A customer receives their online order of a stylish pair of new shoes, but they’re a tad too snug. What do they do? They send them back, get a refund or a replacement, and everyone’s happy. While this can be the case with most returns, let’s be real: not all online shoppers are playing fair.
Some folks buy stuff knowing full well they’ll return it, maybe after a quick spin on the town, or worse, they swap out the real deal for a cheap knock-off. Most of the time, this sneaky behavior called return fraud is a desperate grab for cash.
What’s unfortunate is that return and refund fraud is more common than it might seem. Nearly 15% of all returns are fraudulent- that’s one out of every seven returns. The effect these fraudulent transactions can have on your business adds up. It slashes your margins, jacks up your costs, and can even tarnish your brand reputation.
While being suspicious of all customers is not the right solution, having measures in place to protect your business is unavoidable. Let’s see what returns and refund fraud is, how it can affect your business, and what you can do to protect yourself from it.
What is Return Fraud?
Return fraud is, plain and simple, a fraudulent return. It’s when someone takes advantage of your return policy to get something they don’t deserve. They might be trying to get money back for an item they never actually purchased, or they could be attempting to return a damaged or counterfeit product. Essentially, they’re manipulating the system for their own benefit and at your expense. This could be returning:
- A stolen item.
- A less expensive item in place of a more expensive one.
- A used or damaged item as new.
- An item that was never purchased from your store.
While return fraud involves physically returning an item, there’s another side to this coin: refund fraud. In this type of fraud, the fraudster wouldn’t return the item at all. Instead, they might claim the package never arrived, even though it did, or that the item was damaged upon arrival when it wasn’t. This way, they can claim a refund without having to give anything back and can continue using the item.
Types of Return Frauds
The main reason why it is so difficult to detect return fraud is that it comes in many forms, and fraudsters are always coming up with new schemes. It’s a constantly evolving challenge. Some common return fraud strategies are:
1. Wardrobing
This is a classic example of return fraud. Someone buys clothing, wears it once (or maybe a few times), and then returns it as new. They might even carefully remove and reattach the tags to make it look like it hasn’t been worn. This is particularly prevalent with high-fashion items or special occasion wear.
2. Price Arbitrage
This fraud takes advantage of price differences. A customer might buy an item on sale and then return a similar but more expensive item they already own. They’re hoping to get a refund for the higher-priced item, effectively making a profit on the difference.
3. Bricking
This is less common with clothing and more prevalent with electronics. A “brick” is a non-functional item. A customer might purchase a working electronic device and then return a broken or non-functional one in its place, claiming it was defective upon arrival. In some cases, they might remove parts of the item they can resell before sending it back.
4. Using a Stolen Credit Card/Returning Stolen Merchandise
This fraud can work in two ways. A fraudster may illegally use a stolen credit card to purchase an item and then return it for cash. Or, they might simply return stolen merchandise to your store for a refund, turning stolen goods back into cash.
5. Switch Frauds
In this type, the fraudsters swap out a genuine product for a counterfeit or damaged version. For example, someone might buy a high-end handbag and then return a cheap knock-off in its place. Or, they might buy a new appliance and return an older, broken one.
6. Competitor Sabotage
In some cases, return fraud might be used as a form of competitor sabotage. A competitor might intentionally purchase and return a large number of items to disrupt your operations and increase your return processing costs. While not as common as other types of return fraud, it can still be a problem.
There are also types of refund fraud where the item is not returned:
1. Empty Box Scam
The customer claims they received an empty box, even though the item was received. They’re hoping to get a refund without having to return anything.
2. Damaged Product Scam
The customer claims the product arrived damaged, even if it didn’t. They might provide photos or videos of a damaged item, claiming it arrived in that condition, or simply report the damage to customer service. Again, the goal is to get a refund without returning the item.
Impact of Returns Fraud on Retailers
Return fraud can be a real punch in the gut for retailers. On one hand, the returned item loses value, on the other, the costs of processing the return to investigate potential scams pile up over time.
