The words “stop, thief!” may sound like something from the movies. However, shoplifters are still very prevalent today – cyber shoplifting in particular has been exacerbated by technology and the evolution of more sophisticated fraud methods. 

Take return fraud as an example. A Consumer Returns in the Retail Industry report found that nearly 14 percent of returns are fraudulent; but, because it can be extremely difficult to differentiate between a legitimate and a fraudulent return, ecommerce merchants may write it off as the cost of doing business. This can result in millions of dollars in losses for merchants. Fortunately, with the right strategy and tools, return fraud can be prevented.

The true cost of return fraud

Businesses of all sizes are left to deal with the negative consequences of return fraud. Smaller businesses feel a deeper impact due to limited resources, while larger corporations are often those specifically targeted by many professional fraudsters. Due to the large volumes of claims to review and returns to inspect, they’re frequently forced to rush through processing claims, patch together sub-optimal processes, and hire seasonal workers to handle the volume. It all adds up to a problem totaling over $101 billion in 2023. What’s more, for every $100 in returned merchandise, retailers will lose $13.70 to return fraud.

More than the cost of goods

The impact of return fraud at play in your retail organization is more than the cost of goods sold. It also includes:

• The cost of processing returns, which amounts to 66% of the cost of the item 
• The workload on customer service teams to handle increased ticket volume and time-consuming investigations into return fraud inquiries
• Cost and workload on warehouse and logistics teams to restock items and deal with logistical challenges
• Wasted products; 58% of respondents in Riskified’s Policy Abuse and Its Impact on Merchants study reported that they can only restock half, or less than half, of the returns they receive.

When you take into account the true cost of return fraud, 67% of retailers report they recover less than half the total value of a returned item.

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Types of return fraud

Unlike many other types of fraud, return fraud often exists in a gray area, making it hard to fight. It is perpetrated by fraud rings, crime syndicates, and hardened hackers specializing in return fraud including fake tracking IDs (FTIDs) and empty boxing methods. But it is also committed by regular shoppers who may be law-abiding citizens in other aspects of their lives and good customers outside the occasional illegitimate refund.

Return fraud can include:

Wardrobing: Why buy when you can borrow? When a person buys clothing or other fashion goods with the intent to wear it multiple times and return it, this type of fraud is known as wardrobing.

Switch fraud: We could also call switch fraud the “upgrade scam.” It involves 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.

Frequent or chronic returners: While customers may carry out returns due to a change of mind, impatience, or better deals elsewhere, those who do this over and over may cross the line into abuse of return policies – though this varies from merchant to merchant. 

Seller sabotage: Sellers buy a large amount of a competitor’s product and wait until the end of the return window to return it in order to disrupt — or damage — the competitor’s business. 

Reseller arbitrage: Resellers amass a large inventory or corner the supply of a merchant’s goods and try to sell as much as they can within the return window – everything they can’t sell, they return so they bear none of the risk for overbuying.

Return fraud with stolen cards: Fraudsters purchase items with a stolen credit card, duping the cardholder, and then return the items for cash or store credit, defrauding the retailer.

Cross-retailer return or price arbitrage: For this return fraud scheme, a bad actor identifies the same item at two retailers. They buy it from the retailer with the higher price and return it to the retailer with the lower price. The bad actor then profits from the price difference. 

Employee-assisted return fraud: The fraudster colludes with an employee to return an item fraudulently. This may involve returning an item that wasn’t actually purchased or processing a refund outside of the normal protocols like showing proof of purchase.

Fake tracking ID (FTID): In this return fraud scam, fraudsters alter the return tracking ID of the postage label so a returned good shows it was delivered back to the retailer’s return center and the customer receives a refund. Bad actors attempt this fraud in one of two ways:

Method one involves unlinking the package or the order to the customer. This prevents the return center from tracking down the customer who made the fraudulent return. At the same time, the package shows as delivered, entitling the customer to a refund.

Method two, the more common type of FTID, involves modifying the delivery address on the package. The package is delivered to an unrelated location, where an unsuspecting person throws out the junk package. The delivery tracking shows the package as delivered to the return center, entitling the customer to a refund.

Empty box fraud: This type of fraud entails returning empty boxes or boxes filled with paper, rocks, or 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.

Return fraud prevention

Ideally, prevention should be built into the return policy itself. Potential prevention methods 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? State it on your website, receipt, 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. Make sure employees carefully inspect returned items and closely examine order data, return labels, and proof of delivery. With occasional abusers, catching an attempt can help discourage them from targeting your store again.

Ways to detect return fraud

The above fraud prevention measures will help stop some return fraud, but you will certainly encounter bad actors who will try to scam your business regardless of the policy. For those circumstances, you can use a combination of the following return fraud detection methods. 

Policy optimization: Tailor return policies for different categories and customers.

Data transparency: Strive for increased data transparency to get better control over retail fraud. For example, equip your internal teams with more detailed customer data, such as information about past purchases or return history, that can be used to detect potential instances of fraudulent returns.

Technology integration: Automated systems, combining AI and machine learning, empower merchants to identify return fraud abuse, gather data, and act on that data. A considerable amount of that pressure comes from the time and resources a merchant spends manually processing returns when they don’t have automated returns systems in place.

Train staff and provide dedicated resources: Ensure you have adequate resources dedicated specifically to combating return fraud, such as a dedicated team or department responsible for monitoring returns or analyzing customer data for suspicious activity. 

Join forces with retailers and collaborate with law enforcement: Share information among retailers for collective prevention and cooperate with law enforcement to help them help you crack down on return fraud. 

Partner with a fraud prevention vendor

Sorting out legitimate returns 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 counteracting these types of scams. Serial fraudsters are constantly finding new loopholes to exploit return policies at scale. Once a fraudster finds a successful method, they will often sell the tip to others who will exploit it as long as they can.

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 reduce risk and resource investment while helping to differentiate good customers from return fraudsters.

Protect your business: A guide to refund fraud