Return fraud: The $100 billion problem facing retailers - Ekata, a Mastercard company

Return fraud: The $100 billion problem facing retailers

Ecommerce shopping provides convenience and ease to customers in the busy modern world. One of the conveniences of online shopping is the ability to quickly return products by mailing them back to the merchant. Unfortunately, like many benefits of online shopping, merchants face challenges. One main challenge is return fraud, where a customer manipulates the retailer’s return policy to gain undeserved financial benefit. Often, this involves returning items for a store refund, exchange, or credit under false pretenses. Merchandise return fraud usually ends with some sort of financial loss to the merchant.


At a glance:

  • Return fraud costs U.S. merchants billions of dollars each year and up to $101 billion in 2023
  • Learn more about the five main types of return fraud: receipt fraud, wardrobing, price switching, employee collusion, and cross-retailer fraud
  • Preventing and handling return fraud vigilantly is necessary in today’s modern retail world

The main motive behind return fraud is usually a retail return scam involving a customer or individual using deceptive means to gain financially by obtaining goods or money through refunds.

Return fraud is a growing industry in the scam and criminal world. Below are a few statistics from the National Retail Federation demonstrating the prevalence of this problem for ecommerce merchants.

  • $743 billion worth of retail returns in 2023
  • 5% of sales in 2023 were returned
  • 7% of all 2023 returns were fraud or abuse
  • Merchants lost a total of $101 billion due to return abuse and fraud in 2023

Common types of return fraud

Common types of return fraud

Customers and individuals conduct return fraud in several ways digitally and in stores. Here are the top return fraud types embroiling retailers today:

Receipt fraud

This is a common issue at brick-and-mortar stores. Often, an individual will return stolen items or items purchased at a discount and present a fake or altered receipt with the item at its full retail price. This is an old type of fraud but remains prevalent, especially with the ease of creating and altering receipts through modern technology.

Wardrobing

Also known as “renting,” this is still a prevalent type of fraud. A customer will purchase an item to use temporarily, often for a special occasion like a bridesmaid dress. The person using the item will keep the tags and then return the product for a full refund, effectively “renting” the product for free and engaging in retail return scams.

Price switching

This type of fraud is very common in ecommerce return fraud. When returning an expensive item purchased online, a shopper will return a cheaper item, keeping the expensive one and receiving a full refund, all while retaining the expensive item.

Employee collusion

Unfortunately, fraud can occur when dishonest employees collaborate with outside individuals to manipulate the return process or facilitate fraudulent returns.

Cross-retailer return fraud

When items have similarities or are available at multiple retailers, it opens the door for cross-retailer return fraud. Fraudsters will purchase an item at a discount from one store and then return it for its full retail value at another retailer, thus making a financial gain.

Signs of return fraud

There are eight main red flags that retailers need to be aware of when it comes to return fraud.

  1. Excessive returns: It’s important for businesses to flag customers who frequently return items, especially high-value products. These individuals may potentially be fraudsters and should be closely monitored when shopping and returning items.
  2. Unusual return patterns: Legitimate customers typically follow certain return patterns, such as keeping the item for a short time and retaining the original packaging and tags for the return. Customers deviating from these patterns should raise suspicions. Some signs of potential fraud include returning items on the same day of purchase or returning items without the original packaging or tags.
  3. Multiple items with identical defects: It is suspicious if a customer returns multiple items with identical defects, particularly when these defects are difficult to verify. Such occurrences are often associated with fraudulent activities.
  4. Expired or altered receipts: Retailers should verify that receipts presented for returns have not expired and have not been altered. Altered or expired receipts serve as red flags for potential fraud, and it’s crucial to scrutinize discrepancies in dates, item descriptions and total amounts.
  5. Large returns without an apparent reason: When a customer returns numerous items, especially high-value products, without providing a clear reason, it should raise suspicions of return fraud. Such behavior is indicative of potential fraudulent activity.
  6. Damaged or switched merchandise: Some fraudsters may attempt to switch items or return damaged or used items for full refunds. Businesses should carefully inspect returned items for signs of tampering, damage, or switched components.
  7. Frequent returns without original payment: Customers who regularly return items but never use the original payment method can conceal fraudulent behavior.
  8. Pattern of renting: Customers who frequently purchase items, such as outfits and then consistently return them are likely engaged in “wardrobing” or “renting” items without incurring any fees. Retailers should flag such individuals as potential fraudulent actors.

