Returns are necessary to maintain customer satisfaction, but writing a good return policy requires you to balance conflicting concerns.
If your policy is too strict, you’ll have trouble converting and retaining customers. On the other hand, if your policy is too lenient, you may find yourself overwhelmed by a wave of fraudulent returns.
What is return fraud? Why is it so harmful? And what can you do about it? This article will tell you everything you need to know.
What Is Return Fraud?
Return fraud, also known as return abuse, is a type of fraud where people abuse a merchant’s return policy in order to get free products or cash. These individuals might purchase something legally and use deceitful tactics (like returning a counterfeit product) to get a refund. Other times, they steal a product or purchase it with stolen information before requesting a return.
Regardless of their method, these fraudsters harm businesses and their fellow consumers.
Return fraud can affect both online and brick-and-mortar stores. In fact, many fraudsters take advantage of poor data visibility between online and physical stores to exploit loopholes in the returns process.
Unfortunately, return fraud is very common—mainly because consumers don’t believe it has consequences. In one survey, nearly 40% of people said that they (or someone they know) had engaged in return fraud within the past year.
Return Fraud vs. Refund Fraud
Refund fraud involves an individual attempting to get a refund they’re not entitled to. The term can apply to tax refunds, insurance reimbursements, chargebacks, and more. This type of fraud doesn’t necessarily involve a physical product.
Return fraud falls under the broader category of refund fraud. It’s used in a retail context, as it involves a physical product and the exploitation of return policies.
Types of Return Fraud
Some consumers wonder, “is returning a used item fraud?” The answer is yes—returning a used item is a type of fraud. But it’s not the only one. As a business owner, you need to be aware of the various types of return fraud so you can be on the lookout for them.
- Returning stolen items. This involves individuals shoplifting items and then attempting to return them. Alternatively, they may use stolen credit cards or payment information to make the initial purchase.
- Receipt fraud. Receipt fraud occurs when someone uses a fake receipt (or someone else’s receipt) to return products. In addition to physical receipts, fraudsters might also create fake digital order confirmations.
- Employee fraud. With this type of fraud, staff members use their knowledge of the store's procedures to facilitate fraudulent returns.
- Price switching. Price switching involves buying an item and then adding a price tag with a higher value before returning it to the store. This allows people to get refunded for more than what they originally paid.
- Price arbitrage. Similar to price switching, price arbitrage involves purchasing similar items at different prices and returning the cheaper one as the more expensive one.
- Defective return. This fraudulent tactic involves purchasing a new item identical to one that is defective or broken and then returning the defective item instead.
- Bricking. Bricking is when someone takes an item apart, removes valuable parts, and returns the item for a refund. In addition to the refunded money, the person sells the parts.
- Cross-retail return. With cross-retail return fraud, individuals buy items from one retailer and then return them to another retailer that sells the same product at a higher price.
- Open box fraud. Exploiting a store's open-box policy, individuals purchase a product, return it, and then repurchase the same item at a lower price.
- Wardrobing. This deceptive practice—often referred to as “free renting”—involves purchasing an item, using it once, and then returning it for a refund.
- Empty box fraud. In empty box fraud, fraudsters claim they received an empty box instead of the item they ordered. This allows them to obtain refunds or replacements without returning the original item.
According to one survey of retailers, the most common type of return fraud is wardrobing—48.84% of businesses experienced this type of return fraud in 2023. Wardrobing is closely followed by returns of stolen merchandise and returns of merchandise purchased with stolen money.
What Is an Example of Return Abuse?
One example of return abuse is the 2017 case of a woman who purchased expensive designer handbags online from T.J. Maxx and returned counterfeits in their place. Another example is the man who bought high-end items from Amazon and returned low-value substitutions (like a $400 guitar in place of one worth $2,600).
People sometimes commit return fraud without having negative intentions or knowing the impact of their actions. Others, like the ones mentioned above, purposefully take advantage of return policies for their personal gain.
Regardless of intent, fraudulent returns can have a major impact on both ecommerce and brick-and-mortar businesses.
The Impact of Return Fraud
Contrary to popular belief, return fraud is not a victimless crime. It impacts both businesses and consumers, causing lost revenue, inventory management issues, and stricter policies that make online shopping less convenient.
How Return Fraud Impacts Businesses
When it comes to returns, fraud is a pressing concern for most organizations, with 81% of managers saying it’s a growing issue. In 2023, $101 billion was lost due to return fraud.
In addition to losing revenue, organizations also waste time when they have to process illegitimate returns. Plus, the returns process itself costs money, even when returns aren’t fraudulent—24% of retailers say returns cost between 16% and 20% of a product’s value.
