When good customers behave badly: The unknown side of online retail fraud

Ecommerce was one of the earliest successes in Southeast Asia’s tech and startup scene, and if last year’s 11.11 sales results are any indication, it’s a train that’s not stopping any time soon. During the sales event, Shopee set new records for items sold and shopper visits, while Lazada saw new users in Thailand rise by 120% compared to 2020.

One major driver of these mind-boggling numbers is the promotions and discounts that come out in full force during these major sales events. In the lead-up to the actual sale days, shoppers are encouraged to collect all manner of vouchers, and they also get access to benefits such as free returns or gifts with their purchases, among others.

Unfortunately, despite these offers, some customers still look for loopholes to get extra benefits. This is also known as policy abuse, which is when customers exploit the benefits available to them.

One example of this is promotions abuse. According to Monica Acree, general manager and vice president of sales at fraud prevention company Forter, retailers offer many incentives – such as giving customers 10% off their first purchase – to drive customer retention. “However, some shoppers will often open multiple accounts to take advantage of this discount, and as a result, the retailer ends up incentivizing existing customers unintentionally, which drives up the cost of acquisition,” she says.

Differentiating between fraud and abuse

These cases of abuse don’t strike casual observers as particularly damaging to online retailers. It’s just smart shopping, right? While many think the real problem comes from card and identity fraudsters, the numbers tell a different story. Global studies show that fraud losses add up to around US$22 billion a year, while policy abuse losses are much greater, estimated at around US$65 billion annually, Acree says.

Monica Acree, general manager and vice president of sales at Forter / Photo credit: Forter

These losses pile up from various sources like logistics fees, restocking costs, losses from damaged goods, and costs from inventory that can’t be resold. The overall operational burden of managing these processes also has a significant impact on the retailer’s bottom line.

But let’s take a step back and explain the difference between fraudsters and abusers. “Fraudsters are generally bad actors participating in illegal behavior, such as stealing identities or payment instruments, and utilizing that for financial gain,” Acree explains. On the other hand, abusers, she says, are actual customers who take advantage of a retailer’s policies or promotions. “In layman’s terms, this is when good customers are doing bad things.”

Besides promotions abuse, there are other ways that customers try to game the system. One example is an abuse of the returns system. In these cases, a culprit could buy an item such as skincare or perfume, empty the container, fill it with water or a cheaper product, then return it. In some instances, abusers will mark that they haven’t received an item and file for a refund even though the product was successfully delivered.

A fine line

The ways that fraud and abuse are combated also differ. Countermeasures are black and white when dealing with fraudsters – they are breaking the law and should be identified and reported to the authorities. When it comes to policy abusers, however, it’s much trickier, as risk tolerances and policies differ from retailer to retailer.

“It looks different for every business, so it’s really hard to accurately measure in real time the losses or the cost to the organization,” Acree points out. “Additionally, because policy abusers are technically legitimate customers just doing bad things, you might not want to have a binary response to these abusers. You might want to have a more nuanced approach.”

With returns abuse, for example, imposing a blanket “no free returns” policy on the whole customer base might solve the issue, but it also punishes good customers who have legitimate reasons for returning an item. It’s important to understand that abusers make up only a small segment of users, so retailers shouldn’t treat all customers the same.

“You have to really look behind the transaction and at the identity of that user to understand the potential risk associated with each customer and offer tailored policies,” Acree says. “And that’s a challenge because a lot of retailers don’t have those tools in place to do that.”

A network of protection

Forter, the fraud prevention company Acree works for, helps online retailers with this very issue with its Trusted Policies solutions, which utilize machine learning and AI to pinpoint the identity behind online interactions. This enables retailers to make informed decisions and even tailor policies for each individual. For example, an identity known to be a repeat abuser of returns policies can have their next purchase marked as a “final sale.”

“Our solution is not a rules-based solution,” Acree explains, adding that the company has visibility on over a billion individual identities globally. “Often with fraud or abuse prevention, retailers will set rules which cast wide nets. Anybody that passes the rule gets approved; anybody that does not pass gets declined. And that causes a lot of what we call false positives, where good customers are being declined.”

Photo credit: antonioguillem / 123RF

Additionally, the company works with a large network of retailers, processing over US$250 billion worth of transactions on an annual basis. When a case of abuse occurs on one platform, Forter not only helps solve the issue for that retailer, it also proactively puts in place measures to prevent that identity from abusing the policies of its other clients.

“We have a large network of identities that we can leverage from one retailer to another,” Acree says. “That network impact is one critical thing that we can offer retailers beyond their own abuse prevention policies.”

More shopping days, more problems

As ecommerce continues to grow, so too will customer expectations. Retailers have to keep pace with better promotions and flexible policies. The continued success and proliferation of major sale days means more opportunities over the course of each year for policy abuse to occur.

The markedly increased traffic that these campaigns bring in also means that hiring people to manually review transactions is not a scalable option and that automation is a necessity.

To stay competitive, Acree says, it’s important for retailers to be able to offer these flexible policies.

“They just have to identify that small segment taking advantage – and that’s going to always try to take advantage – so they can be addressed while preserving the most positive experience for all their other customers,” she concludes.

Find out more about policy abuse and how to prevent it by reading Good customers gone bad: Beyond eCommerce fraud, Forter’s report on the subject.

This content was produced by Tech in Asia Studios, which connects brands with Asia’s tech community. Learn more about partnering with Tech in Asia Studios.