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 considered friendly fraud. This means the fraudster genuinely purchases the product or service, albeit with an ulterior motive. The most common scheme is to buy an item of clothing, use it, and then return it, a process known as wardrobing.
While return fraud affects both online and brick-and-mortar stores, it is the former that is more frequently targeted by fraudsters. Items sold by online retailers are purchased with stolen credit cards, in which case the scheme becomes genuine payment fraud rather than friendly fraud.
11 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:
- Wardrobing or free renting: shoppers buy items, use them once and return them later. Often seen by consumers as a victimless crime.
- Opportunistic: buyers return an item after changing their mind, becoming impatient with delivery times, or finding the item on sale elsewhere.
- Seller sabotage: In the cut-throat world of online marketplaces, unscrupulous sellers have no qualms about depleting a competitor’s inventory to hurt them.
- Deliberate fraud: a return scam, where the fraudster purchases an item with a stolen credit card, returns the item and gets the refund in another account.
- Bricking: fraudsters return an electronic item after stripping it from valuable parts, re-selling them for profit and pocketing the refund fee.
- Empty box fraud: bad customers claim that they have received an empty box instead of the merchandise and ask for a refund. Also known as double-dipping fraud.
- Stolen merchandise return: a fraudster pays online with a stolen credit card, and gets a cash refund upon returning the item in-store.
- Cross-retailer return/ price arbitrage: returning an identical item purchased at a lower cost to pocket the price difference.
- Employee return fraud: relying on the store staff to return stolen goods for a full refund.
- Receipt fraud: reusing or falsifying receipts to return the goods, usually purchased at a lower price or with a stolen payment method.
- 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 sure make a dent in 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.
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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:
Consequences of Return Fraud for Retailers
If you are an online store, you stand to lose a lot from return fraud. Aside from the obvious monetary loss, you also have to account for wasted time, shipping costs, admin fees, and communication efforts in dealing with the customer.
If you are dealing with a repeat offender, you must also consider banning them, which ultimately means losing a customer. There may even be retaliation from a customer who believes they have been unfairly labelled as fraudsters, most notably in the form of poor online reviews.
Last but not least, tightening your return policy can also have a negative effect on your brand reputation, which can affect sales and customer loyalty. In other words, retailers have little choice but to accept return fraud as a cost of doing business, while making every effort to minimize its impact.
Consequences of Return Fraud for Fraudsters
While return fraudsters are technically criminal, the consequences tend to amount to little more than a slap on the wrist. Return fraud is hard to prove, and harder to prosecute – unless it is committed at scale.
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. Even then, the fraudster was released on a €3,000 bail.
Even if the law sides with the retailer, chances are that the prescribed fines and jail time for opportunistic fraudsters are unlikely to materialize. What will happen instead is that the store will block the customer’s account.
Note that blocklisting customers can also have negative consequences, as it incentivizes them to create multiple accounts to continue their schemes.
Consequences of Return Fraud for Stolen Card Owners
People whose credit card numbers have been used for return fraud are often overlooked. In a sense, it’s because the chargeback process is designed to protect them. As soon as the unfamiliar transaction appears on their account statement, they can contest the charge with their bank, which will likely issue a chargeback.
But this can also be a demanding process that requires time and effort, not to mention financial distress if the purchase overdraws your account, for instance.
How to Prevent Return Fraud
There is little you can do by then except take it on the chin and report the buyer to the marketplace, the delivery service, or even the police. It’s also possible to confront the buyer, but with professional fraudsters, it’s pretty much a lost cause.
Some marketplaces have solutions in place designed to help with your due procedure. On eBay, for instance, you can set up buyer requirements – you can block buyers with unpaid item strikes, in risky locations, or those with negative feedback scores.
With Amazon, there is no such protection. You’ll have to rely on their internal fraud detection methods, which can leave a lot to be desired, or keep manually checking your FBA customers’ returns reports to spot suspicious activity yourself. And while patterns that point to return fraud are easy enough to spot, once it’s happened, it’s already too late.
Here are four ways that you can still protect yourself in advance.
- 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.
- 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.
- 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.
- 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.
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.
Using Fraud Detection Software to Fight Return Fraud
In recent years, innovative fraud detection software has made it possible for anyone to use anti-fraud tools, even with very little technical knowledge.
For instance, a quick reverse email lookup tool could tell you a lot about a new buyer just from their email address.
As you can see, all the information returned can help us understand whether we’re dealing with a legitimate user or a suspicious account. The risk score at the top lets us know how risky the account seems, based on:
- email domain: Return fraudsters often have to create multiple email accounts. To scale their operations, they go through free domain addresses. Address creation date, and whois database checks also help gauge the legitimacy of the shopper.
- social media lookup: Similarly, fraudsters won’t have time to connect to social networks, so an absence of accounts linked to that email can be a red flag.
- data breaches: An email address that appears on a data breach is actually safer. This is because it proves that it’s a mature address, and one that’s been in use before.
If you gather your buyers’ phone numbers during checkout, you can perform a similar check:
Here, you’ll be looking at country of origin, carrier, and type, along with instant messenger use (for instance, whether the phone number is connected to WhatsApp, Telegram or Viber).
Combining all these data points is a process known as data enrichment and the good news is that it works in real-time, it’s affordable, and you can even do it directly from a Chrome extension.
The rationale behind this check is that a fraudster will probably use throwaway details that have no social media presence, while a regular buyer will give you the address or number they use for their everyday life – for example, on Twitter, Facebook or WhatsApp.
Key Takeaways: Reducing 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.
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Frequently Asked Questions
Analyze the patterns of previously flagged fraud orders and set up rules to monitor historically suspicious signs – customers connected to previously charged back purchases would be the prime example, as are accounts using throwaway details.
A proper fraud detection solution allows you to flag suspicious orders, while connecting your risk team with your refund processing department and setting up information sharing can help you curb fraudulent returns before they happen.
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Bence Jendruszák is the Chief Operating Officer and co-founder of SEON. Thanks to his leadership, the company received the biggest Series A in Hungarian history in 2021. Bence is passionate about cybersecurity and its overlap with business success. You can find him leading webinars with industry leaders on topics such as iGaming fraud, identity proofing or machine learning (when he’s not brewing questionable coffee for his colleagues).
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