What Is Return Fraud? | Different Types and How to Prevent Them
B2C and B2B commerce has only become more complicated in recent years. The rise in online purchases, supply chain challenges, and high return rates have added cost and complexity to many enterprises, across industries.
Unfortunately, these challenges have added new opportunities for fraudulent returns. And it’s not always a lone actor; organized efforts run large returns scams. According to Consumer Returns, “Many fraudulent returns are carried out by individuals, [but] there is also a lucrative organized crime industry which revolves around the practice.”
B2B and B2C sellers are at risk, and industries lose billions of dollars annually to return fraud.
What is Return Fraud?
Return fraud is a crime by which someone (or a group of people) makes money from a fake return. Perhaps the item doesn’t qualify for a return, or the item was never purchased (i.e., stolen) in the first place. However the crime unfolds, the result is that the perpetrators steal money from the item’s seller.
Although large consumer sellers like Amazon and Apple are popular targets for return scammers, fraud happens in the B2B world, too. According to pymnts.com, 30% of B2B businesses lose 3.5% or more of their annual sales revenues to fraud.
The defining characteristic of return fraud lies in its manipulation of the generally customer-friendly return policies offered by retailers. It transforms these policies into vulnerabilities that fraudsters exploit for financial gain. It is one of the most prevalent types of retail fraud, affecting both online and physical retail spaces. This deceptive practice undermines trust between consumers and businesses. It leads to direct financial losses for merchants, who lose out on the revenue from the initial sale of the returned goods.
These crimes frequently occur through refund fraud. Refund fraud involves deceitful attempts to secure a refund for an item without actually returning it. This could be through making false claims about a product’s condition or delivery status. While return fraud directly impacts the revenue from the sale of goods, it further extends the financial damage by affecting the potential resale value of returned items.
Together, these fraudulent practices represent a significant challenge to the retail industry, necessitating robust countermeasures and vigilant monitoring to protect both the integrity of return processes and the financial health of businesses.
Facts about Return Fraud
Online sales have been growing, with about one-third of all retail sales in the U.S. expected to be conducted online by 2030. Unfortunately, these sales lend themselves easily to return fraud online.
According to the National Retail Federations, more than 16% of U.S. sales were returned in 2021, and 10.6% of them were deemed fraudulent returns. Retailers reportedly lose up to $15 billion per year due to return fraud, or $5.90 for every $100 in returned merchandise.
The majority of returns happen in the months following the holiday season, with nearly 81% of all eCommerce returns taking place in January, according to Shopify.
Types of Return Fraud
Return fraud activities can range from the common to the absurd (like wrapping up a potato in an iPhone box and returning it to an Apple store, so the store associates assume there’s a phone inside).
Here are some of the most common types of return fraud and theft to watch out for, no matter your specific business.
Item never received
This popular scam involves the criminal claiming the item was not received and thereby getting a full refund from the seller. Of course, the item was received, and the criminal can now sell it for a profit.
Price arbitrage
This is a scheme in which the criminal falsely claims an item arrived damaged or faulty and gets a refund. In return, the customer returns a cheaper (but similar-looking) version of the purchased product.
Another approach (especially common on Amazon) is to claim that an empty box was received with no product inside. Yet another price arbitrage scam is to strip an electronics product of its valuable parts for resale, then return the product (which looks to be fully intact) for a refund.
In all of these cases, fraud is difficult to catch: Serial numbers must be compared, and products must be closely examined to ensure all parts are included. When companies deal with huge volumes of product returns and tight staffing, this attention to detail and time commitment is often deprioritized.
Price Switching
Price switching is a deceitful maneuver where fraudsters manipulate the apparent value of an item by attaching a higher-priced tag onto merchandise before returning it. This tactic enables the criminal to profit from the difference between the original purchase price and the inflated return value.
This scam exploits retail systems that may not verify the item’s initial sale price rigorously. The threat is especially severe in high-volume return environments or during peak times when staff are overwhelmed. Swapping price tags is a subtle tactic that makes detection challenging, requiring meticulous verification against purchase records or digital inventory tracking to uncover the issue.
