UK retailers lose $2.6 billion annually to policy abuse

New research highlights a significant shift in merchant return and refund policies as a response to increasing policy abuse and fraudulent activities.

A study by Riskified, a company specialising in ecommerce fraud prevention, has shed light on the emerging trend of less lenient return policies among merchants. Recent changes by brands like Pretty Little Thing and ASOS, which have made headlines for toughening their return conditions, reflect this shift. According to the study, fraudulent returns are costing UK businesses approximately $2.6 billion annually, with 79% of merchants now resigned to policy abuse as a routine cost of doing business.

The "Returns, refunds & exchanges: Global insights and policy playbook 2024" report from Riskified reveals that around 79% of merchants view losses due to policy abuse as an unavoidable business expense. Policy abuse is characterised by consumers exploiting a merchant's terms for personal benefit, utilising methods such as "bracketing" or claiming items were not received. Beyond casual consumer fraud, professional scammers have heightened the issue. The report attributes this to "fraud-as-a-service" groups on the Dark Web and increasingly sophisticated tools driven by generative artificial intelligence (GenAI).

According to Riskified's retail analysis, returns, refunds, and exchanges constitute a massive $394 billion cost to the retail sector globally, with at least $28 billion affected by fraud and policy abuse. The company states that three-quarters of online merchants report feeling overwhelmed by policy abuse, with 84% indicating increased difficulty in detecting it.

In reaction to these growing challenges, merchants have tightened their return policies significantly. Currently, one-third of retailers charge fees for returns, and another third have pivoted to policies offering exchanges or store credits instead of cash refunds. Additionally, 40% of online retailers now require returns to be initiated within seven days of purchase, a departure from the traditional 30-day window commonly offered by physical stores.

Despite these measures, many retailers are not actively addressing policy abuse; only 30% of merchants have implemented strategies to mitigate fraudulent returns and refunds. This inaction is partly due to internal hurdles, such as poor data integration, conflicting priorities among departments, and a general lack of cooperation. Solutions proposed include "sliding scale" policies that adjust based on customer value, using identity-based technologies to pinpoint habitual offenders, or entirely banning serial refund seekers.

"The pendulum has swung from generous return and refund policies of previous years to increasingly restrictive policies," stated Jeff Otto, Chief Marketing Officer at Riskified. "Merchants are under pressure to cut costs, but if this correction is applied bluntly across all customers it creates a bad experience for high-value shoppers, stunting growth and loyalty. The good news is this problem can be addressed surgically with an identity-based technology approach that carefully assesses the right policy to implement across the spectrum of customers – maintaining generous policies to delight high-value customers, while cutting-off abusive identities at the point of purchase or claim."

The report's findings are drawn from interviews conducted by Opinium Research with over 500 senior directors responsible for fraud, risk, and policy strategies at large ecommerce businesses. Additionally, economic analysis by the Centre for Economics and Business Research (Cebr) contributed to defining the direct and indirect economic impacts of fraud and policy abuse on return processes.