E-commerce fraud is a bottom-line problem for companies but it’s also a metrics problem for CFOs.
Buyers returning purchases after using them, claiming they never received their order or returning empty boxes are examples of the kind of “friendly fraud” that has ticked up with the rise of online shopping. Retailers call it friendly fraud because it refers to buyers who aren’t career criminals but nevertheless exploit an inefficient process to gain advantage over a retailer.
Separate from the cost these practices pose, they make it hard for CFOs to know how well their company is doing; it’s the nature of friendly fraud to scramble the data a company relies on to track its performance strategies, an analysis by fraud abuse mitigation firm Riskified suggests.
Return and refund fraud, which involves bad-faith buyers returning, or claiming to return, items for a refund, complicate CFOs’ efforts to calculate costs of goods sold (COGS), selling costs, general and administrative (G&A) costs or other metrics they use to track costs, since it requires factoring in refunds to customers who either never intended to keep the purchase or kept the purchase but still submitted a claim.
In 2020, as the pandemic deepened and online shopping skyrocketed, U.S. retailers handled $428 billion in refunds, twice the amount in 2019, according to National Retail Federation data. Meanwhile, a third of consumers in a survey say they’ve committed item-not-received (INR) fraud, which includes buyers asking for their money back even though they received their purchase.
How much companies push back and investigate claims depends on how much in additional resources they’re willing to spend vs. simply absorbing the loss and moving on. “Some merchants … write it off as part of the cost of doing business,” the Riskified analysis says.
If they write it off, does that get factored into their COGS calculation or kept separate? Or, if the number gets big, should it be part of COGS if it isn’t already?
In a related scam, buyers use the product and then return it. It’s called wardrobing when it involves clothes, and that version has grown along with social media influencers who order products to showcase them and then return them when they’re done.
“By the time an item actually is returned, it is often deemed out of season or aged, even if it's in good enough shape for resale,” the Riskified analysis says. “Other times, a return doesn't include the product at all and merchants end up refunding against an empty box.”
Buyers who open several accounts or otherwise circumvent purchase limits also complicate data tracking, since CFOs can’t know how well a marketing push worked, among other performance measures that get muddied.
“It directly affects merchants' promotional strategies,” Riskified says. “Customer misuse of referral promos, coupons, sign-up discounts, and other types of promotion abuse can create inconsistencies in your marketing reports and spend.”
The pandemic sped up the shift to online sales, and although brick-and-mortar sales have regained lost ground, e-commerce is on track to become a dominant way business is conducted. Given the role online sales can play in fueling friendly fraud, CFOs are faced with two challenges. One is helping the executive team find a way to stem losses; the other is identifying and resolving the kind of damage it can do to performance tracking.