What is Return Fraud? | 4 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 also added new opportunities for criminals to attempt fraudulent returns. And it’s not always a lone actor; organized efforts can be involved when running 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 are losing billions of dollars a year 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 is carried out, 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 sale revenues to fraud.
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. Online sales are also a particularly ripe arena for conducting return fraud.
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 has the criminal claiming the item was not received, thereby getting a full refund from the seller. Of course, the item was received, and the criminal can now sell it for a profit.
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, the fraud is difficult to catch: Serial numbers have to be compared or products have to be closely examined to ensure all parts are included. When companies are dealing with huge volumes of product returns and tight staffing, this attention to detail and time commitment is often deprioritized.
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 in 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 happens when a shopper purchases an item and returns it after one use, such as an expensive clothing item. Clothing returns are particularly costly and labor intensive for companies to process because of inspection requirements, cleaning and repackaging. Unfortunately, many returned clothing items end up in a landfill.
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 own viability when it comes to 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 by changing 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 that require a shorter period for returning those kinds of 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, 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.
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.