A Conversation with Riskified COO Naama Ofek Arad on Policy Abuse
Riskified recently launched a groundbreaking new research report: Policy Abuse and Its Impact on Merchants. The findings are based on a survey of 300 merchants worldwide and speaks to the severe challenge policy abuse poses to their profitability and success, and how automation and AI can help.
To learn more about the challenge of policy abuse and how we’re working with merchants to tackle this problem, we spoke with Riskified COO Naama Ofek Arad. Here is what she had to say:
Q: How does policy abuse impact merchants' operational efficiency and resources, including the costs associated with handling fraudulent transactions?
There’s an overlap but policy abuse is not exactly the same as what we consider to be traditional ecommerce fraud, which is mostly centered on online purchase attempts using illegitimately obtained credit card or payment information.
Policy abuse is the misuse of merchant policies, and it’s important to understand that even within policy abuse, there is a lot of nuance. The spectrum of policy abuse covers everything from promo code to reseller to refund and returns abuse. There’s also a spectrum of abusers: from “regular” consumers wearing clothes with the tag on so they can return it later (wardrobing) to organized efforts to exploit merchant policies on the Dark Web.
Something to consider when looking at the problem of policy abuse with respect to fraud, is that while the estimated cost of ecommerce fraud is projected to be $48B this year – we’re estimating $100B in losses from policy abuse. Our work with merchants on both the ecommerce fraud and policy abuse front validates this trend as well, that the cost of policy abuse tends to be larger than the cost of fraud.
Q. How does policy abuse impact merchants' operational efficiency and resources?
Merchants put a huge amount of budget to fund initiatives like free and seamless returns, or coupon codes to win over new customers. So the fact that we’re seeing roughly 20% of their cost being drained by policy abuse, it’s subjecting merchant profitability to death by a thousand cuts.
The problem is that a vast majority of merchants we’re talking to have manual processes when dealing with issues like refunds and returns claims. This approach is costly, time-consuming, prone to human error, and opens the door to creating poor customer experience when a team doesn’t have the scale and resources. Of those we surveyed for our report “Policy Abuse and Its Impact on Merchants,” 62% have no automated systems in place to address policy abuse.
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For example, Riskified worked with a merchant to understand abuse rates in their Item Not Received (INR) claims. The merchant was manually reviewing every INR claim which was definitely not scalable – the merchant processed hundreds of millions of dollars in refund volumes annually. We implemented an automated analysis that covered all claims and orders. We also developed an identity-based policy with the merchant that ultimately prevented 10x more abuse, while certain systematic INR abusers were blocked at checkout.
Q: In your interactions with merchants, have you observed any common misconceptions about retail policy abuse and its potential impact?
Policy abuse has changed what fraud prevention means in ecommerce. Traditionally merchants looked for third-party fraud where the customer was the victim, but policy abuse is not so straightforward as the abusive behavior can come from loyal customers and bad actors alike. This creates a lot of nuance for handling cases of policy abuse.
In terms of its impact, policy abuse is a tremendous burden on merchants and on the ecommerce ecosystem as a whole, taking up valuable resources and eating into margins. We see policy abuse impacting everything from customer acquisition costs, transportation and logistics, to even recycling and landfills. Taking all of this into consideration, including profitability as a top priority for merchants, we believe policy abuse is an area that warrants more scrutiny and deserves much more urgency.
Q: As policy abuse tactics evolve, how do you ensure that merchants are able to tailor their strategies to align with their unique business models and vulnerabilities?
As I mentioned earlier, many merchants don’t have the technology and systems in place to deal with policy abuse issues. That’s why we saw so much potential in leveraging machine learning to solve this problem, the same way we applied it to tackle ecommerce fraud a decade ago. Our AI approach empowers merchants to more clearly “see” the identity behind an interaction. It also enables real-time response, based on custom rules and thresholds the merchant would want to implement.
One merchant came to us facing millions of dollars worth in returns annually. Manual reviews caught flagrant abuse, like empty boxes, but let most slip through. Their team struggled to detect patterns of abuse in that massive volume of data. We helped them move from manual reviews to using our machine learning engine Identity Explore to better identify abusers. One workflow they implemented was to block a segment of serial abusers at checkout. That small percentage of blocked abusers prevented about $3M in abusive returns in just a few months.
Returns are of course a hot topic, and there’s a lot of debate happening around the right approach. A startling number of products received as returns are wasted because merchants aren’t able to restock them, and our research shows that most merchants recoup less than 50% of their losses from returns. This is leading to an overcorrection, in our opinion. For example, many retailers - including Amazon - are backing off from lenient return policies and even charging for returns.
After an era of generosity, this hard pivot might turn off customers from buying from the merchant in the first place. Instead of adopting a one-size-fits-all policy, AI can create a more segmented or even personalized approach that can extend trust and seamless experiences to good customers, and insert friction or outright block customers who hurt the business.
“Policy Abuse and Its Impact on Merchants” uncovers the causes and consequences of policy abuse, and steps merchants can take to combat it.