Return fraud: The $100 billion problem facing retailers

E-commerce 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. Meanwhile, a challenge facing merchants 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.

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 e-commerce 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

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 e-commerce 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

E-commerce 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.

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 e-commerce retailers to detect fraud patterns:

1. Checking the IP address associated with return requests helps detect multiple returns requested from the same location.
2. Verify the customer’s email address and cross-reference it with previous purchases and potentially fraudulent accounts.
3. Using an Address Verification Service 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.

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 e-commerce realm.