What is Refund Abuse & How Do You Stop It?

I’ve handled many returns and often wonder if a customer is trying to scam me. It’s not a great feeling, but if you’ve dealt with returns, you probably get it.

In this guide, you'll learn:

• What refund abuse is
• The common types
• How to prevent it
• The role of chargebacks

Let’s start with the basics.

Key Takeaways

• Refund abuse happens when customers misuse return policies to gain money or products.
• US retailers lose around $101 billion every year due to refund fraud and related scams.
• 57% of merchants have seen rising costs from item-not-received fraud recently.
• Retailers lose about 60% of an item’s price, even when it's returned.
• 45% of US shoppers admit to abusing refund policies in some way.

But that’s not all — chargeback fraud is another serious threat.

It happens when customers dispute purchases to get their money back while keeping the item. Preventing it can be tough, but chargeback alerts can help.

These alerts notify you when a customer plans to dispute a charge. This gives you a chance to issue a refund and avoid the chargeback.

Want to know more? Read this to see how chargeback alerts work.

What is Refund Abuse?

Refund abuse, or refund fraud, happens when customers take advantage of a business’s return policy to gain a benefit. This often means returning items in ways that go beyond what the policy allows.

Refund requests may fall into a gray area — like when shoppers aren't happy with a purchase. Refund abuse involves deliberate attempts to get refunds through false claims.

Why would consumers do this?

People justify refund abuse in different ways:

• Some believe it's harmless, thinking big businesses can afford the losses.
• Others feel entitled to a refund due to dissatisfaction, even if their claims aren't valid.
• Repeat offenders see it as an easy way to get money with little risk of punishment.

It all boils down to money. Just like everything else in life.

Here's an example of refund abuse in action:

A customer buys a high-end camera online, uses it for a vacation, and then returns it, claiming it's “defective.” The business processes a full refund. After inspecting the camera, they find obvious signs of use — worn buttons.

Don’t worry if you still don’t get it. I’ll provide more examples in a bit.

Have you noticed that I didn’t mention anything about returns?

Summary: Shoppers attempt to exploit a seller’s refund policy.

Return Fraud vs. Refund Abuse

Return fraud covers any deceptive activity involving the return of an item. Refund abuse focuses on dishonest attempts to secure a refund — whether a return happens.

Here are a couple examples to help you differentiate them:

• A customer falsely claims they didn’t receive an item and requests a refund. This is refund abuse without a return.
• Another shopper returns a counterfeit product instead of the original item. This is return fraud without asking for a refund directly.

Great. We can move onto how refund fraud works.

Summary: Return fraud involves activities surrounding returning an item.

How Does it Work?

Refund fraud usually unfolds as follows:

1. Choose a target: The fraudster looks for businesses with weak return policies. They study the terms to find loopholes.
2. Buy something: They may skip the purchase and exploit policies another way.
3. File the return: The fraudster submits a return request with a convincing excuse.
4. Get the refund: The business approves the refund without spotting the fraud.
5. Profit: The fraudster keeps the product, resells it, or repeats the scam using different identities.

This is the gist of how refund fraud works.

You’ll need to know about the different types of abuse out there for a better understanding.

Types of Refund Abuse

Here the most common types of refund fraud:

• Item not received: The customer claims their order never arrived.
• Refund without return: Requests a refund but never sends the item back.
• Double-dipping: Refunds from the retailer and the payment provider.
• Policy exploitation: Scammers take advantage of lenient return policies.
• Refund Fraud-as-a-Service: Fraud rings offer refund scams to others for a fee.
• Tender liquidation: Stolen payment methods used to buy products, then returned for store credit.
• Snap-and-Send-Back: Customers buy items for short-term use and return them.

This guide covers refund fraud only, not return fraud types like wardrobing.

Next, we’ll explore each type in detail with real-world examples and insights into how common they are.

1. Item-Not-Received Fraud

INR fraud happens when scammers falsely claim their order never arrived. Forcing businesses to issue refunds or replacements. According to Riskified, 57% of merchants saw rising costs from INR fraud between 2021 and 2022 [1].

Scammers take advantage of weak links in shipping and tracking, often claiming:

• Someone stole the package after delivery.
• The courier delivered it to the wrong address.
• They never received it, even when tracking shows otherwise.

Some even use fake tracking manipulation services to strengthen their claims.

