Fraud

The rate of return fraud: How companies thwart a multifaceted threat

November 1, 2022
The rate of return fraud: How companies thwart a multifaceted threat

In the world of retail, the right to return goods is like a right of passage for the consumer. With every purchase, there are multiple expectations — including a seamless return, refund, and/or exchange experience if ultimately required.

For the retailer, providing this experience is crucial. Especially in the post-COVID landscape, where it’s become even more central for competing companies to build customer loyalty and prevent friction. The way shopping has become omnichannel and on-demand, the same can now be said for returns. 

It is so imperative that 96% of shoppers said they would stick with the same retailer due to an easy return policy. Consumers want transparent return policies upfront, multiple options for refunds and exchanges (e.g., buy online/return in-store), cash over store credit, and, for all of the above, speed in delivery.

While meeting these needs can help build lifetime customer value, it also comes with costs attached. One of which is leaving your company vulnerable to return fraud. As a result, a balancing act exists for businesses looking to provide seamless customer returns while also protecting themselves from bad actors.

What is return fraud? 

As with any scam sector, return fraud comes in many shapes and sizes. There isn’t one catch-all solution to prevent and detect fraudsters, whether in the physical or digital retail space. To put it bluntly, however, return fraud is when someone (the shopper in question or otherwise) attempts to deceive a seller during the return process. 

Here are some of the main examples of return fraud as it exists today:

Theft-based: One of the most common types of return fraud involves two crimes in one. Simply put, a perpetrator will steal an item and then attempt to fraudulently return it, often for a cash refund.

Receipt fraud: Of course, theft-based return fraud is rendered almost impossible when businesses require receipts to process refunds. Nonetheless, some fraudsters use counterfeit/fake receipts (physical or digital) to obtain refunds for stolen or ineligible (e.g., expired return policy) goods.

Wardrobing: While it comes in different forms, this is an example of fraud that bends or breaks a seller’s return policy. Typically common with apparel, a person will wear clothes (while keeping the tags on) and then return the item as if it was unused. The most common type of return fraud, many consumers will commit wardrobing under the assumption it’s an innocent crime, when it is in fact fraud. 

Price manipulation: Another varied form of return fraud, price manipulation (or switching) can involve a fraudster buying a low-cost item and replacing its price tag with a higher-cost item, later returning it for a profit. In another example, a more expensive/higher quality replacement item is purchased, while an older model/lower-cost item (which can deceive an unknowing store employee) is returned. 

Employee fraud: In some instances, return fraud doesn’t just involve the consumer. Trusted employees have been known to act as accomplices or sole perpetrators in scams, whether it involves accepting a return without a valid receipt, assisting someone in a theft-based return, or otherwise circumnavigating/taking advantage of a company’s return policy.

Empty box fraud: Becoming more and more common in the e-commerce space (and broadly referred to as “refund fraud”), a fraudster will claim a delivery item they received is missing or damaged in order to obtain a partial or full cash refund. 

How prevalent is return fraud? 

It’s more common than you think. According to the National Retail Federation (NRF), for every $100 in returned goods during 2021, $10.30 was lost to return fraud. Even more alarming, that number is on the rise — only $5.90 was lost for every $100 the year prior. 

One of the most frustrating aspects of return fraud is that it compounds an already unavoidable loss for businesses. While the phrase “lose a sale, gain a customer” may ring true, online returns, for example, can cost companies $10 to $20 to process. Coupled with a staggering 20.8% return rate for online goods, it’s become a problem too big to avoid or control, so much so that big box retailers like Amazon and Walmart simply write off several returns (i.e., refunding customers while not requiring them to send back items) when it becomes too expensive logistically to facilitate them. 

Of course, this leaves retailers vulnerable to the many forms of “refund fraud” listed above. The problem becomes heightened during the peak shopping time of year — the holiday season. Due a mass influx in deliveries, e-commerce companies become overwhelmed with legitimate orders and returns, making it easier for fraudsters, whether passive or aggressive in their tactics, to slip through the cracks. 

How can companies fight return fraud?

As noted above, there isn’t one great answer. However, there are several best practices that businesses, whether in the online or brick-or-mortar space, can employ.

For starters, it’s important to have the right policies and systems in place. Companies with lax policies (e.g., no receipt required) or minimal systems (e.g., poor record-keeping) are not just compromised, they are targeted. Establishing parameters on cash returns, expiration dates, and other rigid policies, while maintaining an organized record of receipts, purchase history, and other consumer metrics, are all vital methods for return fraud prevention and detection. 

On top of that, a good plan is only as good as those who follow it. Companies must be vigilant in training their employees on return policies, how to spot fraud (for example: does your business have any serial returners?), and other resiliency tactics. Doing so won’t just address outside fraudsters, it can also expose or prevent employees with malicious intents of their own. 

Finally, the same security protocol required to onboard and authenticate customers should also apply to returns, in the form of identity verification. The process can be as easy as requiring a consumer to present ID or the respective payment method when attempting a return (common among most retailers) or more advanced, such as requiring facial recognition along with ID to ensure consumers are who they say they are. 

No matter the level of sophistication, it is a huge deterrent for fraudsters who look to bypass any attempt to reveal their true identity. On the other hand, consumers that are genuinely returning items are often happy to share their ID if it results in a smoother exchange.

Integrate ID verification into your existing application