Ecommerce returns fraud v. refund fraud: Details and examples
Vaishali Ravi
·December 9, 2024
Returns fraud is a growing problem for businesses around the world, and it’s hitting ecommerce businesses especially hard.
Close to 14% of all retail returns in the United States are impacted by fraud or abuse, leading to $101 billion in losses. Return rates can be up to three times higher for online sales v. in-store—so online businesses are likely to see much higher impacts from fraudulent returns than brick-and-mortar businesses.
In this article, we’ll explore some common forms of returns fraud and abuse, and how they differ from refund fraud. We’ll also showcase tactics that your brand can take to mitigate the impact of returns fraud on your business, so that you can protect your profit margins from scam artists.
Ecommerce returns fraud v. refund fraud
Ecommerce returns fraud refers to the process of exploiting a retailer’s returns policy to receive unearned benefits, such as a refund or free products. Some common examples of returns fraud include:
- Wardrobing: Purchasing an item to wear or use it for a single event, and then sending it back. (Many content creators, for instance, purchase clothing items to wear them in social media posts, and then send them back for a refund.)
- Empty box fraud: Requesting a refund, then sending back an empty or weighted box while keeping the item for free.
- Switch fraud: Returning a counterfeit, broken, or cheaper version of the original product for a refund, while keeping the more valuable item.
While similar, refund fraud involves the process of fraudulently obtaining a refund without returning an item. For example:
- “Item not received” fraud: Falsely claiming that an item was not delivered and requesting a refund, while keeping the original item.
- False defective claims: Falsely claiming that the product doesn’t work to obtain a refund, while keeping the item.
- Chargeback fraud: Requesting a refund for a product from the buyer’s credit card company.
While returns fraud is focused on abusing your returns policy to return non-eligible items and get a refund or free item, refund fraud involves the shopper being deceitful about your product’s condition in order to receive a refund without returning the item.
How to curb returns and refund fraud
Both forms of abuse can be damaging to your business—but you can be proactive in putting a plan in place to stop them.
Reduce loss to fraud
Reduce loss to fraudBuild a strong returns policy
Your returns policy should help shoppers feel confident that you stand behind your brand—but make it clear what’s allowed and disallowed in terms of returns. If you require that products must be in new condition with the tags still on to be eligible for a refund, state that up front. In some cases, you may have different criteria for different product types, particularly if you sell intimates or swimwear, which have higher hygiene standards to adhere to.
When a shopper requests a refund, you can then use Loop’s Workflows to ask them whether the item is still in new condition, and automatically reject the request if it doesn’t meet standards. By setting up customized workflows for different product types based on their return criteria, you’ll be able to automate returns management and ensure that your shoppers aren’t abusing your policies.
Monitor for fraud
There are some telltale signs of returns fraud—and Loop’s Fraud Model can help you detect them before your brand is impacted.
Based on millions of returns insights from our merchant transactions, our machine learning algorithm identifies high-risk return requests. You can flag these transactions for further review, or automatically set up next steps in Workflows. For example, if you’d normally offer “Keep Item” on a return, you might disallow that function for a high-risk return. Or, if the shopper is returning multiple high-value items, you can delay the processing of a refund until after the products have been through a manual inspection, rather than automatically refunding the items upon scanning by a shipping carrier. To date, we’ve caught 87% of all attempted return fraud attempts, and our model is improving all the time.
Prioritize exchanges over refunds
Rather than losing out on profits by shoppers abusing your policies, you can create more stringent policies around refunds—while optimizing for exchanges, which can help boost customer retention.
For instance, consider joining the more than 60% of ecommerce merchants who now charge return shipping fees on refund requests. By charging a return fee, you can disincentivize shoppers who are trying to use your generous returns policy as a virtual fitting room, while recouping more of your reverse logistics expenses. By using our new product, Offset, you’ll be able to recoup these fees upfront during a transaction by asking shoppers whether they’d like to pay for free returns later.
Waiving return fees on product exchanges helps you push more shoppers towards choosing another item. With Loop’s Shop Now & Later features, they can effortlessly browse your available inventory, and apply their credit towards any item in your shop. You’ll deliver a great customer experience that builds brand loyalty and cuts down on returns abuse.
Want to learn more about how Loop can help you reduce returns abuse? Get a demo.
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