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Return Fraud: Types, Damage & Prevention Strategies

sahil bajaj

Sahil Bajaj

Senior Specialist - Marketing @ Shiprocket

April 4, 2024

11 min read

The impact of fraud on any business can be devastating, as it can lead to significant financial losses and also they will have to spend resources on legal battles. In this digital age, everything is online, from selling a pen to a car. This has made life easier for many people as well as businesses. 

On one side, online shopping and digital payments have improved sales and cash flows and facilitated businesses to invest in their growth and expansion. On the other hand, it has become essential for online companies to be fully aware of online frauds like deceptive practices at the time of returning merchandise.

The total returns the retail industry took back in 2023 were worth USD 743 billion. Out of these returns, 13.7% or USD 101 billion worth were fraudulent. This article will discuss everything about return fraud, its types, how to identify it, and ways to stop this fraud.

return fraud

Return Fraud: Definition

Return fraud is an intentional act of defrauding a store by misusing the return process. The primary purpose of this fraud is to deceive retailers and steal money. This could include buying a product from one store and returning it to some other store, returning a stolen item using fake or altered receipts, returning items after using it, returning counterfeit items, etc. 

Return fraud, also known as return abuse, is regarded as one of the most common retail fraud typologies.  One of the most prevalent types of return fraud is wardrobing, in which customers buy a clothing item, use it, and then return it.  

It is also important to note that many businesses suffer and incur significant losses in the long run due to return fraud. Therefore, if you do not want to miss out on profit from sales due to return abuse, ensure you have a solution to control return fraud.  

Return Fraud Vs Return: Know the Difference

Return is an inevitable part of retail and a crucial data point for retailers. The return process is implemented to build customer trust and provide shoppers with a seamless post-purchase experience. However, some tricksters use returns to their advantage to make money, get free items, or simply hurt the store’s reputation. 

Return fraud is the abuse of this return process by fraudsters to gain monetary benefits. It is considered a friendly fraud. These unethical practices have grown uncontrollably in recent years, burdening honest consumers with higher prices, damaging business reputations and stealing their high-earned profits. 

Types of Return Fraud

Out of the several types of return frauds existing in the online market, here are some of the most common scams that exist today:

1. Free renting or wardrobing

This type of return fraud is seen when a customer buys clothing. Some buyers shop these items, use them once (with the tags still on), and place an order for a return. 

2. Returning stolen merchandise

Shoplifting and returning merchandise for a refund of the full price. Scammers also use someone else’s (stolen) credit card to buy an item online and return those items to get a refund in their bank account or as cash. 

3. Bricking

This type of return fraud is commonly associated with electronic items. It occurs when a purchaser returns an electronic gadget after dismantling it and replacing or removing its costly parts. This way they get a refund and also earn money by reselling those valuable parts. 

4. Empty box scams

Swindlers falsely claim they have received an empty box instead of the ordered product. Then, to compensate for that, they ask for a full refund. 

5. Merchandise exchange (Arbitrage)

In this type of scam, customers buy similar-looking products that are priced differently and later return the lower-cost one, passing it off as the expensive item. By doing this, they make a profit from the difference. 

Another version of this fraud is a customer purchasing a new item and instead of returning this product, they return an older version of the same item using the new product’s packaging.

6. Receipt Fraud

Receipt fraud occurs when a scammer creates fake digital or physical receipts and commits fraud. He submits this receipt to an online store claiming that he has purchased the product from them. This way, they receive money for the item they never purchased.  

7. Opportunistic

This happens when a customer returns an item after checking the same item on sale on another platform. Another example of this type of return is when a customer deliberately or mistakenly selects the wrong reason for a return on the return form. However, this type of return is not a planned return fraud. 

Knowing all these types of frauds will help you sense and detect what the fraudster is up to and their tactics. So, whether criminals organise a return fraud on a large scale or a friendly fraud happens due to honest shopper mistakes, you might be able to evaluate the reason for the return.  

How Much Does a Business Loss in Return Fraud?

Return frauds risk the seller’s finances and ruin the brand image. Calculating the exact cost of return fraud is not practical as it is astronomical. For an estimate, the resources and efforts must be considered, such as the costs of customer acquisition, customer satisfaction, fighting fraud, and updating policies. However, we have curated a list that mentions some estimates regarding how much money a business can lose in return fraud:

Methods to Identify Return Fraud

With the rise of startups worldwide, companies are growing significantly. Over the last decade, many homegrown companies have established themselves as a key player in successful startup hubs. 

