Customers Pay The Price Of Policy Abuse—The State Of ECommerce Fraud

Lax return policies and lenient fraud prevention measures are fueling a surge in ecommerce fraud, ultimately burdening consumers with higher prices and diminished trust in online shopping.

Ecommerce has transformed the shopping experience, turning living rooms into fitting rooms and checkout counters into a few clicks. But with this convenience comes a cost, and not just for retailers. On average, retailers estimate that 16.9% of their annual sales in 2024 will be returned, and total returns for the retail industry are projected to reach $890 billion in 2024. Fraudulent and abusive practices surrounding returns, refunds, and exchanges now amount to a staggering $394 billion annual expense for retailers globally. Of this, at least $28 billion is lost directly to fraud and abuse, an issue becoming ever more sophisticated, according to a new report from Riskified titled “Returns, Refunds & Exchanges: Global Insights & Policy Playbook 2024.”

The real kicker? Honest customers are paying the price. Retailers are tightening once-generous policies to curb losses, leaving both legitimate and fraudulent shoppers feeling the pinch.

The Monster Merchants Created

The ecommerce boom of the pandemic era was a perfect storm of generosity. Retailers, in a bid to win over hesitant online shoppers, rolled out the red carpet: free returns, instant refunds, and no-questions-asked exchanges. According to a recent Prosper Insights & Analytics survey found that at least 50% of demographics, including Americans over 18, Millennials, Gen-X, and Boomers find flexible return policies very important.

While this approach fostered customer loyalty, it also opened a kind of retailer Pandora's box. Fraudsters and policy abusers quickly identified opportunities to exploit loopholes faster than retailers could address them.

Indeed, the sophistication of abuse has skyrocketed. Riskified’s report says that more than 84% of merchants admit identifying fraudulent activity has become harder, while 76% say policy abuse is growing increasingly sophisticated.

What makes this problem particularly insidious is the advanced technological tools now available to fraudsters. "Generosity is a double-edged sword in ecommerce," says Eido Gal, CEO of Riskified. "What makes for a great customer experience also provides opportunities for fraudsters Factors like the Dark Web and malicious AI tools have turned return fraud into a highly efficient operation."

Forums on the Dark Web offer “Fraud-as-a-Service” kits, while malicious AI tools like WormGPT automate scams that previously required manual effort. These tools empower even novice fraudsters to exploit systems with precision.

"Fraudsters are no longer operating in isolation. They exchange strategies and adjust in real time, making it incredibly challenging for retailers to stay ahead," says Gal.

Good Customers Are Paying the Price

It’s easy to dismiss this as a retailer problem, but the truth is, everyone bears the cost. Fraudsters steal more than products—they siphon away resources that could improve customer experiences. Worse still, peak shopping seasons see an uptick in fraudulent activity, as consumers overlook small, fraudulent charges on their credit cards amidst holiday spending.

Surprisingly, even middle-aged, middle-class shoppers—far from the archetype of a fraudster—are complicit. According to Riskified, these individuals justify policy abuse as a victimless crime, citing financial pressures and an "everyone's doing it" mentality.

Gal points out the far-reaching consequences: "This normalization of abuse erodes trust between merchants and consumers. It forces retailers to implement stricter measures, which ultimately penalize honest shoppers."

Underlining all of this is the simple fact that policy abuse is inherently tricky to identify. Fraudulent claims often resemble legitimate ones, forcing merchants to sift through vast amounts of data. The internal complexity—spanning customer service, logistics, and finance—further complicates the task. According to a Riskified report, 67% of merchants struggle with inadequate collaboration between departments, leading to silos that fraudsters are quick to exploit.

The End of Generous Policies

Retailers are shifting away from the “generous at all costs” philosophy and adopting a more pragmatic approach to safeguarding profits. Policies are shifting rapidly, as Riskified’s findings reveal. One-third of retailers now impose fees for returns, a move designed to offset the financial drain of reverse logistics. This may be forcing nearly 70% of all demographics to attempt in-store returns, according to a recent Prosper Insights & Analytics survey

Similarly, another third of merchants have replaced refunds with store credit or exchange-only policies to retain revenue within their ecosystem. Additionally, two in five online retailers have significantly reduced their refund window to just seven days, a stark contrast to the 30-day standard still common in physical stores, underscoring the industry’s efforts to tighten operational controls.

While these changes help curb abuse, they also risk alienating loyal customers. “Striking the balance between security and service is the crux of this challenge,” Gal notes. “Retailers must protect their bottom line without undermining customer trust.”

Fighting Back: The Identity-Based Approach

For retailers to regain control, they must adopt more sophisticated, identity-driven strategies. By analyzing the individual behind each transaction, merchants can differentiate between loyal customers, occasional abusers, and outright fraudsters. This nuanced approach enables businesses to mitigate losses without alienating their best customers.

Riskified advocates several measures to help retailers combat policy abuse effectively while maintaining strong customer relationships. Leveraging AI and automation enables businesses to identify patterns of abuse and streamline decision-making processes with greater precision. Enhancing data transparency by breaking down silos between departments ensures that customer insights are shared effectively, enabling a more cohesive approach to fraud prevention.

Implementing tailored policies, such as sliding-scale return options based on customer loyalty and purchase history, strikes a balance between protecting profits and rewarding loyal customers.

Finally, focusing resources on customer service excellence enables retailers to deliver standout experiences to their ideal customers while addressing instances of fraud discreetly and efficiently.

This approach, as Gal emphasizes, is about creating a win-win: "We’re not just fighting fraud. We’re optimizing customer experiences. Merchants who master this balance will thrive in an increasingly competitive market."

Toward a Sustainable Ecommerce Ecosystem

The stakes couldn’t be higher. Returns, refunds, and exchanges account for nearly 11% of global ecommerce revenue. Beyond the financial impact, unchecked policy abuse undermines trust—a cornerstone of customer loyalty. Gal emphasizes, “Fraud prevention isn’t just about minimizing losses; it’s about safeguarding the brand’s relationship with its customers.”

By leveraging technology and identity-driven strategies, retailers can outsmart fraudsters without compromising the customer experience. As Riskified’s research shows, the key to success is strategic, data-driven action. Only then can merchants transform policy abuse from a costly challenge into an opportunity to build stronger, more resilient customer relationships.