The Rising Tide of First-Party Misuse

In the 2024 Global Payments and Fraud Report, the Merchant Risk Council (MRC) identified first-party misuse as the biggest trending issue for commerce businesses worldwide. This trend of customers abusing or misusing refund, return, and chargeback processes for financial gain has sadly continued—and even worsened—since the MRC published that report at the end of March. That is to say, there’s been a significant uptick in fraudulent activities targeting merchant return and chargeback policies, leading to considerable financial losses. 

This post is the first in a two part series on how to safeguard your businesses against first-party misuse. To start, we'll define the ways your business may encounter this form of less-than-friendly fraud, ensuring you know how to stay vigilant against this issue. In our next post in this series, we'll dig into the metrics you should monitor to keep associated losses from causing irrevocable damage.

Return Abuse

If you sell goods and services, you have a return policy. Of course you do! Customers will order the wrong size or color the first time, may change their mind about a purchase, or buy a gift for someone who really wishes they hadn’t. Accepting and processing returns is an expected and understandable part of doing business. Unfortunately, in a time where online shopping is king and fraud is becoming an industry unto itself, returns have now also become the newest target for fraudulent activity.

Return abuse typically involves customers purposefully abusing your return policy to make money, save money, or get an item for free. Examples include:

• Returning an item they used or damaged

• Purchasing many items with the intent of only keeping one and returning the rest (e.g. clothing)

• Using the return shipping label to send back an empty box or a random item, hoping the warehouse won’t confirm what was actually returned

• Ordering additional products or services to satisfy the free shipping minimum with the intent of immediately returning the excess items

Refund Fraud

Slightly different from return abuse, refund fraud involves exploiting loopholes in your refund policies to make financial gains. Typically the fraudulent party attempts to deceive or scam your business into giving them money even though they aren’t entitled to any sort of refund. Examples include:

• Fraudulently claiming they didn’t receive their full order and requesting refunds on the “missing” items

• Requesting multiple refunds on the same item

• Requesting a refund on a transaction they’ve already charged back (i.e. double dipping)

• Creating fake receipts or altering real receipts to request refunds for purchases they never actually made

Chargeback Fraud

Chargebacks are unfortunately an expected and expensive part of doing business online. They’re designed to help customers protect themselves against bad actors or identity thieves, making it possible for them to get their money back for purchases they didn’t make or when they can’t get an appropriate refund for valid reasons. As a part of the recent rise in first-party misuse, we’re seeing ever-increasing incidents of customers abusing the chargeback process to get money back for purchases they did make but want to circumvent paying for.

In addition to the losses your business incurs by refunding a customer for their disputed transaction, you’ll also pay chargeback fees and waste time and resources in-house or via vendors going through the dispute process. As such, chargeback fraud can quickly put a significant strain on your resources and finances. Examples of this type of fraud include:

• Disputing a purchase they forgot about (i.e. friendly fraud)

• Disputing the same purchase they already returned and received a refund for, more than doubling your losses

• Disputing a purchase they can’t return under your return policy guidelines (e.g. they used it already, it’s past the return window, or the item was sold as non-refundable)

The Fraudsters Themselves

So far, we’ve focused on identifying the types of first-party misuse your business is likely already dealing with. Knowing what different fraud methods exist can help you segment out where your business may have exploitable vulnerabilities. The natural next question would therefore be around what segments of your consumer base are most likely to commit these financial crimes in the first place. Unfortunately, this is a harder question to answer.

​​Unlike typical fraud patterns, the rise in first-party misuse doesn't adhere to a specific profile. The MRC reports that chargeback fraud, refund fraud, and return abuse appear to come from customers using any type or brand of card, those of both low and high net worth, and can occur in store and online. Merchants from all merchandise categories report losses from first-party misuse, indicating just how widespread this issue is.

Taking Action

While it’s not always clear who’s committing first-party misuse, there are high-level actions you can take to protect yourself:

• Review your return and refund policies for potential loopholes

• Establish clear communication with customers around their purchases, including ensuring your transaction descriptors are easily understood

• Confirm a transaction hasn’t already been refunded before accepting a chargeback on the same transaction (and vice versa)

• Build out a robust chargeback response strategy

• Implement stricter return policies, such as inspecting returned items before refunding the customer or charging for return shipments

• Contact your payment processors and fraud prevention vendors to discuss how they’re addressing first-party misuse

It's clear first-party misuse is a complex and costly challenge for businesses. In the next blog post in this series, we'll delve into how you can leverage payments data to protect your business. Whether you’re monitoring for trends in your chargebacks and refunds, tracking the performance of your fraud rules, or trying to identify the segments of your customer base most likely to commit first-party misuse, Pagos has the tools you need to fight back.

Remember, you're not alone in this; with the right strategies and precautions, you can minimize the impact of these fraudulent activities and safeguard your bottom line. Stay tuned for our next blog post, and in the meantime, follow Pagos on LinkedIn for more relevant insights!