Aussie retailers are bracing for a turbulent summer. Each year Westpac conducts a survey to find out whether consumers plan to spend more or less than they did the previous year on Christmas gifts, and the 2022 results reveal that Aussies are feeling frugal. The survey, released last month, found the proportion of people planning to cut their spending on presents this year was the highest since the global financial crisis in 2008.
This crunch on consumer spending correlates to a nationwide cost of living crisis, as prices of everyday essentials continue to skyrocket and interest rates rise rapidly. According to the 2022 Financial Wellness report from AMP, almost three million Australian workers are feeling moderate or severe levels of financial stress. This isn’t limited to low income earners, as one in five workers earning $100,000 and above also reported to suffer from financial stress. As such it is not surprising that many consumers are reassessing their shopping habits.
With customers spending more cautiously, retailers are coming up with new ways to attract and reward customers in order to match or exceed the profit margin they are targeting this holiday season. Tactics ranging from promotional codes and discounts to gifts and referral bonuses are on the rise. However, these tactics can only be successful if retailers are aware of, and prepared for, evolving consumer behaviours which can damage revenue. With many shoppers currently focused on saving money, it has triggered a rise in policy abuse, a lesser-known and highly concerning consumer behaviour which has the power to drain retail profits this summer.
What is policy abuse?
Policy abuse occurs when regular customers break a retailer’s terms and conditions – usually with the motive of saving or making money. While it is not the same as traditional fraud, every incident of policy abuse, no matter how small, erodes profit margins and contributes to significant financial loss for online retailers – with an impact that is often hard to quantify as it can affect customer service, merchandise, legal and logistic teams.
Policy abuse spiked during the Covid-19 pandemic when consumers relied heavily on online shopping for safety reasons and because of the state-wide lockdowns. Against the backdrop of an economic downturn and skyrocketing costs of living, policy abuse is a serious threat for retailers this holiday season.
Types of policy abuse
There are multiple types of policy abuse. The most common form concerns refunds and returns. For example, a customer may falsely report a damaged item or a missing package, resulting in a refund or the sending of a new product. There are also increasing incidents of customers returning used or worn items which is commonly known as “wardrobing”. Some may even return fake items or empty boxes.
A further consideration for retailers is the misuse of sign-up promotions to access extra discounts. The prevalence of social media has made it incredibly easy for promotional codes to be used in ways which are beyond what the retailer originally intended.
There are also highly sophisticated methods of policy abuse related to resale, which are very common with in-demand items such as designer trainers, new gaming consoles and concert tickets. This involves an individual buying a large number of these items – often through a large number of email addresses – and then reselling them for profit. Some individuals even make this practice a full-time profession to generate a sustainable income stream.
Combatting policy abuse by developing a robust strategy
The first step to preventing policy abuse is to establish good and clear policies. The experience, technology, and methods used to prevent traditional fraud can also help, but it’s crucial that merchants have a 360-view of each customer. This includes having real-time data as well as a meaningful understanding of customers’ behavioral patterns.
Establishing a smooth internal collaboration between customer service, fulfillment and fraud teams is also critical in helping to stop policy abuse as soon as they discover it.
Similar to strategies for preventing traditional fraud, online retailers must balance the customer experience with managing financial losses and have the right tools in place to do so. While many fraud prevention solutions typically focus on account or product-based rules at the checkout, the more sophisticated solutions analyse every event throughout the customer journey to also include account creation, requests for return authorisation, and missing package claims, among others.
By connecting data from various customer interaction channels to uncover sophisticated abuse patterns and trends and connect the dots, retailers can identify when policies are being abused and who is abusing them. This is the ideal situation to prevent policy abuse without compromising the shopping experience for loyal customers.
Planning for a successful holiday season
On top of reducing losses across merchandise, logistics, refunds and more, a good policy abuse strategy can actually increase online sales and profitability. Retailers with a strong policy abuse strategy are better placed to provide their trusted customers with less friction, creating a more positive experience overall. It is also more likely that there will be higher product availability for loyal customers who are ready to buy.
Getting to grips with policy abuse can become the secret weapon for retailers to increase their chances of keeping every cent of profit this festive season. The right technology and data insights can go a long way towards reducing – and in many cases preventing – financial damage.
Eyal Elazar is policy abuse expert at Riskified.