How refund abuse is costing online sellers

When running an ecommerce business, offering refunds is essential for building trust and loyalty with customers.

But sometimes, consumers take advantage of that trust by exploiting generous returns policies. Termed ‘refund abuse’, the practice takes many forms. And as the requests pile up, so do the costs for businesses.

As a result, today’s sellers find themselves facing an impossible task — the need to combat refund abuse and protect profit margins, without losing loyalty.

What is refund abuse?

Refund abuse — also known as returns fraud — is when a customer misuses a company’s refund or return policy to get money back in dishonest ways.

This includes requesting a refund for items they’ve already used, falsely claiming a package never arrived, returning damaged or different items than what was purchased, or using fake receipts or multiple refund requests for the same item.

For consumers, it’s win-win. They get to use a product essentially for free. But for small businesses, refund abuse can lead to serious financial losses and mess up inventory. 

What’s more, unlike large retailers, small online stores often lack the budget and resources to effectively manage these issues.

SMEs are paying the price for refund abuse

A white lie never hurt anyone? Well, sadly, not when it comes to returns. The “harmless” little fibs involved in refund abuse can end up costing small businesses thousands.

According to a survey reported by IT Brief, SMEs lost an average of around £11,000 due to online fraud last year. 42% cited refund abuse as the main perpetrator.

And it seems shoppers aren’t hiding their guilt either, as 38% of Brits have admitted to refund fraud. 34% confess to falsely labelling a fully working item as faulty to get their money back.

“Return policy abuse and fraud pose an enormous challenge to retail brands,” Jonathan Poma, CEO of Loop, told Ecommerce News. 

“Behind the scenes, it is causing harm to retailers by contributing to higher return rates, operational challenges in restocking, and fraudulent activity resulting in damaging losses.”

To refund, or not to refund

The obvious answer may be to impose a stricter refund policy to prevent further fraud. But while larger retailers can afford to lose business from disgruntled customers, small businesses often can’t risk alienating loyal shoppers without risking their survival chances.

After all, it was reported that 40% of an ecommerce store’s revenue comes from repeat customers. Negative customer feedback can also prove to be costly, as 86% of customers say they’d reconsider buying from a business with negative reviews.

Martin Sweeney, CEO of software company Ravelin says: “Too many retailers are happy to dismiss fraud as a cost of doing business. Downplaying fraud to protect the customer experience is a false dichotomy.”

So, what should small businesses do to better protect themselves?

One practical solution is to consider charging for returns. This can help cover the costs of processing returns and discourage refund abuse without outright refusing refunds. It’s the approach also chosen by brands like Pretty Little Thing and ASOS.

Poma adds: “It’s a careful balance that retailers are trying to strike, to both reduce the impact of returns fraud and abuse on merchants’ bottom lines whilst still retaining their best customers and ensuring an efficient customer experience.”