Return Fraud: What It Is and How To Prevent It
The words “Stop! Thief!” are rarely uttered outside of movies anymore. Of course, it’s not that we don’t still have thieves out there. Theft today is like everything else in the 21st century: It happens faster, can be technologically assisted, and is often invisible.
Return fraud is a good example. The US National Retail Federation estimates that for every $1 billion in sales, merchants lose $166 million in returned merchandise. It has become so commonplace for eCommerce merchants that many simply write it off as the cost of doing business. But industry experts estimate that 7-10% of returns are fraudulent, meaning losses of millions of dollars could actually be prevented.
What is return fraud?
Return fraud refers to any scam method that abuses a business’ return process. Some merchant return policies may require a receipt, while others may ask for the product in its original packaging. If a customer returns an item and gets a refund without being entitled to it, that’s return fraud.
There are varying degrees of return fraud. In California, for example, stolen property valued at under $950 is considered a misdemeanor and usually punishable by a fine. If the value exceeds that amount, the offender could spend up to three years in prison.
Unlike many other types of fraud, return fraud often exists in a gray area. It is perpetrated by fraud rings, crime syndicates, and hardened hackers: in fact, an entire industry has risen of fraudsters specializing in return fraud, fake tracking IDs (FITDs), and empty boxing methods and services. But it is also done by regular shoppers who may be law-abiding citizens in any other aspect of their lives and good customers outside the occasional illegitimate refund.
Return fraud can include:
- Empty box scam: Returning empty boxes or boxes filled with paper, rocks, or similar but cheaper items instead of the original merchandise. Abusers have a variety of methods to get around the merchant, including claiming they were not responsible for the switch or deliberately messing with the shipping address so the package will be hard to identify or will not reach the correct warehouse
- Fake receipts: You can make anything on a computer these days, including fake receipts. Targeted attacks on specific merchants could even involve the mass production of such receipts
- Returning stolen merchandise: Shoplifting from a store (or obtaining it illegally another way) and then returning the item for cash or store credit
- Wardrobing: Why buy when you can borrow? When a person buys clothing or other fashion goods with the intent to wear it once and return it, this type of fraud is known as wardrobing
- Switch fraud: We could also call this the “upgrade scam.” Buying a product you already own and returning the old, worn product as the new one for a full refund. Some scammers also sell the new item for profit
- Bricking: Refers to buying an electronic device, stripping it of valuable components, and then returning it for a refund
Return fraud prevention
Ideally, prevention should be built into the return policy itself. Amazon, for example, refunds customers before they receive the returned item. Other merchants may choose to have different policies in place.
Potential prevention methods can include:
- Defining expectations: Be clear about your return policy and what you will accept for a refund. Only in the original packaging? Only with a copy of the receipt? Have it stated on your website or wherever relevant. Consider also stating it on your checkout page
- Shortening the return window: For merchants selling seasonal or limited items, shortening the return window could help prevent switch fraud, for example
- Offer specific shipping options: For online and mail order items, there should be a clear and documented process for shipping back returned items. Many retailers use only specific shipping companies, require certain packaging, or offer coded return labels for convenience
- Charge a restocking fee: This may seem like an inconvenience to your customers, but it’s a reasonable request for higher-end items
- Streamline internal processes: The most effective weapon against receipt fraud is the employees who process the returns. Streamline these processes, making sure that receipts are closely examined and returned items are carefully inspected. With occasional abusers, catching an attempt can help discourage them from targeting your store again
Partner with a fraud prevention vendor
Sorting out legitimate from fraudulent returns can be a nightmare, especially around peak shopping periods such as the holiday season. A wave of returns or a sudden organized attack can quickly overwhelm even experienced operations and customer success teams.
Furthermore, return fraud is becoming more and more sophisticated as the fraud industry is starting to specialize in these types of scams. Letting a one-time abuser go won’t bankrupt a business, but repeat or habitual offenders are another matter altogether.
To make informed decisions and fight return abuse on a large scale, merchants need to be able to connect seemingly unrelated accounts and identities to the real abuser behind them. For that, they need the technological capability to analyze multiple data points and recognize any and all accounts committing policy abuse as belonging to one specific entity.
While some merchants may prefer to make the investment in-house, the right vendor can help merchants to reduce risk and resource investment while helping to differentiate good customers from return fraudsters.
If you had a successful ride on the roller coaster that is the holiday shopping season, your refund policy could soon be coming back to haunt you in the form of empty box scams. Across the board, policy abuse including promo abuse and item-not-received (INR) is on the rise, and merchants have come to expect more of these grey-area cybercrimes during and post-holidays.
Policy abuse is a growing concern for online retailers, but detecting and protecting against it requires a different set of capabilities than blocking traditional eCommerce fraud.
How a major US-based retailer got their skyrocketing item-not-received claims under control.