Refund fraud: What retailers can learn from iGaming payments

Refund fraud has become a serious and costly challenge for online retailers. According to the National Retail Federation in the US, fraudulent returns represented around 14% of all returns in 2023, costing merchants over $101 billion annually. Closer to home, UK retailers saw return fraud spike to an estimated 13.7% of all returns last year, translating to about £11.3 billion in losses. As fraud tactics evolve, retailers must look beyond traditional methods to protect their businesses and customers. One industry that has successfully tackled similar challenges is iGaming, whose advanced fraud prevention strategies offer valuable lessons for eCommerce retailers.

Why refund fraud matters for retailers

Refund fraud covers various deceptive practices, from claiming items never arrived to returning counterfeit or damaged goods. Increasingly, organised groups exploit generous return policies, promoting fraudulent services via social media platforms like Telegram and TikTok. This growing trend is damaging retailers financially and operationally, eroding profit margins and damaging customer trust.

Lessons from iGaming: Pioneers in payment protection

The iGaming industry operates in one of the most fraud-intensive payment environments. Facing issues such as chargeback abuse, multi-accounting and account takeovers, online gambling platforms and payment providers have developed sophisticated fraud detection systems. Retailers can adopt these same tactics to enhance their defences against refund fraud.

AI-powered real-time fraud detection

Some payment providers, such as Yaspa, use artificial intelligence (AI) to analyse transaction patterns and user behaviours. These systems quickly identify anomalies, like unusually high transaction velocities or mismatches between user locations and payment methods. Retailers adopting similar AI tools can swiftly detect suspicious refund requests, flagging potential fraud without inconveniencing genuine customers.

For instance, multiple refund requests from the same account within a short timeframe or unusual refund destinations can be automatically assessed and scored for risk, allowing merchants to prioritise reviews and reduce fraudulent refunds.

Robust Know Your Customer (KYC) processes

Effective identity verification is mandatory in iGaming, with stringent Know Your Customer (KYC) processes ensuring players are legitimate and authorised. Retailers can benefit similarly by introducing targeted identity verification, particularly for high-value refund claims or where inconsistencies are detected. Verifying customer identities using documents or bank account validation not only deters fraudsters but also protects legitimate customers from identity theft.

Transaction velocity monitoring

Monitoring the frequency and patterns of transactions (velocity checks) helps iGaming companies quickly detect fraudulent activity. Retailers can similarly implement velocity checks to identify suspicious refund behaviours, such as rapid sequences of refund requests or unusually frequent claims from new accounts.

Geolocation and payment method verification

Another effective iGaming practice is verifying payment methods against user locations. For retailers, ensuring refund payments return exclusively to the original payment source prevents fraudulent refund diversion scams, a common tactic in refund fraud schemes.

Real-world cautionary examples

The risks businesses face without these protections are real and significant. For example, in 2023, Livia Firth’s consultancy suffered a sophisticated authorised push payment fraud, losing over £324,000 due to inadequate payment verification. Similarly, charity retailers have fallen victim to refund scams where donations made with stolen cards are swiftly followed by refund requests to different accounts.

These examples highlight the critical need for robust, intelligent payment verification systems, something iGaming has effectively addressed through advanced security measures.

The advantage of Pay by Bank and instant payments

One significant innovation emerging from iGaming payments is the widespread adoption of Pay by Bank (instant account-to-account payments). Payment platforms like Yaspa, facilitate secure and instant payments directly between customer banks and merchants. This approach reduces fraud risk significantly, eliminating issues like stolen card fraud and traditional chargebacks.

Secure transactions with inherent authentication

Pay by Bank transactions require customer authentication directly through online banking apps, offering strong customer authentication (SCA) through biometrics or secure codes. This dramatically reduces impersonation or ‘friendly fraud’ risks, such as when a family member uses your card without permission, and ensures genuine customer consent for every transaction.

No chargebacks, reduced fraud exposure

Unlike card transactions, Pay by Bank payments eliminate chargebacks, significantly reducing refund-related fraud. Instead, consumers are protected under Payment Services Regulations in the UK, meaning retailers benefit from immediate settlements, lower transaction fees, and enhanced fraud protection. Yaspa’s Intelligent Payments integrates AI-powered verification and risk assessment, ensuring payments and refunds are secure and traceable in real time.

Bringing intelligent payments to retail

Adopting Yaspa’s Intelligent Payments would allow retailers to benefit from instant, secure bank transactions coupled with advanced pan-retailer fraud detection mechanisms. Yaspa’s system combines real-time AI analytics, robust identity verification, and continuous monitoring of financial behaviour across a user's spending history - not just their activity with a single retailer - helping merchants securely manage refunds, enhance customer experience, and reduce fraudulent activities.

By leveraging proven methods from iGaming, retailers can significantly reduce refund fraud while improving customer satisfaction. Technologies pioneered for high-risk environments, like online gambling, are now accessible and beneficial across sectors, offering retailers and merchants robust defences against emerging fraud threats.

Conclusion: The way forward for retailers

As refund fraud continues to evolve, businesses must embrace innovative solutions proven in high-risk industries like iGaming. The integration of AI-powered fraud detection, robust KYC processes, transaction monitoring, and secure payment methods such as Pay by Bank can significantly enhance retail fraud prevention.

Partnering with intelligent payment platforms like Yaspa positions retailers to protect their businesses, minimise fraud risks, and deliver secure, seamless customer experiences. Learning from the iGaming industry’s proactive approach to fraud protection, retailers can effectively counter refund fraud, safeguarding both revenue and customer trust.

If you’re interested in learning more about how Yaspa’s Intelligent Payments can deliver pan-retailer insights to mitigate fraud for your business, get in touch. We’d love to hear from you.