Already Growing, Friendly Fraud Could Worsen from Professional Refunders

Professional refunders threaten to take the problem of friendly fraud to a new level, according to presenters at the NRF Protect conference in September. Acquainted with a store’s refund policies and the scripts that customer service representatives are likely to have in front of them, these refunders are proving problematic as they manipulate retailers into providing a full refund, replacement, or both.

Roberta Del Monte Radford
Roberta Del Monte Radford

“We’ve had this problem from some time. Taking advantage of a customer-friendly process is nothing new,” explained Roberta Del Monte Radford, senior program manager for Nordstrom.com. “What is different is the hiring of a third party to do it.”

A friendly fraud occurs when a legitimate cardholder makes a purchase and then uses the chargeback process to their advantage. They may fraudulently claim, for example, that an order they place online never arrived, thus earning a refund and keeping the shipment. These cases are a serious concern, according to NRF Protect panelists, but tempered by the number of people who can successfully pull it off.

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Karisse Hendrick
Karisse Hendrick

The dynamic changes when a “professional refunder” is employed, however. “The customer places an order and then hires a third-party to initiate a refund process. They know what a retailer’s process is. They know when to call, what to say, and which buttons to push,” explained Karisse Hendrick, owner and principal consultant at Chargelytics Consulting, in the conference session. “The unfriendliest friendly fraud of all—professional refunding.”

The panelists described a typical refund cycle like this:

  • A customer, Alex, places an online order with XYZ Company for two laptops, which arrive at his house in a few days. He then reaches out to his usual “refunder,” Cy3rtheef, with the purchase details.
  • Cy3rtheef receives Alex’s order and goes to work, contacting XYZ and connecting with a customer service agent.
  • Cy3rtheef impersonates Alex and uses one of many different methods to secure a refund for Alex’s order.
  • Alex receives notification from XYZ that he has been refunded, keeps the laptops, and pays Cy3rtheef a fee for his service.
Dajana Gajic-Fisic
Dajana Gajic-Fisic

Calls from customers that a package hadn’t arrived has always been an issue, and deeper dives into the reasons why show professional refund schemes to be part of the problem. “We were looking to improve customer service, trying to understand the life cycle of the process of ‘why didn’t they get it?’” shared Dajana Gajic-Fisic, head of e-commerce risk operations for JD Sports – Finish Line. “I suspected porch pirates, but I knew there was another twist and I specifically looked at ‘did not receives’ and at repeat offenders and abuses. We’re at the beginning and have a lot to learn, but we now know this is truly happening.”

Because the purchase, when placed, is completely legitimate, “this type of fraud is not easily detected at the front end—it’s hard to be proactive,” according to Gajic-Fisic. When reviewing an order, you can’t guess that this or that customer will call in two weeks to say items in the box were missing. “We’ve seen an increase in these transactions. The problem is that legitimate customers and fraudsters have the same M.O.”

While an individual customer can perpetrate the fraud, hiring a professional refunder nearly guarantees success. These professionals have spreadsheets listing store and refund policies that indicate which types of refund requests will or won’t work. “We’ve gotten used to looking for clues in the patterns of purchases and use technology to help us, but they’re doing the same thing [in collecting store data to find patterns in the refunds they give]. They’ve flipped the script on us,” said Hendrick.

With store refund processes well-known, refund calls can sound like bad community theater, suggested panelists. Professional refunders follow their script; customers service representatives read from theirs.

And the advantage—because stores are careful to cultivate customer-friendly reputations and scared of reviews that could spoil them—typically goes to the professional refunder. “They know exactly what to expect, what the customer service agent will ask, and they know what amount they can refund on their own,” said Hendrick. “They know exactly what to say at your company to get the refund.” And they advertise in dark corners of the web to drum up customers, as in this direct quote from a refunder shared during the presentation: “Xmas coming up! Get your refunds in for half off! Now doing 9% on order above $1,000!!!!”

Better refund data collection can lay a path to prevention. “You want to collect as much information as you can about returns because then at least you can understand where your losses are coming from,” said Radford. For example, specific refund reason codes help LP identify patterns and trends. “If you just have refunds in one big bucket, you can’t figure out what the problem is,” said Hendrick.

With data, teams can cross reference the reasons for returns and identify abusers, said Gajic-Fisic. At Nordstrom.com, Radford said she’s focusing on detecting abusers by knowing their customers better. “What we are trying to concentrate on is how can we detect it. What are the signals? How do separate those orders from the good flow?” Correctly identifying suspicious activity can help retailers design additional verification tools to use in those transactions.

“It’s hard to detect this fraud, and it’s early to think about what we can do from a policy standpoint, but should we be thinking about it? For sure,” said Radford. Right now, LP can be addressing gaps in processes that allow friendly fraud to pass by without scrutiny, she suggested. Finally, closer LP collaboration with customer service and fulfillment can help forge strategies to manage the problem of friendly fraud and the added complication of professional refunders.

Because of inherent challenges in combatting friendly fraud, with the added complication of professional refunders, the retail community would benefit by working together to combat it, according to panelists. “Now that you can hire someone to [work the refund], that’s really what got us to work together. It’s not Nordstrom vs. Finish Line,” said Hendrick.

Industry collaboration is needed sooner rather than later, said panelists. This is a new and developing method of fraud, they said, but it is quickly increasing because of the current financial crisis and explosion in online sales. Moreover, dollar amounts for refunds have grown more accommodating and other roadblocks have been removed to simplify the purchase path as much as possible. “Retailers need to know that this is happening,” said Hendrick. “If you’re not a target, you will be. The biggest companies are being hit first and then others will be once they respond.”