New Research Study: Understanding Refund Fraud

Through the systematic investigation of refund fraud profiles, consumer behaviour, and retail counter-fraud measures, this research project aims to generate new knowledge on the thorny issue of refund fraud.

Importance of the project

According to a recent estimate by the National Retail Federation[1], fraudulent returns account for ten percent of all returns in the United States, representing 1.6% of total sales, which amounts to approximately USD $85 billion annually.

The recent surge in online shopping adoption, largely driven by the pandemic, has seen an accompanying rise in the trend of bracketing, where customers order multiple variations of an item with the intention of returning those that don't fit their needs. This behaviour has necessitated a more permissive returns policy from retailers. Concurrently, there is a growing commitment among these retailers to an omnichannel business model, integrating their online and offline operations to provide a seamless customer experience. This evolving retail landscape underscores the fact that returns will remain a significant aspect of the customer experience. Consequently, there is a substantial benefit for retailers in developing and implementing effective processes to detect and manage return fraud, ensuring the sustainability and profitability of their operations in this new era of retail.

In March, Beck published a framework for classifying e-commerce loss[2]. Our research project would make a valuable contribution to the 'Next Steps' identified by Beck for demonstrating that his typology has real-world application. By filling a critical gap in the existing literature on the nature and degree of retail fraud, our research will contribute to more effective action to address the abuse of returns policies. Our findings will benefit retailers, solution providers, and researchers, and provide a significant contribution to retail loss prevention. 

Overall aims and objectives of the research

Retailers face an unenviable challenge in balancing customer needs and protecting their business and inventory from exploitation by offenders. Nowhere is this balancing act more acute than the refund process. Moreover, thanks to the growth of e-commerce, providing a seamless and stress-free refund process is now considered table stakes, if not a competitive advantage. However, this growth has accelerated the issue of refund fraud, an age-old problem that has evolved to capitalise on permissive return policies.

A pivotal study by Zhang et al[3] delved into this issue, analysing refund fraud's mechanisms and potential deterrents through expert interviews, ultimately proposing a comprehensive framework for its management. This research notably distinguished types of fraud, their underlying motives, and preventative strategies across different retail channels (online, in-store, and omnichannel).

Despite these advancements, there remain critical areas unexplored.

Our study aims to enhance the groundwork laid by Zhang et al. by incorporating broader perspectives and introducing novel analytical dimensions. We intend to integrate insights from both customers and fraud perpetrators to enrich the understanding of refund fraud typologies.

We aim to generate a holistic understanding of refund fraud through the following objectives:

1.      Investigate the operational tactics and skills employed by professional refund fraud services.

2.      Examine customer attitudes towards refunds and their propensity towards fraudulent behaviours.

3.      Formulate detailed narratives of various refund fraud scenarios, alongside potential retail countermeasures.

4.      Quantitatively assess the impact, profitability, and practicality of different types of refund fraud, and critically evaluate the effectiveness of standard retail countermeasures.

Methods, approach and activities

SCOPE

We aim to build on the findings of the recent Zhang et al. study, which outlines ten distinct types of return fraud across various retail formats, including physical stores, online businesses, and omnichannel operations. However, given the complexity and depth of these types, addressing all ten within the confines of a single research study may not be feasible. To ensure thoroughness and depth in our analysis, we believe it is crucial to narrow our focus.

Our decision to concentrate specifically on omnichannel businesses is pragmatic, as bad actors often intentionally exploit the intricacies of such systems. Moreover, many major retailers now adopt an omnichannel model. Limiting our scope to a single channel, such as online retail, would inadvertently overlook a broad spectrum of potentially fraudulent activities spanning multiple channels.

To determine the specific types of return fraud to focus on, we will adopt a "bottoms-up" approach, leveraging insights from two key research components: a customer perception survey and an ethnographic analysis.

The customer perception survey will play a pivotal role in understanding public awareness and perceptions regarding the ease of executing various types of return fraud. This survey will provide invaluable data on how consumers view the vulnerability of different return processes to fraudulent activities.

Simultaneously, our ethnographic analysis will shed light on the prevalence of different 'refund as a service' offerings, providing a detailed understanding of how these frauds are operationalised in real-world settings. By examining the intricacies of these practices, we can gain a comprehensive view of the current landscape of return fraud.

The insights gleaned from both customer and offender perspectives will be instrumental in guiding our research focus. By synthesising these perspectives, we will prioritise a subset of return fraud types for further investigation in our expert consensus exercise. This methodical approach ensures that our research is not only grounded in empirical data but also reflects the realities of the retail environment.