Buy online pick-up in-store (BOPIS)
NRF singled out BOPIS as the most significant source of increased fraud, up nearly 20% from 2020 to 2021. In this scenario, the criminal claims to have bought a product online, lost the receipt, and is now returning the item to a store. SupplyChainBrain explains it further:
“It makes sense that criminals would capitalize on BOPIS programs because they can (in some cases) quickly close out a transaction without presenting a credit card or ID and drive away with an item they never paid for. In addition, BOPIS allows fraudsters to steal without ever entering the store or visiting the website.”
Wardrobing or Renting
Wardrobing happens when a shopper purchases an expensive item and returns it after one use. Because of inspection requirements, cleaning, and repackaging, clothing returns are particularly costly and labor-intensive for companies to process. Unfortunately, many returned clothing items end up in landfills.
Receipt Fraud
Receipt fraud involves criminals creating or altering receipts to return merchandise for a profit. They present a doctored receipt to validate the return of an item that was either not purchased, bought at a lower price, or even stolen. By convincing retailers to accept these returns based on the falsified documentation, perpetrators illicitly gain refunds or store credit at the expense of the business.
This type of fraud is complex and variable; as a result, it poses significant challenges for retailers. It might use sophisticated technology to forge receipts or use lax return policies with less tangible proof of purchase. Retailers facing a high volume of returns can find it particularly difficult to verify every receipt’s authenticity, especially during busy periods.
Returning Stolen Merchandise
Returning stolen merchandise is a straightforward yet impactful form of return fraud. In this method, criminals deceitfully obtain refunds for goods they never purchased. The perpetrator steals items from a store and later returns them, posing as a legitimate customer, to receive cash or credit. This results in direct financial loss to the retailer, complicates inventory management and skews sales data.
The challenge in combating this type of fraud lies in the retailer’s ability to differentiate between genuine and fraudulent returns. Identifying stolen goods becomes a daunting task without concrete proof of purchase, such as matching the item with a transaction using a receipt or a payment record.
Employee Fraud
The term “employee fraud” can be applied in many different ways. However, insiders exploit their position and knowledge of retail systems to participate in fraudulent return activities in the context of returns. This form of fraud can range from employees processing returns of stolen merchandise without proper validation to collaborating with external parties in orchestrating returns for items that were never purchased or are ineligible for return.
Employee fraud is particularly insidious because it stems from the betrayal of trust and misusing policies designed to enhance customer satisfaction. Such fraud doesn’t just cause financial losses through illegitimate refunds. It also undermines the integrity of the retail operation, potentially leading to a loss of customer confidence.
Cross-Retailer Returns
Cross-retailer returns happen when someone purchases an item at one store and attempts to return it at another. This could be an accident, but it becomes fraud when done intentionally to exploit differences in return policies or prices between retailers. For example, someone might buy an item on sale at one store and then return it at full price at another store. A product purchased from one retailer may be returned to another where the same item is more expensive. Both methods aim for a profit or store credit that’s unjustly inflated.
This kind of fraud is tricky for retailers to catch. It involves products that are legitimately available across multiple stores. The major challenge comes in verifying the origin of the purchase, especially for stores within the same chain or those that carry similar merchandise.
Exploiting Return Policies for Cash Conversion
Exploiting return policies for cash conversion is a scheme where individuals buy merchandise only to return it later for cash, even when the original purchase was made using credit or a gift card. This tactic abuses the flexibility of return policies designed to enhance customer service by offering refunds in the original payment method or cash. Fraudsters aim to transform non-cash payment methods into liquid cash, which they can use freely without any transaction history that ties them to the original purchase.
This approach puts retailers in a tough spot. On the one hand, they aim to provide accommodating return policies to ensure customer satisfaction and loyalty. Conversely, they must guard against schemes that unjustly drain their cash reserves.
How to Prevent Return Fraud
Preventing return fraud can feel like a game of Whac-A-Mole: Stamp down one threat, and another one immediately pops up. However, there are some effective strategies that sellers should consider to minimize fraud risk.
Give credit instead of cash refunds
Although the mantra of “customer first” is important, companies must also weigh their viability regarding returns management and refund fraud. To that end, consider offering a store credit instead of a cash refund in certain instances. That way, there’s less incentive for someone to return a fake item or commit fraud.
