Policy abuse fraud is when fraudsters abuse store policies designed to boost customer retention and engagement. Consumers who participate in loyalty rewards cards are 80% more likely to choose that particular company’s brand over other competitors. Online marketplace experience a 142% uplift change in conversion rates through promotional marketing. For any retailer, business policies generate a healthy sales flywheel.
But, as reward programs and retention strategies increased, so has policy abuse. Ecommerce retailers reported a 75% increase over the past two years from users who manipulate store programs for fraudulent gain. Expectations for 2021 losses in ecommerce due to chargebacks reached $20 Billion. It is a growing problem for merchants.
Read on to learn the different types of policy abuse and how you can protect your business from bad actors.
What is Policy Abuse Fraud?
Policy abuse refers to a consumer taking deliberate actions to manipulate store policy for personal gain. As technology creates innovative avenues for customer convenience, such as returns, free shipping, and promotions, it has also created new opportunities that bad actors can exploit. Fraudsters bypass a vendor’s internal rules and use them in illegal ways.
Policy abusers have even started to coordinate, with entire fraud marketplaces now offering payments and rewards to consumers who transgress store sales and other good-faith discounts. Consumers who fall victim to such “Professional Policy Fraudsters” commit fraudulent actions that undermine your business — and ruin it for the rest of your clients.
Payment Fraud Vs Policy Abuse Fraud
While policy abuse includes illegal and unethical activity, it is not the same as direct payment fraud. Fraud occurs when someone other than the cardholder commits acts of thievery, such as in the case of identity theft. Instead, policy abuse occurs when the cardholder themselves is complicit in the scheme and openly manipulates store rules for personal gain, whether or not there is a fraudulent third party involved.
Three Kinds of Policy Abuse Fraud
There are several variations of policy abuse, but most scams fall within three primary categories:
Loyalty Abuse
Loyalty abuse is when a consumer uses your reward programs for personal gain.
A common method for the consumer to leverage loyalty points is via new account fraud. Consumers make multiple accounts with fake or stolen identification, collecting sign-up bonuses and transferring points into multiple banks.
Another method of loyalty abuse regards the use of rewards points for separate fraudulent purchases. Since it is harder to track loyalty gift card fraud, bad actors use phantom points to pay for further fraudulent purchases.
Lastly, groups of consumers will take part in a referral scam, where they cycle free referral bonuses or overshare sale coupons amongst a group, doubling down on the reward value.
Promotion Abuse
Promotion abuse refers to consumers who manipulate store discounts or limited-time offers to drain your revenues.
For example, some users will continue to use free trials long past their expiry, accomplished by renewing each demo with fraudulent credentials.
Other more sophisticated abusers hack into digital promo codes and display the codes online for multiple users to exploit.
Some consumers amass store discounts or discontinued coupons and then resell them to unsuspecting customers who are none the wiser. While the scam offers lower monetary value, second-market gift cards are untraceable and involve a lot less risk.
Promotion abuse hurts marketing spends and customer engagement because users who operate in good faith expect promotional offerings and discounts. But if those sales go to bad actors, your money earned no market retention and instead hurt your odds with reaching long-term profitable clients.
Returns Abuse
Returns Abuse involves a consumer who utilizes the return and refund option at your store so often or in fraudulent ways that it becomes highly unprofitable.
A simple example of returns abuse involves the forging and copying of receipts. With some defects or slight alterations, an incorrect amount will reimburse to the customer once they return an item.
Some folks initiate false return exchanges. With free shipping and contactless delivery, a consumer will request a return, receive payment, and then ship an empty box or a box containing a different item in hopes that it gets lost in inventory.
Other consumers will demand new items after purchase because the original product arrived damaged. But once the second item is delivered, they refuse to return the first and instead resell it to pocket the difference.
Some users just serially return, forcing you to incur extensive charges without a single sale. This is especially expensive for large, hard-to-ship items. As a result, some vendors no longer offer free shipping, even though it limits overall customer satisfaction.