Return fraud can also cause inventory management issues, as is the case when items are shoplifted and returned in physical stores.
How Return Fraud Impacts Customers
To combat return fraud, organizations are often tempted to make return policies more strict. This can be off-putting for legitimate customers, who worry they won’t be able to return something they don’t like. For these legitimate customers, online shopping becomes less convenient and more stressful.
How To Detect Return Fraud
How can you know if you’ve encountered return fraud? The following ideas will help you identify red flags and take action.
Keep a Record of Purchases and Returns
Make sure all transactions are accurately documented, including the reason for returns and any associated fees. Regularly review these records to identify any unusual trends or discrepancies.
For example, you might realize that a certain customer frequently purchases and returns high-value items. Or maybe you notice that somebody always claims to have lost their receipt. When you see red flags, monitor these customers more closely.
By keeping a detailed record of purchases and returns, you’ll minimize the chances of fraudsters slipping through the cracks.
Use a Return Merchandise Authorization (RMA) System
A return merchandise authorization (RMA) system automates the returns process. It allows customers to submit return requests, which are then approved, denied, or flagged for manual review based on your policy. By handling returns through an RMA, you help ensure that non-qualifying requests are denied.
Educate and Train Staff
Your staff members can be a great defense against fraud. But if you don’t train them to recognize the warning signs, they won’t be able to take action.
One survey found that nearly 50% of managers reported that their companies haven’t updated policies or training around fraudulent returns in a year or more. If you’re in that boat, it’s time to up your game.
Train your team to recognize the signs of return fraud, and provide them with clear guidelines for handling returns. This may include showing them examples of damaged or counterfeit items so they can easily recognize them.
How To Prevent Return Fraud
Identifying return fraud isn’t enough—you should also be taking preventative measures. The strategies in this section will dissuade would-be fraudsters and help you intervene before fraudulent returns are refunded.
Let’s start with some data. A Loop study revealed some of the top reasons shoppers would stop abusing return policies:
- Having to pay a return fee (37%)
- The potential of being permanently banned or facing legal consequences (26%)
- Receiving store credit or an exchange instead of cash (24%)
Now we’ll dive into some specific ways you can prevent return fraud, several of which take advantage of the shopper scruples that Loop uncovered.
Require Proof of Purchase
If you’re not requiring proof of purchase to accept returns, think again—it’s estimated that 17% of non-receipted returns are fraudulent, a number that’s on the rise from past years.
For in-store purchases and returns, require a receipt before processing the refund. If a product was purchased online and returned in-store, ask to see the order confirmation email.
If a customer has lost their receipt, consider asking them to show an official government identification such as a driver’s license. By recording their ID number, you can track this person’s future returns. If you notice that they frequently return items with no receipt, you can ban them from making returns in the future.
Don’t Give Cash Refunds (At Least, Not Right Away)
The reason behind most return fraud? People want to make money. By doing away with cash refunds, you eliminate fraudsters’ primary motivation.
Instead of cash, offer a store gift card or store credit. If eliminating cash refunds feels too harsh or leads to backlash, implement a tiered system. Once you get proof that a returned package has been shipped, offer the customer a gift card or store credit. After you’ve received and thoroughly inspected the product, you can convert that to a cash refund.
Of course, this isn’t a foolproof solution. Some fraudsters will gladly collect gift cards and resell them or buy something from your store and resell it. However, taking this step can help reduce the amount of fraud you face.
Update Your Return Policy
A detailed, specific return policy can help you avoid fraudulent returns. Without making the policy too strict—and potentially losing customers—include guidelines and restrictions that outline what can and cannot be returned, as well as the conditions the customer must meet to get a refund.
Include provisions for the following:
- Return windows. Set reasonable timeframes for returns and exchanges; thirty days is standard for many companies.
- Restocking fees. Charging a restocking fee for returned items can deter frivolous returns. Be careful with these fees, though, because they can anger legitimate customers.
- Eligible products. Which products don’t qualify for returns? This may include things like final-sale items, food, or partially used beauty products. Whatever exclusions you have, specify them in your policy.
Ban Repeat Offenders
If someone has a history of fraudulent returns, ban them from returning products in the future. While it's important to maintain a fair and objective approach, taking decisive action against habitual offenders sends a clear message that fraud won’t be tolerated.
Protect Both Your Business and Customers
Whether unintentional or malicious, return fraud can hurt your profits and drain your resources. Proactively tracking purchase data, flagging potential fraudsters, and having a crystal clear returns policy will help protect your store.
As you take measures to protect your store, remember that shoppers want protection too. They have many anxieties about shopping online, and some have been scammed by merchants before.
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