Retailers are losing $100 billion a year from return fraud, bots and coupon stacking, study says

For the last three years, Robert has used a different email address to take advantage of a Black Friday Hulu promotion that most recently offered new customers a yearlong subscription for just $1.99 a month instead of the usual $7.99 monthly cost.

The social media manager has used similar tricks to score multiple first-time customer deals on sports betting websites and when buying Manga, a form of Japanese comics. 

“I really don’t have empathy for a major company. I genuinely just don’t care,” Robert, a 31-year-old who asked to be referred to by his first name only because of privacy reasons, said in an interview with CNBC from his home on Long Island, New York. 

“It’s easy to do it online where all you’re doing is just creating a new email address or creating a new account and it’s like, you’re never actually going to have to speak to anyone about it and there’s really no accountability, so, why not do it?” he said.

This type of “friendly fraud” might feel harmless and seem like a small drop in the bucket for powerful corporations. But taken together with more nefarious forms of fraud, it’s costing retailers more than $100 billion per year, according to Riskified, which published a new study on the problem on Thursday. 

Riskified uses artificial intelligence and automation to fight fraud and boost revenue at major retailers including Wayfair, Peloton, Revolve and Canada Goose. For the study, it surveyed over 300 global companies with more than $500 million in total annual revenue.

The firm found retail policy abuses, such as return fraud and using fake email addresses for promo codes, is rising for some retailers. The practices tend to spike during the holidays or during times of high inflation. 

About 90% of the companies polled in Riskified’s study said offering generous refunds, return policies and promotions to drive sales and increase customer loyalty are important to their overall business strategies. However, the misuse of such policies is proving to be a major drain on profits, forcing some to think twice about offering such freebies as retailers look to protect their margins while they face high costs, rising shrink and a slowdown in discretionary spending.

“In our experience with merchants over the past two years, especially as they’ve been sharpening their pencils around profitability, they’ve really started to take a harder look at this,” said Riskified CEO Eido Gal.

“When you think about how easy it is to call in and say I never received my item, I received the wrong item, I want a different size, you can get a refund or a new item incredibly easily,” Gal said. “It’s much more easier to do that than it is to steal financials or credit card information and I think fraudsters have caught up to that.” 

In some cases, friendly fraud is considered a cost of doing business and something retailers must contend with as part of customer acquisition.

It includes practices like using multiple email addresses to take advantage of promotions more than once, buying multiple items with the intention of returning most of them or wearing an item with plans to return it and not pay for it. 

However, serial and professional fraudsters are exploiting those lax policies and taking those abuses a step further, according to the study.

In one example analyzed by Riskified, a company identified 137,000 fake accounts created by just 4,000 abusive customers looking to take advantage of a steep 35% discount promotion for first-time customers. It cost the company more than $14 million annually. 

In another case, a top pet supply company based in the U.S. lost $3.5 million in the first quarter of 2023 alone after a small group of serial fraudsters exploited a promotion code for a 35% to 50% off discount.

In other cases, fraudsters claim they never received an order when they actually did, so they can receive a refund and get the items for free.

A majority of respondents, 55%, said their costs from those kinds of tactics were “very significant” in 2022, suggesting it has become more common and costly compared with other types of abuse, the survey said.

“Merchants don’t have the time or resources to follow up on claims. In fact, it could cost them more to investigate these claims one by one than to just accept what the customer claims,” the survey said. “Companies that ship products to consumers all over the world may not have visibility into who their last-mile delivery partners are, thus they can’t invalidate claims with any certainty.”

Other types of nefarious policy abuse include returning empty packages for a refund or using bots to buy out highly valued, limited-edition items, only to resell them for a higher cost on a third-party platform. The technique is common for limited-edition sneaker drops and concert tickets, which happened during sales for Taylor Swift’s Eras Tour. 

Sixty-five percent of the survey’s respondents said they rely on manual reviews for at least a majority of their refund and return claims. The process can be costly, time-consuming and ineffective. 

“One survey respondent even said they would rather have a customer break into their warehouse and steal an item than order it and return it because their returns process was so long and costly,” the survey said. 

Gal, Riskified’s CEO, said the “smartest” companies are starting to be more selective about who should receive freebies, and are using customer histories to determine who should have to pay for a return and who can send one in for free. 

“Let me give my best customers free returns always because that’s the convenient thing and that’s what I want to do to be competitive and let me work through and understand the identities of who’s not my best customer, and they would still have that restocking fee,” said Gal. 

ThredUp, which sells pre-owned clothes online, has a dedicated fraud and abuse task force that uses data and enhanced account monitoring to fight bad actors who are taking advantage of programs, the company told CNBC. 

For example, the company recently introduced a feature dubbed “Keep for Credit” where customers interested in making a return are given the option of keeping the items in exchange for store credit. It cuts down on the cost ThredUp faces for restocking returned items and brings shoppers back into the store to buy more.

Disclosure: Comcast, which owns CNBC parent NBCUniversal, is a co-owner of Hulu.