Return Fraud: What Is It and How To Protect Your Business

Between 2012 and 2022, the combined merchandise return rate for both eCommerce and brick-and-mortar stores nearly doubled. According to the National Retail Federation, retailers see an average of $145 million in returned goods for every $1 billion in sales. For eCommerce merchants, return rates are typically higher — with 2023 seeing a 17.6% return rate. Returns reached $743 billion and 13.7% of that sum is attributed to return fraud, costing merchants a total of $101 billion.

Merchants have reported various types of return fraud in the past year. According to a recent survey, 49% experienced return fraud involving used, non-defective merchandise, commonly termed wardrobing. Additionally, 44% saw returns of shoplifted or stolen items, 37% cited returns made with fraudulent or stolen payment methods, and 20% faced fraud from organized retail crime groups.

Return fraud, sometimes called returns fraud or refund fraud, is a type of retail fraud where scammers unlawfully exploit a return policy to gain a financial advantage or merchandise for free. It can involve returning stolen goods for a refund or store credit, using counterfeit receipts, or purchasing items to use temporarily before returning them for a full refund. Such fraudulent activities cause significant losses for retailers and can lead to stricter return policies, ultimately affecting honest customers.

There are many different types of return fraud. Each of these practices represents a different approach to defrauding retailers through the return process, ranging from individual opportunistic actions to organized criminal activities. For a deep dive on solutions to combat return fraud, read Types of Return Fraud & How to Mitigate Risk.

1. Wardrobing or renting: Returning used, non-defective merchandise after using it for a purpose, like wearing a dress to a party and then returning it.
2. Receipt fraud: Using a forged or altered receipt to return merchandise.
3. Shoplifting for return or returning stolen goods: Stealing merchandise and then returning it for cash or store credit. Items can be returned by either the shoplifter themself or by another party who stole the goods.
4. Inny fraud: Collusion between employees and customers to facilitate fraudulent returns. For example, an employee in a return center responsible for issuing refunds coordinates with fraudulent shoppers or organized crime rings to process unauthorized batches of refunds.
5. Price switching: Swapping price tags on items and then returning the higher-priced item for a refund or credit.
6. Returning merchandise purchased with stolen financial information: Stolen credit card or banking information is used to make unauthorized purchases for return.
7. Returns fraud rings: Organized groups that engage in return fraud at a large scale. They often operate by stealing goods or obtaining them through other fraudulent means and then returning them to stores for a refund or credit. These rings may use sophisticated tactics and can involve multiple people to carry out large-scale fraud operations.
8. Refunder companies: These companies offer a dubious service where they facilitate returns for customers in exchange for a fee. They typically promise to help customers get refunds for their purchases by exploiting loopholes in return policies or using deceptive practices. This can include making false claims about products being damaged or not received.
9. Repeat returners: This term refers to customers who frequently return items. While not all repeat returners engage in fraudulent activities, this behavior can be a red flag for potential fraud, especially when the frequency of returns is unusually high or the reasons for returns are suspicious.
10. Opportunistic (buyer’s remorse): This type of return fraud occurs when a customer makes a purchase and then experiences buyer’s remorse, deciding to return the item under false pretenses. For example, they might claim the item was not as described or defective when, in reality, they simply changed their mind.
11. Bricking: In this form of return fraud, a customer purchases a product, removes or damages valuable parts of it (such as components of electronic devices), and then returns it for a refund or credit. The returned item, now ‘bricked’ or rendered useless, causes a loss to the merchant.
12. Lying about damage on items that can’t be shipped back: This involves customers falsely claiming that an item is damaged in a way that makes it ineligible to be shipped back, like claiming a laptop has leaky batteries. The customer does this to avoid the hassle of returning the item while still receiving a refund.
13. Promotional Abuse: Some customers or fraudsters abuse promotions by purchasing items at a discount only to return them for a full-price refund. eCommerce merchants reported losing 31% of their annual marketing spend to promotional abuse, with businesses in the United States losing $189 billion in revenue due to this type of fraud​​.
14. Bracketing: Over half of the respondents in a survey admitted to bracketing, a process of ordering multiple products with the intention of returning at least one, leading to increased return rates. This has prompted companies to implement charges for return shipping, with 37% of respondents saying they would be dissuaded from engaging in return fraud if charged a return fee​​.

