What is Return Fraud? Types, Impact, Prevention Tactics

According to the NRF 2023 report, retailers reported various types of return fraud, with 49% citing incidents of wardrobing involving returns of used, non-defective items. 

Additionally, 44% mentioned the return of shoplifted or stolen merchandise. Another category of return fraud included 37% experiencing returns of items purchased using fraudulent or stolen payment methods. Furthermore, 20% indicated instances of return fraud perpetrated by organized retail crime groups.

Since return fraud is becoming more and more common, let’s learn about what return fraud is. In this article, we will explore the different types of return fraud, what consequences it imposes, how to detect it, and lastly, we will delve into the top 18 most effective preventative methods. 

What is Return Fraud?

Return fraud, also known as return abuse or scamming, is a common form of retail fraud. In this type of fraud, individuals dishonestly purchase or receive products and then exploit retailers' return policies to obtain refunds or store credit.

Further, criminals practice various techniques such as stolen property, wardrobing, and price switching. It is worth noting that return fraud operates in a gray area because it involves both organized crime rings and regular shoppers seeking illegitimate refunds. Furthermore, sometimes fraudsters buy products but with ulterior motives, which is a characteristic feature of friendly fraud.

It is worth mentioning that refund fraud is a specific type of payment fraud where individuals falsely claim refunds, deceiving organizations into issuing reimbursements for expenses they did not legitimately incur, causing potential financial losses and reputational damage.

What is the Difference Between Return and Refund Fraud?

Return fraud and refund fraud are distinct concepts in retail, differing in their nature and implications. In the below table, we will differentiate between these two types of fraud.

Aspect

Return Fraud

Refund Fraud 

Definition

Return fraud involves the act of returning merchandise to a retailer for a refund or credit, exploiting customer-friendly return policies.

Refund fraud is a type of payment fraud where false claims are made about an item to receive a refund without returning the item in question.

- Nature: 

- Impact: 

Nature

It encompasses scenarios where a customer, with or without fraudulent intent, returns an item for a refund, but the return may not meet the criteria set by the retailer's policy. 

It goes beyond the realm of retail returns and involves fraudulent claims for reimbursement, often through deceptive means such as claiming a product was not received, was unsatisfactory, or using stolen credit cards for the purchase. 

Examples

  • Wardrobing (returning clothing after wearing it)

  • Opportunistic returns (returning items without a legitimate reason)

  • Switch fraud (replacing a purchased item with a different one before returning it)

  • Falsifying receipts

  • Claiming non-receipt of items

  • Using stolen credit cards to make purchases and then seeking refunds

Impact

Return fraud may not necessarily involve criminal intent and can be perceived as a misuse or abuse of the return process. It can range from unintentional mistakes by customers to deliberate attempts to gain monetary benefits through illegitimate returns.

Refund fraud is typically more intentional and malicious, aiming to deceive the target organization into issuing a refund or reimbursement for a product or service that the fraudulent actor did not legitimately incur expenses. It can be more financially damaging and may involve criminal charges.

It is apparent that while return fraud focuses on the misuse of a retailer's return policy for various reasons, refund fraud involves making false claims to receive a refund without returning the item, often with criminal intent. The revenue losses for the two different fraud types also vary, with return fraud resulting in a loss of revenue from the initial sale and refund fraud extending to potential resale revenue loss.

11 Types of Return Fraud

Retailers must be watchful against various types of return fraud to effectively prevent and address these deceptive practices. Below we explain the 11 most common return fraud tactics:

  1. Returning Stolen Items: Thieves steal high-value products like electronics or jewelry and return them for a quick cash refund, exploiting the retailer's return policies.
  1. Receipt Fraud: Scammers use fake or altered receipts to obtain refunds, creating sophisticated counterfeits to deceive the retailer.
  1. Employee Fraud: Employees engage in deceptive practices, participating in return fraud by stealing products or accepting cash refunds for items never purchased.
  1. Price Switching: Scammers switch item price tags, purchasing at a lower price and returning with a higher price tag for a full refund.
  1. Opportunistic Fraud: Consumers may not break laws but attempt to return items without proper qualifications, acknowledging the lack of receipt or original packaging.
  1. Switch Fraud: Customers purchase an item at one price and switch it for a used or damaged item before returning it for a refund.
  1. Bricking: Customers intentionally break electronic items before returning them, exploiting the return process for non-functional items.
  1. Cross-Retail Return: Customers purchase from one retailer and return the item to another, often targeting different locations of the same chain.
  1. Empty Box Fraud: Customers falsely claim to receive an empty box instead of the intended merchandise, seeking a refund.
  1. Open-Box Fraud: Scammers exploit open-box sales by purchasing a boxed product, returning it, and buying the discounted open-box product instead.
  1. Wardrobing: Consumers purchase items, use them temporarily, and return them for a full refund, applying to various industries beyond fashion.

