How AI keeps an eye on rising cases of retail returns fraud
It stands to reason: as online shopping grows in adoption across Australia, so will incidents of online fraud. More specifically, retail returns fraud is becoming a thorn in the side of retailers, costing them billions in financial losses every year.
In fact, across the country, fraudsters and organised retail crime rings have been targeting ecommerce, with nearly two-thirds of retailers reporting a growing focus on online returns fraud. Retailers say a leading tactic is "claims and appeasements" fraud, where a bad actor fraudulently claims a purchased item never shipped or arrived damaged in exchange for cash back or an appeasement.
However, to curb the financial losses and get more eyes on fraudulent online returns, retailers are investigating AI-powered solutions to flag unusual behaviours and spot fraudulent returns before they get through.
Everyone buys online, leading to BORO and BORIS behaviours
In 2023, Australians spent more than $63 billion in online shopping with more than 80% of households purchasing online. The behaviour is a cultural change that is fuelling many Australians buying via ecommerce channels weekly. At the same time, Australians are buying online and returning online (BORO) and buying online and returning in-store (BORIS) at higher rates. Understandably, the intense rate of these transactions makes it hard for retailers to keep track.
The cultural shift is leading retailers to becoming more susceptible to online returns fraud. For instance, wardrobing, or when a shopper buys an item like a shirt, wears it once, and then returns the item, is a popular trend in returns fraud. Gift card fraud is also popular; however, claims and appeasements fraud is the most concerning.
New research from Deloitte discovered that last year, 15% of returns claims in the U.S. were fraudulent. It's a big concern worldwide, and Australian retailers are accelerating strategies to reduce fraud and claims abuse and protect their profits.
What claims and appeasements fraud looks like
In claims and appeasements fraud, clever is as clever does. One popular tactic is buying a high-priced item like a flatscreen TV, claiming the item isn't working to get a refund, and rather than shipping back the TV, the fraudster fills the box with rocks.
More sophisticated incidents include ORC rings that buy 15 pairs of sought-after sneakers at $200 each online, using 15 different credit cards (often stolen) under 15 different names and billing addresses. Yet, the fraudsters in the ring have every pair shipped to one location. The variance is just enough to throw off online systems, as the fraudsters then file individual claims on each pair of shoes, saying the item never arrived and they want a refund.
Dark web forums that feature fraudsters selling their returns fraud services are another problem. The services are found in places on Telegram, Whatsapp, or Discord, where the fraudster markets that they'll teach a person how to buy an expensive TV and claim it as an "Item not received." The person working with the fraudster keeps the TV in exchange for a percentage of the total cost of the order.
Often, the payments in dark web deals are in Crypto, further hiding transactional information.
AI helps strike a balance in returns fraud
Clearly, online returns fraud is becoming tough to detect. In response, retailers can enforce stricter returns policies to reduce incidents, such as a no receipt, no return policy. Unfortunately, extreme policies could upset loyal customers. AI aims to help retailers strike a balance between the tough and the loyal and treats each online return separately.
For example, a retailer that receives a claim to return a flatscreen TV can leverage predictive modelling and AI to automatically read through that consumer's shopping history with the store, as well as how the shopper has interacted across different touch points. The data might show that the consumer is a loyal shopper who spends a lot with the retailer.
At the same time, AI modelling might alert an ecommerce representative that 15 pairs of shoes from different credit cards are shipping to one location. The alert can come with a recommendation to refuse the returns.
AI assists retail teams with data
Fraudsters know their ways around retail associates and retail systems, but AI can help be another set of eyes. These solutions can identify suspicious behaviours and recommend whether a return should be processed. The technology serves as a reliable intermediary.
By linking transaction identifiers across all online and in-store orders to flag consumers that may be attempting to hide their identity, AI helps reduce friction for both shoppers and customer service teams involved in a transaction. With AI's data-driven tools, retailers can get ahead of a growing problem.
