Fraudulent claims target luxury retailers online: How AI can limit the damage

July 8, 2024

Dolce & Gabbana Sardinia 2024 show.Image: Dolce & Gabbana

High-end, luxury retailers already contend with organized retail crime (ORC) groups brazenly breaking into stores and taking designer purses, clothing and more. But there is a larger threat looming online — claims and appeasements fraud.

The abusive act may sound friendlier than a flash mob, but the schemes can heavily increase retail losses at luxury retailers. This is particularly true for retailers using legacy platforms that do not track transactions across online, in-store POS systems and customer service programs.

In total, the retail industry loses, on average, $21 to $35 billion to fraudulent claims and appeasements every year.

Moreover, Visa’s annual Global eCommerce Payments & Fraud Report, in partnership with the Merchant Risk Council, listed returns fraud as the leading form of online abuse for the first time. The results have luxury retailers – who are experiencing unusual scenarios in claims and appeasements – on alert.

Examples of claims and appeasements fraud in the luxury space
On one end, claims and appeasements fraud can look like a can of tuna arriving inside a shopper’s delivery order instead of the Dolce & Gabbana ashtray that was ordered.

In this situation, it is an honest claim from the shopper, who unknowingly had the ashtray stolen, while the bad actor swapped it for a can of tuna.

Then, there are more sophisticated manners of abuse, such as:

A fraudster or ORC ring might buy 20 purses at $1,200 each online, using 20 different credit cards – often stolen – under 20 different names and billing addresses, but shipping all items to one location.

The fraudster then files each claim one at a time, calling customer service, saying an item never arrived and that he or she wants a refund. The bad actor may also say an item came damaged or not as it appeared online, requesting an appeasement such as a $500 credit.

If the retailer has a legacy order management system, the customer service representative may not be able to track previous claims, refunds or appeasements, lacking the ability to tie unusual behavior to the same address.

When systems are not sharing data, the representative cannot see the abuse and grants the appeasement.

Similarly, fraud as a service is growing in the luxury space.

Forums on the dark Web and Telegram, Whatsapp or Discord feature fraudsters selling their services. They will teach a person how to buy an expensive garment and claim it as “Item not received.”

The fraud customer keeps the garment in exchange for a percentage of the total cost of the order, while the fraudster expands his or her ring with new transactions and builds loyalty.

Additionally, much of the payments are in Crypto to hide the transactions between fraudsters.

Pete Barker

Ways luxury retailers can fight claims and appeasements fraud
To be clear, all retailers are susceptible to claims and appeasements fraud, but luxury retailers with trendy, desirable and high-priced items are priority targets.

One way of combating some online fraud is through stricter returns policies.

For example, a luxury retailer such as Dolce & Gabbana might have a customer claim that an item is damaged, but the company’s policy requests the customer to mail in the item for repair.

While this approach can reduce fraudulent appeasements, retailers must be cautious not to alienate loyal customers with policies that may seem unfair. Striking the right balance is crucial, and AI can serve as an effective intermediary.

Luxury retailers that leverage AI within their loss prevention strategies rely on predictive modeling to help identify unusual behavior happening across different touch points such as a customer service system, in-store and online.

AI quickly reads through the hundreds and thousands of transactions to spot the 20 purses purchased all going to one location.

AI does not need to be a luxury within a retailer’s returns strategy
Claims and appeasements fraud is becoming increasingly sophisticated, making it difficult to detect in a sea of transactions. This issue is more problematic for luxury retailers than chargebacks or phishing scams.

AI links transaction identifiers across all online and in-store orders to spot consumers that may be attempting to hide their identity. This reduces friction for both customers and retailers by providing customer service teams with data-driven guidance to quickly approve or deny appeasements or reshipments.

Luxury retailers need to protect profits and can do so by mitigating claims and appeasements fraud.

Pete Barker is director of product at Appriss Retail, Irvine, California. Reach him at pbarker@apprissretail.com.

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