9 Types of Return Fraud & How to Mitigate Risk

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Return fraud has been a persistent challenge for merchants, evolving alongside changes in retail practices and technology. Its history and trends reflect a continuous cat-and-mouse game between fraudulent actors and eCommerce shops seeking to protect their business.

Pre-Internet Era

Initially, return fraud was relatively unsophisticated, involving simple tactics like returning stolen goods for cash or exploiting lenient return policies. As stores introduced more structured return policies, fraudsters began manipulating or forging receipts, as well as switching price tags to return items for more than their purchase price.

Internet and eCommerce Era (1990s-2000s)

By 1998, eCommerce was still an emerging concept, with online annual sales hitting $5 billion. As eCommerce continued its rise through the early 2000s, return fraud found new avenues. The anonymity and convenience of online shopping made it easier for fraudsters to return goods without physical scrutiny. Wardrobing became more prevalent, and friendly fraud — where customers falsely claim non-receipt of goods or dissatisfaction — became more common.

eCommerce Rapid Growth Era (2000s-2010s)

Over the next two decades, eCommerce saw exponential growth. By 2013, online sales in the United States reached $263.3 billion, a 17% increase from the previous year. Merchants began employing sophisticated methods and technology to track returns and identify fraudulent patterns. Additional countermeasures involved using databases to flag serial returners and the integration of more secure and comprehensive receipt systems. The use of big data and analytics helped merchants better understand return patterns and identify potential fraud.

Record-Breaking Increase: Recent Trends and COVID-19 Impact

The COVID-19 pandemic accelerated the shift to online shopping, subsequently increasing the volume and complexity of online returns and fraud. There has been a notable rise in organized groups engaging in return fraud, often involving larger-scale operations with stolen or counterfeit goods. In response, many merchants have tightened their return policies, requiring more stringent proof of purchase and limiting the time frame for returns.

Future Outlook

The global eCommerce market is expected to continue growing at a relatively steady pace, with sales projected to surpass $8 trillion for the very first time by 2027. This represents a more than $3 trillion increase from 2021, marking an average annual growth rate of 8.3%. The growing challenge for merchants is balancing customer-friendly return policies while mitigating return fraud. The future may see more widespread use of artificial intelligence and machine learning to predict and prevent return fraud, potentially personalizing return policies based on individual customer risk. There is also a growing emphasis on consumer education about the ethics and impacts of return fraud, which aims to reduce its occurrence through increased awareness.

In summary, return fraud has evolved from simple deceitful returns to sophisticated schemes involving technology and organized crime. Merchants are continuously adapting, employing advanced tracking, data analytics, and stricter policies to mitigate these losses while striving to maintain customer trust and satisfaction.

Return fraud causes significant financial losses for retailers and can lead to higher prices for consumers to offset these losses. A growing concern, here’s how return fraud affects eCommerce businesses.

Financial Loss

Merchants incur an average of $145 million in merchandise returns for every $1 billion in sales, and for every $100 in returned merchandise, retailers lose $13.70 to return fraud​​​​. The loss adds up with indirect costs, like shipping and handling, restocking, and the loss of merchandise value, especially in cases where returned items can no longer be sold as new. Even worse, when return fraud involves false claims of item not received (INR) or did not arrive, merchants lose out on both merchandise and revenue, costing them double. 

Operational Strain 

Handling fraudulent returns puts a strain on a company’s operations. Resources are diverted to deal with the returns process, which can be complex and time-consuming, especially in cases where fraud is suspected or a chargeback has been initiated. This includes additional customer service time, inspection of returned goods, and compiling transaction details and reports. The NRF also reports that for every dollar of merchandise returned, merchants incur an expense of approximately 21 cents in return handling costs. When fraudulent returns are factored in, this cost increases, impacting the overall operational budget.

Increased Prices and Stricter Policies 

To mitigate losses, eCommerce businesses might be forced to increase prices or implement stricter return policies. While this can help reduce fraud, it negatively impacts good shoppers — impacting brand reputation, customer satisfaction, and loyalty, as flexible return policies and competitive pricing are preferred. 

