It’s well known that when revenue increases, so does fraud. Fraud fighters have been grappling with the challenge of policy abuse for over a decade, but it’s now costing companies more than ever. U.S. retailers are losing an average of 1.2% of their total revenues, totaling $89 billion per year. From returns and INR (item not received) abuse to reseller and reshipper abuse, fraudsters, and in many cases, average customers, are capitalizing on company policies that favor the customer.

Whether it’s promotional and policy abuse or friendly fraud, and the culprit is a sophisticated fraudster or a repeat consumer taking advantage of policies, the problem is the same. Company policies and offerings are created to provide excellent customer experiences for genuine, good customers who are loyal, honest, and ultimately of high value to businesses. It’s the bad actors who ruin these benefits, leaving companies with significant losses.

Here, we will provide a better understanding of the challenges of policy abuse and their damaging effects and explore solutions to solve the problem.

The Difference Between Promo Abuse, Policy Abuse & Friendly Fraud

These three phrases overlap and are typically used synonymously despite minor differences. Let’s break them down:

• Policy abuse refers to any exploitation of a merchant’s terms and conditions that define what a customer is entitled to. This is the overarching bucket within which the following two types of fraud fall.
• Promotion or promo abuse exploits policies specific to a business’s offers, such as discounts, loyalty programs, rewards, coupons, and promotion codes.
• Friendly fraud, liar buyer, or first-party fraud refers to abusing refund policies. The buyer claims they didn’t receive a product or service and then files for a refund to reverse the transaction while they keep the product or service.

Each of these can be carried out by sophisticated malicious actors, amateur fraudsters, serial abusers, and first-time policy abusers who are typically regular consumers.

The Cost of Policy Absuse

As mentioned above, U.S. retailers are losing an average of 1.2% of their total revenues, totaling $89 billion per year. In addition to direct revenue losses, policy abuse can bring in fake, low-value, or damaging customers. Marketing and sales spend time, money, and resources on promotions that may attract the wrong customer, who will abuse policies. In 2021, retailers spent $6B on Black Friday digital promotions, while one-third of the actual buyers were fake. These fraudulent purchases also skew marketing and consumer data, which only increases the waste of resources. The more policies abused, the higher the cost of acquisition, which directly impacts margins and, oftentimes, profitability.

Companies increasingly offer more incentives and discounts to gain new customers while policies remain in the customer’s favor. On the other hand, when companies don’t offer promotions and make stricter policies, genuine shoppers will turn to competitors.

However, strategic policies, analysis of your data, and identifying customers as real, fake, or fraudulent can enable companies to provide positive customer experiences to those who deserve it while stopping policy abuse.

1.Implementing strategic policies

Merchants, rightfully so, hesitate to deny service or refunds regarding suspected first-party fraud. The “customer is always right” attitude and concerns about losing good clients create a lot of pressure. However, in some cases, policies that target abuses can be implemented strategically. For example, requiring customers to send a photo of products they claim arrived broken or implementing policies that require a customer’s presence when the package is received can solve issues of chargeback and item not received fraud. 

2.Analyze your data

Learn from your chargebacks, promo stats, churn rate, and refund claims data to identify where policy abuses are occurring and what kind of customers are abusers. For example, you can identify problematic policies and fraudulent behaviors by looking at customers who churn after using a promo on their first order and comparing it to users who don’t.

3.Solving Policy Abuse With Identity Validation

When a consumer has previously committed policy abuse, the likelihood of them doing it again is 100 times higher. Merchants can leverage their historical customer data and add friction when an account has a questionable or fraudulent history. Furthermore, when fraudsters use fake accounts or repeat credentials, such as billing and shipping addresses, credit cards, or emails, such data can be verified as real or fake.

Identiq’s Private Network for Identity and Validation allows merchants to collaborate with each other and identify good consumers while keeping fraud out. The fully private network is made up of over five billion validated identities from some of the world’s largest companies, enabling network members to know the risk of a user at any touchpoint–from account creation and signup to checkout and payment.

Want to learn more about how Identiq can help you find the good customers and keep the bad ones out?

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