In essence, our project employs a process-driven approach to inform our research scope and direction. This approach is designed to maximize the relevance and impact of our findings, ensuring that our research contributes meaningfully to the understanding and mitigation of return fraud in omnichannel retail settings.

Regarding market coverage, our research will primarily focus on UK, North America and Australia. This choice is largely influenced by the linguistic challenges associated with exploring customer and offender perspectives in diverse languages. While we acknowledge that some retailers may operate beyond these markets, we do not foresee this extending beyond the scope of our study to adversely affect our findings. This approach ensures a more manageable and focused investigation, allowing for a thorough analysis within these specific market contexts.

APPROACH

The investigation will involve a mixed-methods approach, including interviews, surveys, and qualitative analysis. This approach will enable the project to gather rich and nuanced data, providing a detailed understanding of the problem.

Ethnographic appraisal of a refund fraud community. Ethnographic research is evolving to address the challenges posed by crime's migration into digital environments. 'Rapid' ethnographic methods, such as 'focused ethnography' and 'rapid appraisals', are increasingly used in fields like health emergencies to gather data quickly and cost-effectively[4][5][6]. These methodologies are particularly pertinent for studying online illicit markets, known for their rapid innovation, and changing practices.

We will apply the ‘rapid’ digital ethnographic approach to study the burgeoning illicit market of online retailer fraud services. Following the development of the protocol we will apply for ethics approval via Griffith University’s Human Research Ethics. The ‘rapid’ ethnography will generate key insights into the online markets for online retailer fraud services. This will help identify the characteristics of distributors, the types of products distributed (e.g. refunding services), and the archival and documenting of new cybercrime communities. These insights will ultimately be instrumental in informing the prevention of activities.

Customer perception and willingness to defraud. We will design an online survey to gather insights from retail customers regarding their experiences with returning goods and their understanding and attitude toward refund fraud. The survey will explore customers' perspectives on various factors related to refund fraud, including their perception of the risks involved, potential rewards, and the likely sanctions they anticipate from engaging in such fraudulent activities. We will also seek to understand the effectiveness of interventions that could deter individuals from abusing refund policies.

We intend to employ the services of Prolific, a survey firm renowned for its exclusive focus on academic research surveys for participant recruitment. Our team has previously collaborated with Prolific, yielding exceptional results in survey-based research[7]. Prolific's unique positioning in the market stems from its commitment to hosting solely academic research surveys, which fosters a panel of participants who are genuinely engaged and interested in the surveys they complete.

Furthermore, Prolific ensures the reliability and quality of its participants through rigorous vetting processes, including bank-grade Know Your Customer (KYC) checks. This meticulous approach to participant selection is crucial in maintaining the integrity of our research. Additionally, Prolific's capability to apply over 300 different filters for panel creation allows for precise and targeted recruitment of survey participants. This level of specificity is instrumental in ensuring that our survey reaches the most relevant and appropriate audience, thereby enhancing the validity and applicability of our research findings.

Literature review of refund fraud in retail. The first phase will involve a comprehensive literature review strategy, guided by the methodology outlined in Zhang et al. Our primary objective is to delve into both academic and grey literature to identify and analyse additional studies focusing on refund fraud. This approach is designed to augment and extend the insights revealed by Zhang et al, rather than merely replicating previous work.

Our literature review will encompass a range of perspectives to ensure a holistic understanding of refund fraud. This includes examining literature from the viewpoints of both customers and offenders, providing a dual perspective that is often lacking in traditional analyses. By incorporating these diverse viewpoints, we aim to gain a more nuanced understanding of the motivations, methods, and impacts associated with refund fraud.

Furthermore, a significant focus of our literature search will be on the commission process of refund fraud. Understanding the mechanics and methodologies of how refund fraud is perpetrated is essential for the subsequent phases of our project. This detailed exploration will enable us to identify gaps in current knowledge and practice and inform the development of more effective prevention and intervention strategies.

Expert consensus exercise. The consensus exercise proposed in this phase of our research is a modified type of "red teaming", a strategy used to improve insight by assuming an adversarial role or perspective. It involves critically examining a problem or situation from the viewpoint of a competitor or adversary, to identify potential weaknesses, threats, or unforeseen challenges. This approach is particularly beneficial in security and risk management contexts, as it allows for a more comprehensive understanding of vulnerabilities and the development of robust countermeasures.

