It’s a thought
that has probably occurred to some of us at one point: why not buy something we
need, use it, and return it? Or, better yet, order a product online and say that
it never arrived, allowing the customer to keep the money and the product. Many
times, this thought will transcend into action, known as claims fraud, that is
costing merchants anywhere between $2.1 to $4.2 billion a year. While this
issue is the worst it’s ever been, it’s a problem that goes back decades. In
fact, it’s so prevalent that it predates the internet, stretching back into the
days of mail order catalogs.
It is estimated
that 10% of all order claims are fraudulent, but that doesn’t mean that the damage they cause is limited to that
10%. Because companies don’t know which claims are fraudulent, they have to
suspect that all claims could be
fraudulent, and that means treating all customers like potential fraudsters.
damage that this causes cannot be understated. Alternatively, it means giving
up completely on finding the 10% and adopting a “the customer is always right”
approach. This is largely what Amazon has done, and because of their success,
many companies have adopted the same approach.
industry is hit particularly hard by chargebacks. According to data from our
partner Amadeus, chargebacks are up by 50% since pre-pandemic levels. It is
estimated that 2-8% of all travelers miss their flights, and a percentage of these people will choose to try to claim money
back through the chargeback system.
For this reason
and the general high level of fraud against the industry, airlines, travel agencies
and other parts of the sector have to pay extra on card processing to factor in
claims fraud and need to devote time, money and manpower to reducing fraud as
much as possible. Their customers will also have to experience greater
difficulty during the payments process, increasing friction in what can already
be a difficult process.
There should be a
better way to manage claims fraud, one that doesn’t put undue pressure on
legitimate customers, but also doesn’t allow anyone to make a fraudulent claim
How claims fraud works
The term “claims
fraud” is typically used in the insurance industry for an instance of a
customer making a fraudulent insurance claim. The term can be used more widely
and for a greater range of claims, including those made against eCommerce and
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Claims fraud is
very simple: a customer orders a product, then contacts a company to say that
it didn’t arrive or arrived broken. They will refund the customer’s money,
leaving the consumer with both the product and the money that they paid for it.
Although it is unlikely to be carried out by large criminal organizations,
claims fraud is very common and easy to carry out. Like all types of fraud, it
is likely to become more prevalent during a financial downturn.
We can see it as
an opportunistic crime rather than something that is part of a larger pattern,
which makes it difficult to spot using very basic machine learning. It is easy
to spot when a customer has a track record of claiming that an item didn’t
arrive and asking for a refund, but claims fraud is typically an indulgence
rather than a habit.
A person may engage in it because money is tight or because they have a large
expense that they couldn’t cover normally. They may even be completely casual
about it, making claims on items that they could easily afford and rolling the
dice on whether they are to ‘double their money’ by taking a few minutes to
make a claim – similar to a 100% mail-in rebate. In this sense, it is very much
like a chargeback.
difference between claims fraud and chargeback fraud is that merchants will be
handling 100% of the refund process rather than working with card schemes as
they do with chargebacks. Unless they are operating on an entirely “the
customer is always right” policy, a merchant will have to contact their
logistics company and request proof of delivery, then return this proof of
delivery to the customer. If the customer digs their heels in, then you may be
going back and forth between them and the logistics company for days or weeks.
If they weren’t lying, then you will have done irreparable damage to your
relationship with that customer.
Countering claims fraud
above, merchants have traditionally had two options when countering claims
fraud. The first is an “active” approach, in which claims have to be
investigated, usually by a dedicated staff member or an entire team depending
on the size of the company, and this can end with the company losing the claim
after devoting time to contesting it or winning and ruining their reputation
with their customer.
The second method
is a “passive” approach that involves turning a blind eye to the possibility of
fraudulent claims, since any given claim is 90% likely to be legitimate. Few,
if any, companies operate a truly
passive approach, and even Amazon, who made the approach widespread in e-commerce,
will dispute some claims. It’s also not possible for every company to practice
this method: a company selling computer parts or high-end fashion can’t write
off orders that can cost $1,000 or more, even if it does cause reputational
There is a third
way, however, one that allows companies to maintain their relationships while
reducing the total number of false claims.
AI and machine learning is already used to find the underlying signals of fraud
in chargebacks, which claims fraud is functionally very similar, and it can be
easily adapted to the latest fraud trends. Automated systems can also be tied
into an AI/ML system – for example, requesting images of deliveries from
logistics companies automatically with no human intervention required. This can
significantly reduce the amount of work needed to make sure that claims are
legitimate, with the added bonus of the vast majority of claimants not being
affected in any way by the process. Those that are affected will be selected
according to a constantly-improving set of criteria and that selection will
happen in real time.
For the travel
industry, this means not only a reduction in friction for customers, but an
overall reduction in fraud that could lead to the point where the industry is
no longer considered to be “risky” and the premium that companies must pay can
be reduced. It will require significant investment from the industry, but the
rewards more than justify an initial outlay.
technology, travel merchants can significantly reduce the number of
fraudulent claims they receive while maintaining the customer relationships
that their businesses are built on.