With more than one in ten refunds being a case of return fraud, retailers must be more vigilant than ever.
That’s easier said than done, however. There are nine types of return fraud to deal with and even if you detect fraud, it can be hard to prove. Often, retailers have no way to verify a customer’s false claim.
Fortunately, there are strategies your business can use to spot fraud and solutions you can put in place to prevent it.
What Is Return Fraud?
Return fraud is any action that abuses a store's return policy. This is a type of friendly fraud that typically entails a customer returning merchandise that is not eligible for a refund.
Here are a few reasons why goods may not be eligible for a refund:
- They are stolen merchandise
- The goods have been used
- The items are counterfeit
- The goods were purchased from another retailer
Refund fraud is a common type of return fraud, which occurs when a customer receives a cash refund or store credit without returning the goods to the store. Buyers do this by making a false claim that would prevent the goods from being sent back.
Unfortunately, around 7-10% of all returns are fraudulent and involve a manipulation of the retailer's return policy. Most customers will gain from this type of fraud as they make money or receive free items.
Types of Return Fraud
While return fraud is simple enough to understand, it has become increasingly hard to spot as there are multiple ways a customer can commit fraud.
Here is a depressingly long list of the various ways that customers can commit returns fraud:
- Wardrobing: This is when a customer buys an item, typically a clothing item, uses it once and then returns it. Unfortunately, many shoppers see this type of fraud as harmless.
- Empty box scams: This type of scam refers to when a customer falsely claims that they have received a package without the merchandise and demands a refund.
- Opportunistic: This fraud occurs when a customer returns an item for a non-recognized reason like impatience, a change of heart, or they have found the item elsewhere. They will then request a return with a reason that is not true in order for the refund to go through. Most customers think opportunistic fraud is harmless as it is often not premeditated.
- Price switching: This is a more deliberate type of scam that only occurs in brick-and-mortar stores. Price-switching refers to when consumers purchase an item, replace the price tag with a more expensive item and return it.
- Seller sabotage: This scam is one of the most ruthless, as competitive retailers will purchase items in bulk to deplete their competitor's inventory. They will return the items much later, sometimes even replacing merchandise with counterfeit products.
- Stolen merchandise return: This is when someone buys merchandise online with a stolen credit card and then brings the item into the store to return it to receive a cash refund.
- Bricking: Bricking is a serious type of fraud that requires planning. Buyers will purchase an item, typically an electronic device, and will take it apart and keep the most valuable pieces. The buyer will then put the device back together and return it, making money by keeping the return fee and selling the stolen parts.
- Receipt fraud: This occurs when a fraudster falsifies or reuses a receipt to receive a refund. The goods would have most likely been purchased with a stolen credit card or at a lower price.
- Cross-retailer return: Cross-retailer fraud refers to when a buyer purchases identical merchandise at one store and returns it to another store where they sell the same items for a higher price.
The Huge Cost of Return Fraud
Return fraud can cost your business a lot if left unchecked, especially if you own an online store. A survey in 2021 found that retailers lose around $10 for every $100 of returned merchandise.
This loss can ultimately stack up to $165 million in merchandise returns per $1 billion the retailer makes in sales. Furthermore, a survey in 2022 showed that out of $212 billion in returns last year, around $22.8 billion of those returns were fraudulent.
It’s not just the cost of the fraud that you have to consider. Other factors, like shipping and administrative fees also impact revenue. Add onto that all the time wasted communicating with fraudulent customers and processing returns.
How to Prevent Return Fraud
It’s not all bad news. There are several steps your business can take to prevent many forms of returns fraud from happening in the future.
Update Your Return Policies
The first thing you should do is to update your return policies. Offering more lenient return policies will often increase business, but it also increases the vulnerability of your store. Remember that there is a fine line between having convenient yet strict policies.
Here are a few policies you can enforce:
- Inspect all items before administering a return and ensure the price tag is intact
- Only issue a return to those with valid receipts
- Ensure the customer has a valid ID and a payment method that matches the receipt
- Restrict shoppers who return merchandise frequently
Train Your Staff
Whether you have an online store, brick-and-mortar location or both, taking the time to train your staff to detect fraud is essential and will save you a lot of hassle.
If you have an online retail store, educate your customer service employees about return fraud so they can better spot fraud trends and suspicious activity. Discuss the popular characteristics of fraudsters, such as random bulk orders.
Train in-store staff to recognise warning signs and suspicious behaviour, like when customers are hesitant to provide personal information. Your staff should also know when to alert management before issuing a refund.
Enforce Time Limits
Enforcing a return time limit is an easy way to prevent return fraud. While some stores offer a 30 to 90-day return window, others only issue returns after 2-4 weeks.
If your intent is to eliminate seller sabotage, shorter return windows are better. However, you must also keep regular customers in mind and give them leeway to return products that have genuinely failed them.
When choosing how much time to allow, think about the product you’re putting limits on. You can have different limits for different types of merchandise.
Use Fraud Detection Software
Fraud detection software may be expensive, but it can save you many more times the purchase cost. There are several types of software to help prevent fraud, all of which we will list below.
- Phone number lookup. The customer's phone number can reveal information like their region, country, phone carrier, and if they have purchased from your store before.
- Data breach scans. Some software lets retailers detect whether certain emails have been compromised in data breaches or not.
- Email lookup. Investigating all emails linked to the customer can reveal how many accounts they have, how long they’ve had those accounts and whether they use free domains or not. All of this information can help you decide whether the customer appears to be legit or not.
- Social media lookup. If you want to take verification one step further, you can see if the customer's email is connected to social media accounts. Fraudsters will not usually take the time to set up social media accounts.
Improve Your Delivery and Returns Service
Another method to reduce fraud is implementing an intelligent return and delivery management system. Ideally, your retail store should have systems to keep detailed sales and customer history records for returns and payments. This way, you can review return records for suspicious activity.
Furthermore, implementing digital identification systems for delivery and returns will also help. Not only will this system ensure the right customer is receiving their goods and is a verified purchaser if they wish to return, but implementing these systems will weed out fraudsters looking for easy ways to make money.
Several software solutions will help authenticate users and detect suspicious behaviour from customers. Finally, implementing red flag alerts on things like inconsistent shipping and billing information will help detect possible fraudsters.
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