Tighten your returns policy
The simplest way to lower your rate of return fraud is to change your policy. This is especially important around the holidays when fraud rates skyrocket. You could modify the policy to include a holiday return cutoff date or place restrictions on popular orders requiring a shorter period for returning those items.
Get proof of delivery and require receipts
Choose a delivery carrier that can give you a tracking number or even a photo of the product when it’s delivered to the customer. This way, you have proof the item was received if a “not received” or “received damage” claim is made.
Require customers to return the invoice or receipt that came with a product and refuse returns that don’t include this paperwork. This will allow you to cross-reference the purchase and ensure you’re not giving money back for a sale you never made.
Leave a cushion
How does an electronics company keep a customer from buying a brand new flat-screen TV the day before a huge sporting event and then returning it the day after? By adding a cushion for big-ticket items, like a restocking fee. If you go this route, attach the fee to higher-priced items that are most enticing for fraud, such as electronics, seasonal items, and expensive fashion items.
Require Customer Identification for Returns
Requiring customer identification for returns is one of the most robust strategies against return fraud. Mandating that customers present a valid ID during the return process introduces a safeguard that makes it difficult for scammers to manipulate returns. It can deter many types of fraud, making it less appealing for individuals to exploit return policies.
Moreover, it enables retailers to track return patterns and identify potential fraudsters, adding a layer of security to the transaction process. This policy can strengthen the integrity of returns without causing issues for honest customers.
Serial Number Tracking
Implementing serial number tracking is a powerful deterrent against return fraud, particularly price switching and cross-retailer returns. This approach involves recording the serial numbers of items at purchase and rechecking them upon return. It ensures that the returned item is the same one sold initially, thwarting attempts to return stolen goods or items purchased elsewhere.
Time-Limited Returns
Setting a time limit on returns is an effective strategy to minimize return fraud methods like wardrobing. Establishing a specific window for returns can significantly reduce the opportunity for fraud. This policy discourages the return of used or worn items and those looking to exploit long return periods for profit. A well-defined return timeframe keeps the return process manageable and straightforward, ensuring that it serves its intended purpose of customer satisfaction and trust.
Train Staff to Identify Signs of Return Fraud
Training staff to recognize the signs of return fraud is a crucial line of defense for retailers aiming to protect their businesses. An informed and vigilant team can significantly reduce the incidence of fraudulent returns by spotting suspicious patterns and behaviors early on. Here are effective methods to train staff:
- Educational Workshops: Conduct regular training sessions to educate employees about the various types of return fraud and the common tactics fraudsters use.
- Real-Life Scenarios: Use case studies and real-life examples to illustrate how fraudulent returns might be attempted in their specific retail environment.
- Spotting Red Flags: Teach staff to identify red flags, such as reluctance to provide ID, frequent returns without receipts, or items returned in an unusually new condition.
- Policy Familiarization: Ensure employees are thoroughly familiar with return policies and procedures and confidently enforce them.
- Communication Channels: Establish clear channels for staff to report suspicious activity or seek advice, fostering a culture of openness and vigilance.
Empowering employees with knowledge and tools creates a formidable barrier against return fraud, ensuring the protection of their assets and customer trust.
Use Returns Technology to Reduce Return Fraud
Most mid-sized and large sellers can reduce fraud opportunities by implementing returns management technology. Specifically, a returns management system (RMS) is a supply chain technology that coordinates and streamlines every aspect of the returns journey and after-sales care management.
From the customer experience to setting standardized workflows that ensure employees are inspecting and managing returns accurately, an RMS can give you better control over how returns are processed, verified and tracked. It integrates seamlessly with your other supply chain systems, like WMS, TMS and OMS, which means you get a single source of insight into returns management, reasons and outcomes, from start to finish.
A leading global appliance company replaced a spreadsheet-heavy returns process with an RMS that standardized returns initiation for distributors. Very quickly, the company learned that some returned items were counterfeit products. By implementing a standard and very detailed returns process, the company caught the fake returns, identified customers who abused the policy, and saved significant money.
The ReverseLogix RMS is the only end-to-end returns management system built for retailers, eCommerce, 3PLs, and manufacturers. Whether B2B, B2C, or hybrid, the ReverseLogix platform facilitates, manages, and reports on the entire returns lifecycle. View our pricing plans or schedule a demo today!