Product and Inventory Headaches

Return fraud distorts inventory records and levels, leading to inaccuracies in stock data which can result in overstocking or understocking. Merchants spend considerable resources managing returns. A survey by Optoro, a technology firm focused on returns optimization, found that processing a single return can cost double the amount for shipping, including labor, inventory handling, and freight. On top of that, it’s estimated that a significant portion of returned merchandise cannot be resold at full value. A study by Appriss Retail found that in certain retail sectors, up to 10% of returned merchandise is not in a condition to be resold at the original price, affecting the overall value of inventory. 

These challenges underscore the need for eCommerce businesses to adopt robust fraud prevention strategies. Measures such as implementing time limits on returns, requiring IDs, thorough record-keeping, training employees to spot fraud, using fraud protection software, and segmenting products based on value can be effective in mitigating return fraud​​​​. Additionally, technology plays a crucial role in preventing return fraud, with AI-powered software capable of identifying patterns indicative of fraudulent activity​​.

Signs of Return Fraud

Return fraud is an increasingly prevalent issue for merchants, marked by several distinct signs. These signs, individually or in combination, can indicate return fraud, a significant concern for retailers needing vigilance and robust return policy management.

• Empty packages being returned: Receiving return packages that appear intact on the outside but are devoid of the actual product inside.
• Packages filled with garbage or irrelevant items: Instances where the returned package contains trash, unrelated objects, or anything other than the original product.
• Damaged labels: Signs of tampering or wear on the package labels, which may suggest an attempt to obscure tracking information or original purchase details.
• Manipulated labels: Altered or forged labels on returned goods may indicate an attempt to commit fraud by returning items that were not originally purchased from the retailer. This could also be an effort to obtain a refund or replacement before the warehouse and customer support can identify that the returned package is empty or fraudulent and link it to the customer’s account.
• An uptick in claims for non-shippable items: An increase in return requests for items that are logistically impossible to ship back, such as hazardous materials or a bag of broken glass.
• Frequent returns by the same customer: A pattern of frequent returns by the same individual could indicate a systematic abuse of the return policy.
• Mismatched product serial numbers: Serial numbers on the returned item that don’t match those of the original purchase, suggesting the product is not the same.
• Inconsistencies in return reasons: Vague, inconsistent, or implausible reasons given for the return, which may hint at a lack of legitimacy.
• High-value items returned without original packaging: Returns of expensive items without their original packaging, manuals, or accessories, are often a sign of deceitful behavior.
• Returns just within the return policy window: Regular returns made just before the expiration of the return policy period, potentially indicating a pattern of exploiting the policy’s limits.

To reduce the impact of return fraud or prevent it from happening in the first place, consider the following strategies. 

• Implement fraud detection software: Utilize sophisticated fraud detection and prevention software that analyzes return patterns and flags suspicious activity, helping to identify potential fraud before it affects the bottom line.
• Tighten up refund policies: Establish stricter refund policies, such as shorter return windows or requirements for original packaging and receipts, to deter fraudulent returns.
• Improve internal communication: Foster strong communication and collaboration between customer support and warehouse staff. Simple tools like a shared Google Sheet can be used to track returns and flag discrepancies.
• Choose a proactive 3PL vendor: Partner with a Third-Party Logistics (3PL) vendor that actively monitors return patterns and promptly alerts you to suspicious activities.
• Require detailed return explanations: Implement a policy where customers must provide a detailed explanation for their return. This can discourage fraudulent returns and provide valuable feedback for improving the customer experience as well as data for spotting inconsistencies.
• Use serialized tracking: Implement serialized tracking for products, ensuring each item has a unique identifier. This makes it harder to return items fraudulently purchased or acquired elsewhere.
• Regularly audit returns: Conduct regular audits of returned items to ensure they match the product descriptions and conditions as claimed by the customers.
• Educate customers on return policies: Communicate return policies to customers at the point of sale and through follow-up communications. Educated customers are less likely to inadvertently engage in practices that might resemble return fraud.