Written by Guido Ronchetti, CTO at XTN Cognitive Security®
Policy Abuse is a common and well-established fraud pattern in e-commerce, referring to a customer deliberately manipulating sore policies for personal gain. If this abuse was already an issue in the physical domain, technology introduced even more profitable opportunities for fraudsters. Promotions, free shipping, returns, and referral marketing campaigns are some of the preferred playgrounds for criminals in the digital e-commerce world.
Let’s describe some of the significant categories of policy abuse scams out there:
- Loyalty, Coupon, or Promotion abuse happens when a customer uses reward programs for personal gain. This abuse is strictly related to New Account Opening fraud. It all starts with fake accounts used to benefit from collecting multiple sign-up bonuses such as gadgets or credit coupons quickly gathered and transferred by the fraudster. Those fake accounts are often just used for sign-up; they do not produce any order or revenue for the service owner.
- Referral Abuse occurs when a group of fake users refers to each other to gain referral bonuses. Again, it all starts with registering many fake or synthetic accounts, with little or no activity and revenue coming from referrals and new users.
- Returns Abuse involves a customer who utilizes the return and refund option in a fraudulent way that becomes highly unprofitable for the store. A typical example is the forging and copying of receipts, with some alterations, to have a higher reimbursement when returning an item. Another case is requesting a refund by shipping back an empty box or a different item, hoping it gets lost in the inventory. Sometimes it also involves declaring the item as damaged, requiring a refund, and refusing to return the damaged goods.
A slightly different case of returns abuse is usually referred to as an Overpayment Scam (Cash Forwarding or Cash Advance Scams). This is a bit more advanced and consists of paying for a purchase with a stolen credit card, then requesting to refund to a different form of payment. In this pattern, the fraudster can obtain money back from the card passing through the merchant.
All Policy Abuse scams will hurt the store’s revenue. Loyalty, Coupon, and Promotion abuse will mainly reduce the effectiveness of marketing investments. Returns abuse will introduce additional fees such as chargebacks from credit cards, shipping costs, and decreased value from lost or damaged items. Those scams undermine the brand’s reputation, creating friction in the customer experience and reducing trust from financial partners (banks and credit card operators).
How can you protect your online store from Policy Abuse scams?
First, you should focus on preventing New Account Opening Fraud from happening. By blocking fake and synthetic accounts from successfully enrolling, we can efficiently prevent Loyalty, Coupon, or Promotion abuses.
Another countermeasure to focus on is analyzing customers’ behavior to spot returns abuses. By recognizing trusted users and isolating suspect behavior or recurring returns, you can quickly and efficiently focus on suspect behavior, leaving most user experiences unmodified.
At XTN Cognitive Security®, we developed a long experience protecting banks and highly regulated enterprises. We strongly believe the e-commerce market should also move toward an effective fraud prevention solution. Our AI-driven Cognitive Security Platform® is the ideal product to protect e-commerce from Policy Abuse fraud. We have designed the Cognitive Security Platform®, providing behavioral analytics features to analyze and evaluate customers’ interaction with the e-commerce service.
