaged in shipping.
· Coupon or Promotion Abuse: When customers use promotions and offers beyond their intended use. For instance, a customer might open a new email account to improperly take advantage of a promotion rewarding new customers.
· Reseller or Limit Abuse: This affects companies that are selling limited editions or limited quantities of an item—for example, designer sneakers. Buyers conceal their true identities to exceed the quantity limits to resell products at a profit.
· Item Not Received (INR) Abuse: When buyers falsely claim that an item was not delivered to secure a refund. This practice is similar to first-party payment card fraud (often called “friendly” fraud) but does not involve a chargeback claim filed with a credit card company. INR abuse can also happen in tandem with an INR chargeback with their credit card company to try to double the refund.
How Common is Policy Abuse and Who Commits It?
Policy abuse is a common practice among customers, with 45 percent of consumers admitting to exploiting merchant policies, according to Riskified data. Offenders can be found at both ends of the socioeconomic spectrum, and young consumers are the most common perpetrators. Riskified found that 65 percent of respondents who admitted to abusing merchant policies are ages 18 to 29 and 51 percent are between 30 and 44. This could be because young shoppers who are digitally native could be more skilled at exploiting policy loopholes in ecommerce. This also suggests that younger generations represent a “coming wave” of shoppers who are more willing to commit policy abuse that threatens revenues.
Nearly half of the people surveyed who took advantage of merchant policies (49 percent) did not feel guilty about it. This was likely because they didn’t understand what was considered policy abuse in the first place. Retailers should remember that customers who do break the rules are not always “bad” customers. Only 39 percent of them thought their behavior was wrong, according to the survey. Some people feel that what they did was fair, and 14 percent of them think they deserve extra benefits because of bad customer service. Lastly, 31 percent of young people said they might commit policy abuse again in the future.
Clearly, policy abuse is a problem that isn’t going away, and as the priorities and strategies of CFOs gain more of the spotlight, CFOs should be aware of this growing trend and be prepared to collaborate in order to tackle it efficiently
What Can CFOs Do About Policy Abuse?
Retail return fraud, coupon abuse and INR abuse can cause significant revenue loss, and, as the leader responsible for preserving revenue and managing financial risk, ultimately CFOs should collaborate with not only their fraud prevention teams but leaders across other lines of business to ensure a unified strategy that prevents policy abuse.
The CFO should work with the company’s management team to implement technology to identify and prevent policy abuse. Technology can help retailers unmask data manipulation and fake accounts and access a holistic view of the customer’s behavior to uncover abuse patterns and trends.
At the same time, CFOs should ensure they have a deep understanding of their retail company’s strategy around customer loyalty and promotions. Fraud teams, finance departments and other business areas should arrive at a balanced approach that includes continuing to incentivize and reward loyal customers, while tackling the most egregious forms and perpetrators of policy abuse.
CFOs should be aware of the risks and implement solutions that protect the organization’s revenue while still facilitating positive customer interactions. By educating themselves on policy abuse tactics, using advanced technology and applying insights to policy creation, CFOs of retail companies can navigate the challenging economic period and thrive through economic hardship.