Example:

A customer orders a gaming laptop online and later insists it never arrived. Although the courier confirms delivery, the business refunds the full amount.

2. Refund Without Return

Refund without return happens when a fraudster gets a refund without returning the product. They often claim the item is defective, damaged, or not as described.

Example:

A customer buys a high-end blender and claims it arrived broken. The business refunds the full amount, but the customer keeps and continues using the functional blender.

3. Double-Dipping

Double-dipping happens when a customer requests a refund from the retailer and their payment provider. Getting paid twice for the same purchase.

Some sources claim double-dipping related to INR claims rose by 35% between Q3 2021 and Q3 2022 [2].

Even legitimate customers may fall into this trap. Studies show 41.6% of those who commit “friendly fraud” also double dip by disputing a charge while waiting for a refund.

We'll talk about friendly fraud in a bit.

Example:

A customer claims their order never arrived and asks the retailer for a refund. They meanwhile file a chargeback with their credit card company. In the end, they receive 2 refunds while keeping the product.

4. Policy Exploitation

Policy exploitation happens when customers repeatedly abuse a business’s return policies.

A survey found that 45% of US shoppers admitted to some form of policy abuse [3]. For instance, they'll falsely report missing items. Fraudsters push these policies to their limits, knowing businesses often prioritize customer satisfaction.

Example:

A customer regularly buys electronics from an online store and claims each time that the item arrived damaged. Despite no proof of defects, the business issues refunds.

5. Fraud Rings (Refund Fraud-as-a-Service)

In this scheme, organized fraud rings help individuals exploit refund policies for profit. They operate through social media and encrypted apps. Offering step-by-step instructions or managing the entire process for a fee.

Example:

A Telegram-based fraud ring called "Chin Chopa" allegedly stole over 10,000 items. Raking in millions through refund scams since 2023 [4].

I suggest scrolling to the end of this post and reading the investigation regarding this fraud ring. It offered a lot of insight into how these things work.

6. Tender Liquidation

Tender liquidation is when fraudsters use stolen payment methods to buy items and return them for store credit or refunds. Turning stolen money into legitimate funds.

Example:

A scammer buys electronics with a stolen credit card and returns them for a gift card. They then sell the gift card for cash. Effectively laundering the stolen funds.

7. Snap-and-Send-Back

Snap-and-send-back fraud happens when customers buy items, use them briefly and then return them for a full refund. They'll often do this for social media content.

It’s common in fashion and electronics, where people want to show off luxury items without keeping them.

How common is it?

A Barclaycard study found that 9% of UK shoppers admitted to buying clothing just for social media photos before returning the items.

If you’re a customer, you might wonder whether this is a crime.

Is Refund Abuse a Crime?

Yes, refund abuse is legally considered theft. The law treats it as a serious offense because it involves deceiving businesses for financial gain.

Those caught committing refund fraud can face:

• Jail time
• Fines
• Probation
• Community service
• House arrest

In 2021, a Rhode Island man, Michael Chaves, defrauded Amazon and other retailers out of $50,000. He ordered expensive products, swapped them with cheaper items, and returned them for full refunds [5].

Chaves then received a 30-month federal prison sentence. 

He fought the law and the law won.

Is return fraud even that bad? Yes…

How Bad is It (For Merchants)?

Refund abuse costs US retailers an estimated $101 billion each year.

Though, the impact goes beyond lost revenue. Businesses also face:

• Higher operational costs
• Wasted shipping and handling expenses
• Lost work hours processing false claims

Even when merchants recover returned items, they lose an average of 60% of the item’s price. Fraudulently returned products often lose resale value, which increases financial strain on businesses.

To offset losses, businesses often raise product prices — passing the cost onto consumers. This helps maintain profits but can hurt competitiveness.

Investigating refund fraud adds another expense. Fraud specialists charge anywhere from $75 to $125 per hour. More advanced services can cost up to $400 per hour [6].

Monoliths like Amazon likely pay even higher rates.

Finding the Right Balance

Tightening refund policies can prevent fraud but might damage your brand. But. Being too lenient invites more abuse.

I mentioned that refund abuse has increased. Let’s find out why.

Summary: Businesses lose money on higher operational costs, staffing, and it’s hard to sell returned items.

What’s Contributing to Its Rise?

