Return Fraud: What Is It & How To Prevent It

Online stores have to contend with aggressive competitors, grumpy customers, and ecommerce fraudsters. But at least, when it comes to fighting return fraud, there are a lot of defenses retailers can put in place today. Let’s break them down below.

What Is Return Fraud?

Return fraud is an act designed to defraud a store by abusing its return policy. While the return process is put in place to assist customers and shoppers, unscrupulous individuals use it to their advantage to make money, get free items, or simply hurt the store. 

Return fraud, or return abuse, is a type of friendly fraud where the fraudster buys a product with the intention of returning it after use, such as in wardrobing. While it affects both online and brick-and-mortar stores, online retailers are more often targeted. If items are bought with stolen credit cards, it shifts from friendly fraud to genuine payment fraud.

Differences Between Return Fraud and Refund Fraud

Return fraud and refund fraud are two types of fraudulent activities that take advantage of store policies in different ways.

The main difference is that return fraud involves the physical return of merchandise, while refund fraud manipulates the refund process without necessarily returning any goods. Understanding these distinctions helps retailers better prevent both types of fraud.

What Are the Consequences of Return Fraud?

The consequences of return fraud can be dramatic for online stores, and surprisingly tame for fraudsters. Let’s start with the victims:

• For Retailers: Return fraud can significantly impact online stores. Beyond monetary losses, retailers face wasted time, shipping costs, administrative fees, and communication efforts. Dealing with repeat offenders may require banning them, resulting in lost customers and potential retaliation through negative reviews. Tightening return policies can harm brand reputation, affecting sales and customer loyalty. Retailers often must accept return fraud as a business cost while trying to minimize its impact.
• For Fraudsters: Return fraudsters typically face minimal consequences, as proving and prosecuting such fraud is challenging unless done on a large scale. For example, in 2019, a major European scam cost Amazon $370,000, but the perpetrator was released on a €3,000 bail. Even when retailers win legal battles, fines and jail time for fraudsters are rare; usually, the store just blocks the customer’s account. However, this can lead to fraudsters creating multiple accounts to continue their schemes.
• For Stolen Card Owners: Victims of stolen credit card return fraud are often overlooked because the chargeback process protects them. They can contest unfamiliar transactions with their bank, which typically issues a chargeback. However, this process can be time-consuming and stressful, especially if the fraudulent purchase causes financial distress by overdrawing their account.

8 Types of Return Fraud

Return fraud exists on a wide spectrum, ranging from honest shopper mistakes to malicious operations on a large scale by organized crime rings. Here is what a fraudulent return might look like:

1. Wardrobe or free renting: Shoppers buy items, use them once, and return them. Consumers often see this as a victimless crime. 
2. Opportunistic Buyers return an item after changing their minds, becoming impatient with delivery times, or finding it on sale elsewhere. 
3. Seller sabotage: Competitors may purchase all items from a rival’s store and return them as late as possible to deplete their inventory.
4. Bricking: Fraudsters return an electronic item after stripping it from valuable parts, re-selling them for profit and pocketing the refund fee.
5. Empty box fraud: Deceitful customers claim that they received an empty box instead of the merchandise and ask for a refund. This is also known as double-dipping fraud.
6. Stolen merchandise return: The fraudster pays online with a stolen credit card and gets a cash refund upon returning the item in-store. 
7. Cross-retailer return/price arbitrage: Returning an identical item purchased at a lower cost to pocket the price difference. 
8. Price switching: Placing higher-priced labels on items with the intention of returning them for cash.

It’s worth noting that the most sophisticated return scammers can certainly dent retailers’ profits. In 2019, for instance, the biggest European scam ever recorded by the USA’s National Retail Federation cost Amazon $370k after a Spanish buyer stole items and returned boxes filled with dirt to match the original items’ weight. 

How to Prevent Return Fraud

Once return fraud occurs, there’s little you can do except report the buyer to the marketplace, delivery service, or police. Confronting the buyer, especially if they are professional fraudsters, is often futile.

Some marketplaces offer solutions. For instance, on eBay, you can block buyers with unpaid item strikes, in risky locations, or with negative feedback scores. On Amazon, there’s less protection; you must rely on their fraud detection or manually check your FBA returns reports for suspicious activity. Spotting patterns of return fraud is possible, but by then, it’s usually too late.

Here are four ways that you can follow to prevent it and protect yourself in advance.