According to the National Retail Federation (NRF), retailers lose a staggering $166 million in merchandise returns for every $1 billion in sales. What makes it worse is that of every $100 in returned merchandise a retailer accepts, they lose $10.40 to return fraud. That adds up to an estimated $24 billion in losses every year.
Return fraud also tends to spike during the holidays, with 25% of all annual product returns happening between Thanksgiving and New Year’s Day. In fact, almost 81% of all e-commerce returns happen in January, likely fueled by post-holiday returns.
How to Prevent Return Fraud
So, what can you do to protect your business? Here are some strategies to consider:
1. Create Clearer and Stricter Return Policies
A well-defined return policy can be your first line of defense. Make sure your policy is easy to understand and clearly outlines what is and isn’t acceptable when it comes to returns.
For example, specify time limits for returns, acceptable conditions for returned items (e.g., tags still attached, original packaging), and any exceptions to your policy.
2. Reconcile Refunds/Returns to Sales
Ensure you are carefully comparing return or refund claims with your original sales records. You can verify that the return is legitimate by matching up the returned item with the original purchase details. This helps prevent situations where someone tries to return an item they didn’t actually buy from your store or claims a refund for an order they never placed.
3. Offer Store Credit Instead of Cash
Offering store credit in place of refunds in cash can discourage fraudulent returns. It keeps the money within your business and reduces the incentive for someone trying to get cash for a stolen or fraudulently obtained item.
How this works is, for example, only a digital balance or in-store credit in return. This way, customers might be less likely to try to return a stolen item if they know they’ll only receive store credit, which they can’t easily convert to cash.
4. Add Additional Fees for Certain Items
Consider implementing additional fees for certain high-risk items, particularly those prone to return fraud. For example, after Halloween, you might add a restocking fee for returned costumes. This can deter impulse purchases and discourage people from buying items with the intention of returning them after the holiday is over.
Another type of fee could be a handling fee for returns that require extra processing, such as items that are missing parts.
5. Set Up a Returns Management System
A dedicated returns management system can be a game-changer. It makes it easier to cross-verify purchases, track how and when returns are claimed, and identify suspicious patterns. You can even set up rules within the system to detect common fraud scenarios and automate fraud alerts. This can save you time and resources while improving your ability to catch fraudulent returns.
How Lateshipment's Returns Management Software helps to prevent Returns Fraud
Returns are a fact of life in e-commerce, but they can quickly turn into a nightmare when fraud enters the picture. LateShipment.com’s Returns Management software makes returns easier and helps you protect your business from scams.
The platform lets you create a smooth, branded return experience for your customers, empowering them to start returns effortlessly through a self-service portal. This gives you more control. You can set up custom return rules and workflows and automatically flag suspicious returns based on specific criteria, such as unusually high return rates for certain products or customers or inconsistencies in return reasons. This way, you can catch fraudulent returns before they start affecting your bottom line.
Beyond simply managing returns, LateShipment.com also provides valuable data and insights through the Returns Intelligence feature.
Final Thoughts
Businesses are affected by return fraud every single day. Unfortunately, this is an unavoidable reality, as tactics and strategies constantly evolve. The best you can do is put measures in place, such as stricter return policies, more verification, and closer inspection of returned items.
LateShipment.com can be your partner in catching those who are trying to defraud you before fraudulent returns and refunds start affecting your business. Beyond simply managing returns, LateShipment.com can assist you with every aspect of managing your product shipments, optimizing both cost and customer experience.
LateShipment.com’s Parcel Audit and Shipping Refunds, along with the Shipping Insurance solutions, can help you recover lost revenue due to shipping errors and protect your shipments from loss or damage. Meanwhile, the Delivery Experience Management and Returns Experience Management software ensures your customers have a positive and seamless experience.
Ready to take control of your returns and protect your business from fraud? Book a demo with LateShipment.com today!