Refund abuse is on the rise, fueled by growing online sales, social media influence, and economic pressures.

According to the National Retail Federation (NRF), the total return rate in the US hit 14.5% in 2023. Online returns reached 17.6% in that same period.

Fraudsters take advantage of online shopping because it often lacks physical product verification. In 2020 alone, fraudulent returns led to $25.3 billion in losses.

Platforms like TikTok and Reddit have also made refund scams more accessible. Users openly share refund “hacks” and loopholes, encouraging others to exploit them. One TikTok video on refund fraud gained over 9,000 views. 

While 9,000 views may seem small, the real danger lies in the compound effect. Those viewers might share the scam with others, further fueling the problem.

Financial hardship has also driven more people to commit refund fraud. A Ravelin survey found that 51% of online shoppers who admitted to first-party fraud blamed rising living costs.

Other triggers include:

• 29% cited the COVID-19 pandemic.
• 18% pointed to job loss.

There’s another factor that contributes to this. Friendly fraud. Let’s learn what that is.

Summary: Social media, online shopping, and higher living costs resulted in higher fraud.

Refund Abuse vs. Friendly Fraud

Friendly fraud happens when customers unknowingly commit fraud. It's often due to confusion over a merchant’s policies or forgetting a purchase.

A shopper may see an unfamiliar charge on their bank statement and disputes it. Even though they received the item. Most of the time, they don’t mean any harm to the business.

Refund abuse is intentional. Shoppers manipulate return policies to gain money or products. 

Chargeback fraud takes this a step further.

It's an extreme form of refund abuse. The customer disputes a legitimate charge with their bank to get their money back while keeping the product. They'll skip speaking to the merchant about the purchase issue.

Unlike standard refunds, chargebacks involve the card issuer, which leads to:

• Higher fees for businesses
• Stricter penalties
• Damage to a merchant’s reputation

We compare the differences between chargebacks and refunds in this guide.

Here’s an easier-to-digest comparison of the 3:

Here’s a guide that’ll do a better job explaining the differences between friendly and chargeback fraud.

Let’s get back on track and look into how you should deal with refund fraud.

Summary: Friendly fraud is unintentional.

How to Respond to Refund Abuse

If you think a customer is abusing your refund policy, take these steps to protect your business:

1. Investigate Suspicious Claims

Review refund requests, especially from customers with frequent returns. Check order details, shipping records, and return patterns for inconsistencies.

Comparing refund claims with tracking data and purchase history can reveal signs of abuse.

2. Contact the Customer for Clarification

If a claim seems questionable, reach out to the customer for more details. Ask for proof, like photos of damaged items or shipping confirmations. This step discourages dishonest claims and gathers evidence if a dispute arises.

3. Implement Partial Refunds

When returned items don’t meet policy standards, offer partial refunds instead of full reimbursements. This helps minimize losses while staying fair to honest customers.

4. Strengthen Internal Processes

Identify common fraud patterns and adjust your return policies. Adding extra verification steps for high-risk customers can reduce abuse and prevent future scams.

5. Leverage Chargeback Representment

If a fraudulent refund claim turns into a chargeback, fight it with strong evidence. Provide documents like shipping confirmations, delivery proof, and your return policy. The more solid your documentation, the better your chances of winning the dispute.

Here’s a separate guide that teaches you how to deal with chargebacks.

6. Blacklist Repeat Offenders

Track and flag customers who repeatedly abuse refund policies. Updating internal databases and customer profiles helps prevent them from striking again.

7. Report Fraudulent Activity

For severe cases, report refund fraud to law enforcement or industry fraud databases. Working with other merchants to share fraud data can help stop repeat offenders.

You know what’s better than dealing with refund abuse? Preventing it.

Here’s How to Detect & Prevent Refund Abuse

It’s impossible to eliminate refund fraud entirely, but you can take these steps to reduce it:

1. Strengthen & Communicate Clear Return Policies

To prevent refund abuse and manage customer expectations, clearly outline your return conditions. Specify requirements such as proof of purchase, original packaging, and return time limits.

To ensure customers can easily find and understand your policy, use these key touchpoints:

• Return policy page: Create a detailed page that outlines conditions, timeframes, and more. Make sure it's easy to find from your homepage.
• Footer links Add a link to your return policy in the website footer, so users can access it from any page.
• Product pages: Summarize key return details on product pages.
• Checkout process: Include a brief policy overview or a link during checkout to remind customers of the terms.
• Order confirmation emails: Include return details in order confirmation emails.

