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What is Return Fraud? And What You Need to Know to Avoid It

Illustration of a fraudster returning a package through a smartphone

Returns are an inevitable aspect of doing business; however, not all returns are legitimate. Return fraud can pose significant challenges to the sustainability and profitability of e-commerce ventures.

In a 2021 survey by the National Retail Federation (NRA), alarming statistics highlighted the pervasive impact of return fraud on retailers’ bottom lines. They revealed that for every US $100 worth of returned merchandise, retailers are losing US $10.30 due to fraudulent activities. Shockingly, approximately 10% of all returns are tainted by fraudulent schemes and the exploitation of return policies.

Despite retailers’ efforts to remain vigilant, return fraud remains a formidable challenge. Detecting and preventing such fraudulent activities proves exceptionally difficult, given the intricate nature of these schemes and the inherent complexities of modern return policies. Many retailers find themselves caught in a delicate balancing act, striving to uphold customer satisfaction while safeguarding against the detrimental effects of return fraud.

Here, we’ll delve into return fraud and its various forms and, most importantly, equip businesses like yours with the knowledge and strategies to mitigate its impact.

Table of Contents
What is return fraud?
The impact of return fraud
Strategies to mitigate return fraud
Final thoughts

What is return fraud?

Error symbol hovering above a laptop keyboard

Return fraud encompasses a range of deceptive practices in which individuals exploit the return process for personal gain; this can include returning stolen merchandise, using counterfeit receipts, or manipulating return policies to obtain refunds or replacements unjustly.

Those who engage in return fraud often see it as a “victimless” crime. Still, it is illegal, and fraudsters can be punished in the same manner as those involved in any other type of theft. In Canada, for example, theft over US $5,000 is considered an indictable offense with a penalty of up to ten years in prison. Additionally, return fraud can significantly impact businesses, particularly smaller businesses.

Types of return fraud

There are many different ways of going about return fraud; here are some of the most common:

  • Wardrobing: Also known as “renting,” this fraud involves purchasing an item to use temporarily and then returning it for a full refund. Common in the fashion industry, wardrobing often involves clothing and accessories worn once for a special occasion before being returned.
  • Price switching: In this tactic, fraudsters purchase an item at a lower price and then attempt to return it using a counterfeit receipt or falsely claiming it was purchased at a higher price, thus profiting from the price difference.
  • Return of stolen goods: Criminals may steal merchandise from stores and then attempt to return these items for cash or store credit without a receipt.
  • Warranty fraud: Some individuals exploit warranty policies by returning items that are no longer functional or claiming false defects to receive replacements or refunds.
  • Bricking: Buyers strip electronics of components they can use or resell and return the product, claiming it was non-functional upon arrival.
  • Receipt fraud: Using manufactured receipts to return products.
  • Empty box fraud: Customer claims they received an empty or open box and requests a refund. Sometimes, it is also known as double-dipping fraud.

The impact of return fraud

Return fraud poses significant challenges to e-commerce businesses, impacting their bottom line, operational efficiency, and customer trust. According to the National Retail Federation (NRF), return fraud costs retailers billions annually. In the US alone, losses from return fraud are estimated at US $18.4 billion.

Key impacts include:

  1. Financial losses: E-commerce businesses bear the direct financial burden of return fraud, including the cost of refunded merchandise, processing fees, and lost revenue from stolen or damaged goods.
  2. Operational costs: Managing returns, investigating fraudulent activities, and restocking returned items incur additional operational expenses for e-commerce businesses, impacting their overall efficiency and profitability.
  3. Reputation damage: Return fraud can tarnish the reputation of e-commerce brands, eroding consumer trust and loyalty.
    • When customers perceive that a brand is vulnerable to fraudulent activities or fails to address them adequately, they may question the reliability and authenticity of the products and services offered.
    • Fraudulent returns can disrupt the customer experience, leading to dissatisfaction and frustration among legitimate customers. Lengthy return processes, increased scrutiny, and additional verification measures implemented in response to fraudulent activities can create hurdles for genuine customers, tarnishing their overall shopping experience.

What about consequences for fraudsters?

Unfortunately, even though return fraud is criminal, the consequences tend to be minimal. This may be due, in part, to the fact that return fraud is challenging to prove and even more difficult to prosecute.

The consequences were minimal, even in a large return fraud case in 2019—the largest European scam ever recorded by the NRF. In this case, a Spanish buyer stole items and returned the boxes filled with dirt to match the original items’ weight, costing Amazon US $370k. They were released on €3,000 bail.

While you may think that blocklisting customers who have engaged in return fraud is a good solution, note that doing so may incentivize them to create alternate accounts to continue to engage in fraudulent behavior.

Strategies to mitigate return fraud

Return policy mind map shown on an office table

While eliminating return fraud entirely may not be possible, e-commerce businesses can implement proactive measures to mitigate its impact and protect their interests.

Implement robust return policies

  • Clear and transparent policies: Communicate return policies to customers, outlining acceptable reasons for returns, timeframes, and associated fees or conditions. Transparency can help deter fraudulent behavior and set clear expectations for both parties.
  • Verification procedures: Implement verification measures such as requiring proof of purchase, matching serial numbers or tags, and utilizing technology solutions like barcodes or RFID to track merchandise.

Leverage technology solutions

  • Data analytics: Utilize data analytics tools to identify patterns and anomalies in return behavior, enabling early detection of potential fraudulent activities.
  • Fraud detection software: Invest in fraud detection software that uses algorithms and machine learning to analyze return patterns and flag suspicious transactions for further review.

Enhance security measures

  • Secure packaging: Use tamper-evident packaging and security tags to deter theft and tampering during transit and storage.
  • Authentication technologies: Incorporate authentication technologies such as holograms, watermarks, or NFC tags into product packaging to verify authenticity and prevent counterfeit returns.

Final thoughts

Return fraud poses significant challenges to new e-commerce businesses, threatening their financial stability, operational efficiency, and reputation. By understanding the various forms of return fraud and implementing proactive strategies to mitigate its impact, e-commerce entrepreneurs can safeguard their businesses and foster a culture of trust and transparency with their customers.

Remember, while returns are an inevitable aspect of e-commerce, vigilance and preparedness are crucial to successfully navigating the complexities of return fraud.

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