Preventing return fraud

Ecommerce and brick-and-mortar retailers must adopt several strategies to prevent and detect return fraud and scams. The first line of defense is for every retail business to clearly outline their return policy on their websites. This return policy should include timeframes, conditions and any applicable restocking fees. Customers must be aware of and agree to these terms before completing a purchase.

Customers should initiate returns through a secure online portal where information is digitally captured, especially for online returns. This secure portal must verify the authenticity of returned items by matching serial numbers, SKU numbers, or other unique identifiers to the original purchase. Similar or identical identifiers should also be used for physical returns. For online orders and returns, requiring customers to request and receive an RMA (Return Merchandise Authorization) number before returning their items can help track returns and validate legitimate return requests.

Digital tracking and online portals are vital for businesses to record each customer’s return history. This information can be used to identify fraudulent patterns and retail return scams. In addition to this, several key tools are necessary for ecommerce retailers to detect fraud patterns:

  1. Checking the IP address associated with return requests helps detect multiple returns requested from the same locations.
  2. Monitoring the IP addresses associated with returns is essential, but it’s also important to verify the customer’s email address and cross-reference it with previous purchases and potentially fraudulent accounts.
  3. Using geolocation data to confirm that return requests match the customer’s location and shipping address is another way to pinpoint fraud.

All these defense mechanisms can be enhanced by employing machine learning algorithms and artificial intelligence to analyze customer behavior and detect unusual patterns indicative of return fraud.

Handling return fraud incidents

Handling return fraud incidents

To avoid substantial financial losses due to merchandise return fraud, retailers need to handle return fraud incidents appropriately. Retailers should utilize digital receipts and maintain order history records to track returns, helping verify purchase information. Fraud detection software and algorithms play a crucial role in identifying unusual return patterns, allowing them to flag suspicious and fraudulent returns. Additionally, verifying the email address and IP address associated with the return is necessary, as fraudsters often duplicate return requests and tracking these identifiers helps detect false and duplicate claims.

Companies are also encouraged to flag high-value returns and check the customer’s purchase history for any patterns of frequent or high-value returns. This practice should go hand-in-hand with monitoring shipping and delivery information to confirm that the returned items match the original products the customer received. Due to the ease of online shopping and returns, merchants must remain vigilant about return transactions.

Another potential issue related to return fraud is the threat of chargebacks. To proactively prevent chargebacks, businesses should maintain proper documentation and provide evidence to payment processors when a customer disputes a transaction. Staying up-to-date on data analytics tools that can identify trends and anomalies in return data is essential for preventing and detecting return fraud.

Return fraud poses a significant and growing threat to both online and brick-and-mortar retailers, as highlighted by NRF statistics. Merchants must take proactive measures to safeguard their operations. Understanding common types of return fraud and recognizing red flags is crucial for early detection. By implementing clear return policies, secure online portals and digital tracking, businesses can strengthen their defenses against fraudulent activities.

The key to success lies in remaining vigilant and adapting strategies to evolving return fraud tactics. Employing advanced tools such as machine learning algorithms and artificial intelligence enhances the ability to detect unusual patterns indicative of fraud. It’s not just about preventing fraud but also effectively handling incidents when they occur. The use of digital receipts, order history records, and fraud detection software helps verify purchase information and flag suspicious returns. As return fraud continues to evolve, adapting and staying ahead will be the cornerstone of a resilient defense for businesses in the ecommerce realm.

 

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