How Does Return Fraud Affect Businesses?

Return fraud has significant impacts on businesses. It can result in huge financial losses and reputational damage. As per the NRF 2023 Report, return fraud has resulted in a total loss of $101 billion for retailers this year. Additionally, for every $100 worth of returned merchandise, retailers are experiencing a loss of $13.70 due to return fraud. Incidents peak during holiday seasons, with 25% of annual returns happening between Thanksgiving and New Year's Day.

1. Return Fraud Impact on Retailers

As a result of return fraud, the impact on a company's bottom line is immediate. Retailers lose money when fraudsters obtain products for free or at a reduced price.

In addition to that, return fraud affects businesses' reputations and customer relationships. Lax return policies may destroy customer trust. This, in turn, leads to potential long-term damage. Despite efforts to minimize the impact, businesses often accept return fraud as an unavoidable cost.

2. Return Fraud Impact on Fraudsters

The consequences for fraudsters, however, are relatively mild. While committing return fraud is technically criminal, proving and prosecuting it can be challenging. Repeat offenders may face banning, but legal repercussions are often limited. In rare cases of large-scale fraud, fines and jail time may be prescribed, but these outcomes are uncommon. Let’s think of a scenario where retailers block fraudulent customers' accounts, this indeed might discourage repeat offenses, but it can also incentivize criminals to create multiple accounts.

Stolen card owners also face consequences. The chargeback process is designed to protect them, but it can be demanding, requiring time and effort. Financial distress may occur if the fraudulent purchase overdrafts the account. 

Return Fraud Detection Strategies 

In fact, people might think that there is little one can do to prevent return fraud. And this has some truth to it. This is especially true for return fraud because if merchants change their return policies, they might lose sales. However, by combining the below-mentioned proactive strategies and leveraging technological advancements, retailers can strengthen their ability to detect and at least reduce the impact of return fraud effectively. Let’s take a look at the below strategies:

  1. Reviewing Historical Data: Analyze data from previous return fraud cases to uncover common characteristics or red flags. This enables retailers to spot potential scams and take necessary actions to prevent losses.
  1. Monitoring Returns: Keep an eye on return rates, particularly noting sudden increases. A significant increase could mean that scammers are focusing on certain stores or items. In this case, retailers can quickly find and deal with any suspicious behavior.
  1. Optimizing Return Policies: Minimize risks by refining return policies to be clear, fair, and equipped to prevent fraud and system abuse. Also, your employees are important in the equation. When you train your employees, it becomes easier for them to detect unusual behavior or a suspicious one. 
  1. Utilizing Machine Learning and Behavioral Analytics: Employ advanced technologies to identify anomalous behavior indicative of various types of fraud in real time. 
  1. Analyzing Data from Past Cases: Leverage insights from past return scam cases, allowing retailers to identify specific behavioral patterns or red flags unique to their business. 
  1. Educating and Training Staff: It is important to ensure your staff is educated and trained to recognize red flags associated with return scams. Providing guidance on distinguishing "normal" versus "abnormal" numbers of returns enhances the overall awareness and responsiveness of the team.
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18 Tips to Prevent Return Fraud

By now, we established that return fraud poses a significant challenge for retailers, but a strategic approach can help minimize its impact. Below, we provide you with 18 ways to prevent return fraud, including various measures and considerations.

1. Educating Employees

  • Provide regular training sessions for employees to recognize suspicious behavior.
  • Post guidelines in the workplace to raise awareness of common scams.
  • Ensure no repercussions for reporting fraud to encourage employee vigilance.

2. Transaction Handling

  • Cease giving cash refunds to mitigate cases involving stolen or counterfeit goods.
  • Opt for refunds in store credit or vouchers, enhancing traceability.
  • Refund purchases made with debit or credit cards directly to the customer's account.