When online stores are rapidly developing and scaling businesses, the risk of exposure to return fraud is also growing simultaneously. Hence, it is imperative to know the measures to be taken to detect return fraud proactively:   

1. Scrutinising the data from previous return fraud cases or your competitors

Have you experienced any return fraud in the past few years? The answer might be yes if you have been running an online store for quite some time. First, you need to analyse the behavioural patterns or red flags specific to your business. Even if you haven’t encountered return fraud, you can evaluate the data of your competitors to study the situation. This information helps sellers spot potential scams and take appropriate measures to prevent losses.  

2. Leverage machine learning and behavioural analytics

These elements will help you identify peculiar behaviour that signifies different types of fraud, which we have already discussed in this guide. 

3. Building a proficient workforce

Enhancing your staff expertise to determine the red flags surrounding return fraud and categorising the regular or unusual number of returns can help detect fraud.  

Is it Possible to Identify Return Fraud Using Anti-Fraud Tools?

In recent years, innovative fraud detection software or anti-fraud tools have helped to detect fraud in real-time. These tools allow you to access an extensive range of applications without having to know much about the technical side. This software also helps you evaluate which transactions led to post-transaction issues like return fraud. 

Let’s dive in to learn how data enrichment platforms can help identify return frauds:

1. Reverse email lookup

Reverse email lookup tools play a crucial role in identifying return fraud. But how? Leveraging these will help determine how long the customer used the email address. Remember, a fraudster will always have multiple email accounts and keep on creating new ones through free domain addresses. This is where email lookup will help!

These tools will help you gauge the customer’s legitimacy by checking the email address creation date and doing database checks.  

2. Social media lookup

Scammers will have multiple email addresses. Moreover, they won’t have time to connect to social networks using all the email addresses they have created. 

They will always find new ways to deceive people and businesses. Hence, it is highly unlikely their email address will be linked to any social media accounts. So, without any accounts linked to a particular email ID, it can be a red flag. 

3. Phone number lookup

This is another way to identify if your customer is a fraudster or a legitimate buyer. Always consider the customer’s phone number, including the country they are from, the carriers they use, and whether they have used the same number to make other purchases. This information could prove helpful if you suspect the customer is a scammer.  

4. Data breaches  

A legitimate buyer’s email address probably will appear on data breach records. The major reason why the email addresses that have been compromised in a recent data breach are considered safer is because it proves that they are mature addresses and are the ones in use. 

Ways to Stop Return Fraud

Here are some of the best ways to prevent return fraud-

1. Take ID and contact for returns

Mostly, retailers ask for the receipt when they process a refund. This could be changed; sellers should ask for the customer’s contact details if the product was purchased online. 

You should set up a mandatory check-in for flagged orders or customers. This is an excellent way to avert refunding items bought using stolen cards and discourage repeat offenders.

2. Tag it up

There are a lot of customers who buy the product, use it, and then return it. This type of return is called wardrobing or free renting. It can affect your business negatively as you cannot sell such items again. To avoid such fraud, it is recommended to use anti-tampering devices, such as 360 ID tags, to prevent customers from wearing and returning the product.

3. Train your employees

The best way to prevent return fraud is by training your IT team and staff to handle returned goods and process refunds. Educate them on types of fraud and the things they need to look out for to detect and stop it. The training you provide your employees should teach them about best practices on keeping the return and refund record, asking questions about the reason for the return, and sticking to the return policy.

Some examples of how to train your IT team include teaching them to watch out for failed login attempts, returning patterns, and abnormal traffic spikes.

4. Shortening the return window

This is particularly true for merchants who sell limited or seasonal items. The best way to prevent or lessen fraud is to shorten the return window temporarily. You can also restrict the return option for high-demand products and change the policy to return them within a short window.

Dynamic return policies can help retailers save costs and create a positive shopping experience that boosts customer loyalty.

5. Use external resources

If you frequently face return fraud, it is best to employ external resources. You can collaborate with any third-party specialist in return fraud prevention. These organisations use advanced technologies, data intelligence, and industry expertise to prevent fraud.

Conclusion

If you are running an eCommerce store or any online business, you must know, out of the total number of merchandise sold, how much was returned to you the previous year. Without this information, you won’t be able to prevent return fraud and recover from the loss caused by it to the business. 

Armed with this valuable information in this article, it will be easier to gauge the signs and prevent return fraud to protect your business from financial losses. 

Like other lakhs of eCommerce stores, if you want to streamline your processes from shipping to hassle-free returns clearly and straightforwardly, Shiprocket can enhance your activities at every touch point. 

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