The site, Brooklinen, does a fantastic job weaving in all these best practices. They explain their return policy in plain English and separate sections for customers in many spots. They also have a link to their return policy in their checkout page and in the footer.

They also have an accordion that describes the process on every product page.

2. Train Customer Service Teams

A well-prepared customer service team is your first line of defense against refund abuse. Equip them with clear guidelines to process refund requests while maintaining good relationships.

They should focus on these areas:

• Recognizing red flags: Train staff to spot suspicious patterns, such as frequent high-value returns.
• Verifying return eligibility: Ensure they check proof of purchase, return timelines, and more.
• Enforcing policies: How to apply return rules politely to avoid alienating genuine customers.

3. Conduct Spot Checks & Audits

Regular audits and spot checks help businesses detect refund abuse early. They also discourage fraudsters from taking advantage of lenient return policies.

These are fruitful.

A study found that businesses conducting surprise audits experienced median fraud losses of $75,000. In contrast, companies that didn’t conduct audits faced losses of $200,000. This represents a 63% reduction in fraud-related losses [7]. 

This proves that periodic audits are a powerful tool for fraud prevention.

3. Watch for Refund Timing Manipulation

Fraudsters often request refunds right after receiving an order just before a tracking update. Tracking the timing of refund requests can help spot suspicious patterns.

4. Check for Discrepancies in Return Items

Look for returns that don’t match the original purchase. Fraudsters often swap products, damage items, or send back empty boxes to exploit return policies. Inspecting returned items helps detect and prevent these scams.

5. Monitor Unusual Payment or Account Activity

Frequent changes in the following may signal organized fraud:

• Payment methods
• Shipping addresses
• The use of multiple accounts for similar purchases

Keeping an eye on these behaviors can help detect repeat offenders.

6. Use Fraud Detection Tools

Automated fraud prevention software helps detect suspicious refund requests by flagging unusual patterns. These tools use machine learning to catch behaviors like repeated refund requests from the same IP address or device.

Many payment processors, such as Stripe, offer built-in fraud detection features. If your platform doesn’t include these tools, consider third-party apps. Or, you may need subscription services designed to spot fraudulent activity.

Need help finding the right tools? We've reviewed some of the best Shopify apps to help you choose the right one.

You’ll also need to prevent fraud to stop chargebacks. But what does that mean?

All Business Owners Should Also Know About Chargebacks

Chargebacks do more than take away a sale — they come with extra costs. For every $1 lost to fraud, merchants actually lose $3.75. This happens when factoring in fees, merchandise replacement, and administrative expenses.

But it doesn’t stop there.

If chargeback rates get too high, merchants could face:

• Increased fees: Payment processors may raise transaction fees.
• Account termination: If chargeback ratios stay too high, processors might shut down your account.
• MATCH list inclusion: Ending up on this list can make it difficult to work with other payment providers.

What counts as ‘too high’?

It depends on the payment processor and card issuer. We cover these thresholds in detail in a separate guide.

I mentioned friendly fraud, which accounts for 70 – 79% of all chargebacks. Chargeback fraud likely accounts for many of these cases. Businesses struggle to prove intent, though —making it a persistent challenge.

I hope this information helped.

Wrapping Up

Refund abuse costs businesses billions each year. It forces companies to raise prices, which can drive customers away. On top of that, chargebacks add even more financial strain and could lead to losing your merchant account.

So, what can you do about chargebacks?

Chargeback alerts offer a solution. Our alerts have helped some customers prevent 9 out of 10 chargebacks, saving them time and money.

Want to see how they work? Give them a try today.

Sources

• [1] Losses Due to Policy Abuse. Riskified. 9/14/2023.
• [2] Double-dipping. Forter. 1/13/2023.
• [3] Fraud Consumer Survey. Riskified. 11/21/2022.
• [4] Case 2:24. FrankOnFraud. PDF.
• [5] Business Man Charged with Refund Fraud. US Attorney’s Office. 6/17/2020.
• [6] Private Investigator Cost. Talo. 12/21/2024.
• [7] Surprise Audits vs. Fraud. Sweeney Conrad. 6/25/2024.