3. Customer Identity Verification

  • Implement methods like presenting a valid ID or using security cameras and facial recognition.
  • Reduce fraudulent returns by confirming the returning customer's identity.

4. Implement Time Limits

  • Set time constraints on returns, discouraging late or opportunistic return attempts. For example, enforce a strict 14-day return limit to prevent prolonged return windows.

5. Optimize Return Policies

  • Define clear expectations in the return policy, specifying conditions like original packaging and receipt.
  • Shorten return windows, especially for seasonal or limited items.
  • Offer specific shipping options using coded return labels or designated carriers.
  • Charge a restocking fee for higher-end items to deter fraudulent returns.

6. Collaborate with a Fraud Prevention Vendor

  • Implement AI-driven solutions to detect common fraud scenarios and anticipate future risks.
  • Utilize configurable tools with custom rule sets to combat specific fraud types effectively.
  • Fine-tune alerts across payment chains and respond to changing fraud risks in real-time.

7. Fine-Tune Return Policy Parameters

  • Develop a clear set of parameters specifying conditions for merchandise return.
  • Set practical yet adaptable expectations, including the condition of returned goods and time limits.
  • Define return shipping requirements for card-not-present purchases.

8. Make Policies Accessible

  • Prominently display return policies on websites, invoices, receipts, and packaging.
  • Ensure easy accessibility to policies during checkout and throughout the shopping experience.

9. Utilize Historical Data

  • Swiftly access historical data to recognize incoming threats and identify frequent return scammers.
  • Analyze cardholder information, return requests, and patterns to spot potential fraud.

10. Flexibility in Policies

  • Maintain a firm yet flexible return policy, considering circumstances like missed return cutoff dates.
  • Offer alternatives like store credits or exchanges to build customer loyalty.

11. Limit Cash Refunds

  • Substitute cash refunds with store credit or exchanges to deter fraudsters.
  • Encourage genuine customers to use credit while discouraging fraudulent return attempts.

12. Turn Returns into Opportunities

  • Offer bonuses for exchanges, providing extra credit over the item value to incentivize additional purchases.
  • Leverage returns as opportunities to create new sales and foster customer relationships.

13. Receipt and ID Verification

  • Require identification for processing returns, discouraging questionable returns.
  • Implement verification measures for both in-house and online returns, such as photo ID and address confirmation.

14. Enforce Return Policy

  • Actively enforce terms outlined in the return policy, ensuring employees are trained to implement policies.
  • Communicate non-negotiable terms to customers during checkout or online transactions.

15. Deploy Fraud Detection Software

  • Implement buyer requirements on platforms like eBay to block potentially risky buyers.
  • Utilize fraud detection software to require ID and contact details for returns, preventing fraudulent returns.
  • Update return policies based on consumer protection guidelines to mitigate threats.

16. Improve Record-Keeping

  • Maintain accurate records of transactions, including sales, refunds, and returns.
  • Facilitate investigations and provide evidence in case of disputes.

17. Strengthen Online Security

  • Implement robust security measures for online transactions, including SSL encryption and two-factor authentication.
  • Utilize secure payment gateways to reduce the risk of chargeback and refund scams.

18. Continuous Improvement

  • Regularly review and update refund scam mitigation strategies to stay ahead of evolving tactics.
  • Conduct internal audits, stay informed about the latest fraud trends, and adopt new technologies.

Conclusion

To conclude, the many effects of return fraud, including losing money and customers' trust, show the need to take strong actions to prevent it. Using a strong fraud protection system like FOCAL can help you better spot and stop not just return fraud but also other types of fraudulent activities.

FAQs

Q1. What distinguishes refund fraud from return fraud?

Return fraud involves exploiting customer-friendly return policies, while refund fraud entails making false claims for a refund without returning the item.

Q2. What’s an example of return buse?

Return abuse may involve excessive returns, swapping items, or exploiting lenient return policies for personal gain.

Q3. Is refund or return fraud considered illegal?

Both refund and return fraud are deceptive practices and are generally illegal, subject to varying legal consequences.

Q4. How can return fraud be identified?

Return fraud can be identified by monitoring suspicious patterns, verifying customer identities, and analyzing historical data to recognize red flags.

Q5. What constitutes the most common return fraud?

Wardrobing, where customers return items after use, and price arbitrage, exploiting price differences, are among the most common forms of return fraud.

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