1. Require ID and contact for returns: Frequently, retailers only ask for a receipt when processing a refund. If the item was bought online, ask for the buyer’s contact details and cross reference them with the order. Have notes from your risk team accessible on the shop floor, or set up a mandatory check-in with them for flagged orders. This way, you can prevent refunding items purchased with stolen cards.
   
2. Eliminate cash refunds and offer credit or gift receipts: Fraud begins at the incentives. If you can, try to offer credits or gift receipts instead of cashbacks on returns. Criminals aren’t looking for items; they want to launder money through your store, while regular customers might be just as satisfied with a new opportunity to purchase.
   
3. Update your return policies: While there are consumer protection guidelines detailing the musts of return policies, you can still use them to mitigate threats. For example, by weighing electronic items upon return and comparing this to their original weight, you can eliminate bricking altogether.
   
4. Read your buyers’ digital footprint: Digital footprint analysis is a term used in fraud prevention. It is an advanced process that was once only manageable (and scalable) by the biggest e-tailers, as industry-grade tools were expensive and complex to integrate. Today, they are much more accessible and cost-efficient.

Return Fraud Detection

As businesses scale, the risk of encountering return fraud increases, necessitating the implementation of sophisticated detection methods. Employing advanced technologies and thorough analysis can help identify and mitigate fraudulent activities in real time. Key strategies include:

• Machine learning and behavioral analytics: Machine learning algorithms can process vast amounts of transaction data to identify unusual patterns and behaviors indicative of fraud invisible to the human eye. By continuously learning from new data fed into it, these systems can adapt and improve their detection capabilities, making it harder for fraudsters to bypass them.
• Digital footprint analysis: This technique involves examining the digital traces left by customers during their interactions with the online store. By analyzing elements such the lack of social media presence, IP addresses, device information and browsing behaviors, businesses can detect inconsistencies and suspicious activities that may signal fraudulent intentions. Digital footprint analysis, once exclusive to large e-tailers due to its complexity and cost, is now more accessible and cost-effective, allowing even smaller retailers to leverage this powerful tool.
• Historical data analysis: Analyzing past return transactions provides valuable insights into common fraud patterns and red flags specific to a business. By identifying these patterns, retailers can develop risk profiles and take proactive measures to prevent future incidents. This historical analysis helps in recognizing repeat offenders and understanding the tactics they use, enabling businesses to refine their fraud detection strategies continuously.

Implementing these advanced detection techniques helps retailers stay ahead of fraudsters, protecting their inventory, reputation and bottom line.

Explore the Cost of Return Fraud

As mentioned above, calculating the true cost of return fraud is hard. It does not take into account the wasted resources and efforts required to ensure customer satisfaction, fight fraud, and update policies. But even with the most conservative estimates, the cost of return fraud is astronomical:

• According to the NRF (National Retail Federation), annual losses from return fraud are estimated at $18.4 billion in the US alone.
  
• Combined with other forms of fraud, the figure climbs up to $24 billion.
  
• 50% of return fraud is wardrobing, where customers return non-defective but used merchandise.
  
• The holiday season is particularly challenging for retailers as 1 in 3 items purchased between Thanksgiving and New Year’s Day will be returned.
   
• According to Deloitte, 10% of all supply chain costs are now dedicated to reverse logistics, which includes dealing with items fraudulently returned.

Key Takeaways: Detecting and Preventing Return Fraud

Return fraud is increasing, and it puts retailers in a challenging position. Making your return policy too strict could see you lose business. If it’s too lax, unscrupulous buyers and competitors will abuse it. 

But thanks to modern tools for preventing fraud, you can easily flag suspicious shoppers without technical skills or the need for a dedicated loss-prevention budget.

Return fraudsters who operate at scale have to create multiple accounts fast with a list of credit cards. A good data enrichment tool for digital footprint analysis can spot the riskiest buyers before they damage your business with excessive returns.

Frequently Asked Questions

Useful Links:

• SEON: 7 Types of Ecommerce Fraud: How to Prevent & Detect them
• SEON: Guide to Chargeback Fraud Detection & Prevention
• SEON: Friendly Fraud: What Is It & How Do You Stop It?

Learn more about:

Browser Fingerprinting | Device Fingerprinting | Fraud Detection API | Fraud Detection with Machine Learning & AI

Sources:

• Deloitte: Bringing it Back – Retailers Need a Synchronized Reverse Logistics Strategy
• Newsweek: 22-Year-Old Allegedly Scammed Amazon Out Of $370K With Return Shipments Filled With Dirt
• NRF: Naughty or nice: 3 things to know about fraud during the holiday season