Our project's consensus exercise will be conducted in two distinct parts:

1. Development of Prevention Strategies: In the first part of the exercise, we will present our experts with a series of crime scripts that detail various refund fraud scenarios. These scripts will be primarily sourced from the Zhang et al. study, supplemented with insights from both the customer perception survey and ethnographic analysis of the refund fraud community. The experts, working in groups, will be tasked with developing prevention strategies to counteract these refund fraud scenarios. This collaborative approach not only leverages the collective expertise of the participants but also encourages innovative and diverse solutions.

2. Evaluation of Prevention Strategies: The second part of the exercise involves the experts assessing the prevention strategies developed in the first part. They will rate these strategies across four dimensions: (i) potential harm to a business if the fraud is successful; (ii) anticipated profit for the offender if the fraud is successful; (iii) feasibility of the prevention strategy; and (iv) the defeatability of the prevention strategy. To ensure a comprehensive evaluation, groups will be assigned different scripts from those they worked on in the first part. This multi-dimensional rating system is designed to provide nuanced insights into the effectiveness and practicality of each strategy, highlighting potential areas for further research and development.

We plan to hold a one-day workshop in an Australian city and an online workshop series for UK experts. The online format for UK participants will likely span several days to accommodate different time zones and to avoid screen fatigue. The experts will comprise retailers, researchers, and technology experts. Additionally, we anticipate conducting a series of one-on-one interviews with solution providers. These interviews will be crucial in capturing the technical aspects of refund fraud and its detection, providing valuable insights into the current state of practice and potential areas for technological innovation.

Through this consensus exercise, we aim to gain a deeper understanding of the perspectives of retailers, the realities, and constraints they face in thwarting refund fraud, and the practicality of various prevention strategies. This comprehensive approach will significantly contribute to our research objectives, providing a well-rounded understanding of the complexities involved in combating refund fraud.

Outcomes, outputs and dissemination

Project Report: A substantive report, outlining the size of the problem, methodology, sources used, participant recruitment and analysis. We would provide guidance and practical strategies to address refund fraud. The writing style will be accessible to professionals working in retail but devoid of academic jargon.

Academic article: To increase exposure to the issues and feasible solutions, manuscripts targeted at an academic audience will be prepared.

Workshop presentation: The researcher would participate in a recorded online workshop to present the research and discuss significant findings and mitigation strategies.

Staffing

Griffith University’s Professor Michael Townsley is a highly respected and accomplished criminology researcher with over 20 years of experience in the discipline. He is a quantitative researcher focusing on spatial criminology and has published extensively in international journals on a diverse range of topics. He is the only academic on the Profit Protection Future Forum steering committee, Australia and New Zealand’s peak body for loss prevention professionals.

Associate Professor Joe Clare is based in the Law School at The University of Western Australia and is the author of 52 journal articles and book chapters. His research focuses on policing, applied evaluations, offender decision-making, and academic integrity and he is a member of the ANZ Society of Criminology Policing executive committee.

Dr Andrew Childs is a Lecturer in the School of Criminology and Criminal Justice at Griffith University. His research primarily focuses on the evolution of illicit online marketplaces, the nature of trust and risk in online spaces, and innovative digital research methods for studying offenders. More broadly his work on digital culture has been featured in various outlets such as The Conversation and The Interpreter.

Next Steps

The research was officially launched in February, with deliverables due at the end at the end of 2024. If you would like to participate, please email Colin Peacock at colin@ecrloss.com

References.

[1] National Retail Federation (2022). 2022 Consumer Returns in the Retail Industry. National Retail Federation and Appriss, December 2022.

[2] Beck. A (2023) Developing a Framework for Understanding and Measuring E-commerce Losses in Retailing. ECR Retail Loss

[3] Zhang, D., Frei, R., Senyo, P., Bayer, S., Gerding, E., Wills, G., and Beck, A. (2023). “Understanding Fraudulent Returns and Mitigation strategies in Multichannel Retailing”. Journal of Retailing and Consumer Services, 70:103-145.

[4] Johnson, G, A, & Vindrola-Padros, C. (2017). Rapid qualitative research methods during complex health emergencies: A systematic review of the literature. Social Science & Medicine, 189, 63-75.

[5] Pink, S. & Morgan, J. (2013). Short-term ethnography: intense routes to knowing. Symbolic Interaction, 36(3), 351-361

[6] Sangaramoorthy, T. & Kroeger, K. A. (2020). Rapid ethnographic assessments: a practical approach and toolkit for collaborative community research. Routledge.

[7] Quinn, L., Clare, J., Lindley, J., and Morgan, F. (2022). Demand for and disposal of stolen goods in legitimate second-hand online markets: an explorative online survey. Global Crime, 24(1):19–48. DOI: 10.1080/17440572.2022.2142781.