The Cost of Policy Abuse Fraud
The most obvious cost is your store’s balance sheet. Whether it is through loyalty cards or lost returns, each form of abuse will hurt your bottom line. Plus, there are plenty of additional fees such as chargebacks from credit cards, shipping costs, decreases in value from lost or damaged items, and a devaluing of your reward currency.
Uber fell victim to a well-known policy abuse scandal, where a rider racked up close to 50,000 Euros worth of free rides through promotions and mass emailed referral packages. Uber dealt with the problem, but it put a hefty limit on Uber’s future promotional offerings, lowering the rest of the ridership’s overall engagement.
Policy abuse does go beyond simple financial losses to your business. It can also hurt your brand reputation, merchant bank partnerships, and your relationship with your credit card partners. Routine chargebacks increase your risk score with financial institutions, leading to higher fees and difficulty getting capital or new credit cards.
Plus, many stores become too harsh in their desire to prevent policy abuse. This, in turn, causes a backlash from clients who participated in promotional opportunities out of good faith. Unaccepted vouchers and discontinued loyalty programs hurt the honest majority most, and that reduces your consumer market engagement.
Good promotions still work—it is important to find a balance between deterring policy abusers while still retaining your high-quality prospects.
How to Address Policy Abuse Fraud
There are several steps you can take to help prevent policy abuse without loss to your initial customer base:
Clear and Transparent Policies
When possible, write out legible terms of use for all store policies. With a clear and accessible policy, you disincentivize bad actors without adding too much friction from those who operate legally. Most consumers are happy to oblige with common-sense rules, even if they involve some restrictions.
For example, a happy customer will be more than willing to show proof of purchase for all returns, while such a rule will thwart those attempt policy scams.
If you fall victim to policy abuse, update your store policies as required. Add in clauses that prevent policy abuse once you determine a loophole or a potential grey area that bad actors can exploit. Over time, you will develop a clear, easy-to-read central policy that encourages honest business transactions.
Abuse Prevention Technology
Many vendors now invest in Policy abuse technology services. The online applications help track bad actors, fix loopholes in online reward programs, and update outdated security flaws for promo codes and referral bonuses.
Most of the technology analyzes customer behavior and will alert you if it determines any suspicious activity in connection with online sales or discounts. The systems can even track returns, confirm proof of purchase, and ensure inventory updates accordingly. Even just simple tools like email verifications, upper limit restrictions on sales coupons, and customer monitoring tools all help prevent policy abuse.
Since the prevention solutions work behind the scenes, it adds a level of protection to your business without any change to the majority of customer interactions.
Limit Promotional Activities and Loyalty Rewards
It is not in your best interest to do away with your promotional activities, but adding some limitations to how those sales are employed in order to prevent loyalty program abuse fraud is crucial. For example, you could offer loyalty rewards for store purchases only, not invites. Such a restriction protects against sign-up scams while still offering a unique program to clients who make legitimate purchases.
Another step that some vendors have made is to offer non-monetary rewards. Cash is easy to exploit, but if a customer receives a physical item or a discount off of their next purchase, it becomes a lot harder to game the system.
Offer promotions and loyalty rewards to your customers for routine engagement, but include some restrictions to make everyone feel safe and secure.
Key Policy Abuse Fraud Takeaways
Returns, coupons, and discounts all help create business engagement and long-term customers. But as merchant technology increases, bad actors have found ways to abuse store policies to their advantage.
While it is important to deter fraudulent consumers, ensure you employ methods that create a positive customer experience for your high-priority clients. Adjust your policies and promotional offers with prevention technologies to deter consumer fraudsters, all while creating a safe environment for the majority of your customers.
Sources:
https://www.3tl.com/blog/15-customer-loyalty-statistics
https://www.bigcommerce.com/blog/promotional-marketing/#what-is-promotional-marketing
https://chargebacks911.com/chargeback-stats/