Prevent and Detect Fraudulent Returns

Return fraud is when a customer dishonestly abuses a company’s return policy. People commit return fraud for monetary gain, to gain free merchandise, or to just damage a business. As the retail sector shifts towards online-based business models, return fraud is becoming increasingly widespread.

Customers now expect to be able to easily and quickly return items that are faulty or unsatisfactory. To stay competitive, e-commerce businesses need to have flexible return policies in place. Making it easier for your customers to return goods helps to drive sales, but it also increases the number of returns. The National Retail Federation (NRF) estimates that in 2023, US $743 billion worth of purchased merchandise was sent back to retailers. That equates to 14.5% of all sales.

Appriss Retail and National Retail Federation 2023 Returns Survey

It’s now common for unscrupulous scammers and fraudsters to take advantage of return policies to defraud businesses of all sizes. If left unchecked, return fraud can turn into a serious problem for your business.

But there are ways to combat return fraud. In this article, we’ll explain how you can stop return fraud, fight off fraudsters, and save money for your business.

What is Return Fraud?

Return fraud is also known as refund fraud or refund theft. Return fraud occurs when a customer asks for a refund on a returned item that does not qualify for a refund. In some cases, the customer may have made an honest mistake and hasn’t realized that the returned item is ineligible for a refund. But returns are increasingly being used as a way for people to defraud merchants.

Return fraud is now one of the most common types of criminal activity perpetrated against e-commerce retailers. Retailers report that return rates have increased by 67% during the last five years. 13.7% of retail returns in 2023 were found to be fraudulent, an increase of 10.4% from the previous year.

Protecting your business means staying vigilant against the threat of return fraud. Not protecting yourself against return fraud can lead to substantial revenue losses and increased paperwork.

What Are the Different Types of Return Fraud?

Return fraud comes under the category of friendly fraud, which means that it is difficult for a retailer to know if the customer is acting in bad faith or not. This can put the merchant in a difficult position and make them reluctant to dispute a customer’s claim.

Retailers often don’t want the reputational damage that tends to come with refusing a refund or return. Scammers and cybercriminals leverage these concerns to commit fraud against businesses. Understanding how scammers operate can help you to identify suspected cases of return fraud and take appropriate action.

There are several different types of return fraud. The ones that are most relevant to you will depend on your industry, your return policy, and whether you operate online or not. We’ve put together a list of the most common types of return fraud:

Receipt Fraud

Cybercriminals sell fake receipts through sites on the dark web. Fraudsters use these fake receipts to obtain refunds for products they did not purchase. Fake receipts can be either digital or physical, so can be used against both brick-and-mortar and e-commerce retailers.

Returning Shoplifted Goods

Thieves don’t always just run off with items they’ve stolen. Shoplifters will sometimes return stolen goods and ask for either a refund or store credit. Customers often lose their receipts, and many merchants want to avoid damaging their reputation by refusing a refund. Shoplifters know there’s a good chance they’ll get a refund for their stolen goods. Shoplifting only occurs in-store, so it does not impact the online retail industry.

Wardrobing

Wardrobing fraud is when a customer buys a product intending to return it after they’ve used it. Expensive items meant for specific occasions such as costumes or evening wear are often used for wardrobing fraud.

Since the merchant is getting the products back in good condition, many people don’t see the problem with this type of fraud. 56% of consumers in the US have admitted that they regularly practice wardrobing fraud. One in every four purchases during the 2023 US holiday season was made with the deliberate intent of committing wardrobe fraud.

Receipt Switching

Receipt switching occurs when a fraudster buys an item and then makes a separate trip to buy the same item again. The fraudster then returns the second item and uses the first receipt to ask for a refund. If the merchant grants the refund, the scammer has effectively received the first item for free.

Merchandise Exchange

Merchandise exchange is when a fraudster buys a new version of a product they already own and then returns the old item in the new packaging. In many cases, it’s hard to tell the difference between two versions of a particular item.

Bricking

Bricking is a type of return fraud usually associated with electronic products such as laptops or desktop computers. Scammers remove components from a product and resell the components after returning the product.

Competitor Sabotage

While hugely popular, online marketplaces like Facebook, Etsy, and Amazon aren’t well-regulated. Unscrupulous businesses can buy up the entire stock of a competitor and then return the products as late as the competitor’s return policy allows for. The original retailer bears the cost of processing the returns as well as the expense of restocking popular items.

Retailer Arbitrage

Fraudsters buy a product from one retailer and then return it to a different store selling the same item at a higher price. The scammer then gets to keep the price difference. This type of price arbitrage fraud usually only involves expensive items. Sellers of upscale luxury goods are often targeted in these types of fraudulent cross-retailer returns.

What Is the Impact of Return Fraud on E-Commerce Stores?

Return fraud can be one of the most dangerous bot threats for online retail companies but it’s also a problem for businesses that operate offline. A recent survey of UK retailers showed that 80% of large retailers were concerned about returns. The same survey reported that 67% of smaller retailers considered returns to be a major problem.

The cost of retail fraud for merchants rises by a rate of 20% every year. At the time of writing, the cost to business has been estimated to be US $101.91 billion per year. During the holiday seasons, return fraud accounts for 16.5% of all returns at a cost of US $24.5 billion.

As well as the loss of revenue, there are administrative costs associated with refund fraud. On average, processing a return costs an e-commerce business 21% of the value of the order.

How to Protect Your Business Against Return Fraud

Return fraud can impact any type of business, but e-commerce retailers are particularly vulnerable and they started to change their return policies

Use Reliable and Robust Fraud Prevention Software

Cybercriminals can use automated bots to scan the internet for e-commerce merchants with flexible return policies. A botnet can then be deployed to abuse those policies at scale. Criminals use sophisticated programs using artificial intelligence and machine learning technology to mimic human behavior. This makes identifying red flags and suspicious behavior difficult.

Fraud prevention software can stop automated bots from attacking your websites or mobile apps. Fraudulent activities can be detected and flagged in real-time allowing your teams to act immediately to stop scammers.

Implement Stringent Return Policies

Your return policy needs to be flexible enough to be attractive and useful for your customers. But it also needs to protect your business from scammers and fraudsters. It’s important to formulate a return policy that is easy to understand for your customers and your employees.

Clearly state which types of products are eligible for refunds. Make sure to list any exceptions. Provide your customers with details on what they need to provide to claim a refund, like having a valid receipt. Include unique product identifiers on your receipts to prevent receipt-switching fraud. State whether or not your business will cover any associated costs, such as shipping. Be sure and put a clear time frame on returns.

Provide Fraud Training for Employees

Employees must know how to recognize return fraud red flags. Educate your teams on the different types of return fraud and e-commerce fraud. Implement clear policies on what employees should do if any suspicious activities are detected. Include processes for dealing with fraud from customers as well as instances of employee fraud.

Employees must keep a detailed record of all returns and refunds. The return policy must be strictly adhered to. Any exceptional cases should be referred to a superior for evaluation. IT teams should keep a close watch for abnormal traffic spikes, unusual device fingerprints, and failed login attempts. With the right fraud prevention software, you can ward off cyberattacks and stop scammers in their tracks.

Fight Return Fraud with DataDome

DataDome provides state-of-the-art software for return fraud detection and e-commerce fraud prevention. DataDome targets suspicious activities from bots and immediately blocks them from your websites, mobile apps, and APIs. Fraudsters are stopped in milliseconds before they can do any damage to your business.

Sources

E-Commerce Returns 2024: European Retail Survey

Return fraud is on the rise

2023 Consumer Returns in the Retail Industry

Retail return fraud is rising as consumers send back purchases in droves