How to protect your margins from rising return fraud
Taylor Humphrey
·April 9, 2024
Shopping online has become so convenient that some customers have found ways to game the system. How? Through return fraud and abuse, which has become a big issue for retailers.
Return fraud and abuse refer to deceptive or manipulative practices used by consumers to exploit return policies of retailers. This can include activities such as returning stolen merchandise, falsely claiming refunds, or exploiting lenient return policies for personal gain.
Not only does it add complexity to your warehousing operations by increasing the number of returns your team needs to process, but recent data is finding that it significantly eats into your margins.
Challenges with Rising Return Fraud
- Fraud is increasing
- Retailers lose a significant amount of revenue
- For every $100 in returned merchandise accepted, retailers lose $10.40 to return fraud.
What This Data Tells Us
Return Fraud and Abuse Are On The Rise
More customers are exploiting lenient return policies, leading to financial losses while complicating the returns process.
For example, shoppers might purchase an item, wear it for an event, and then attempt to return it, often in poor condition. Another common practice is “bracketing,” where a customer buys multiple sizes of the same item and returns the ones that don’t fit.
More overt forms of abuse include returning an empty box or falsely claiming an item was never received, prompting the retailer to send a replacement.
This issue is also amplified in international expansion and growth because the added expenses and complexities of cross-border shipping exacerbate the fraud problem.
Of course, no one wants to lose money this way, which is why it’s crucial to have a return policy that’s fair to honest customers but also has safeguards to catch those trying to game the system.
Opportunities to Overcome Fraud Challenges
- When surveyed, 37% of US shoppers said a fee for returns would dissuade them from engaging in fraud or abuse.
- Retailers may have no choice but to add more friction to their returns policies, and 56% of Loop shops charged a fee for refunds in 2023. How to Unlock These Opportunities
Identify Returns Fraud and Act Swiftly
There are four common types of return fraud to be aware of:
- Unintentional Return Fraud: Shoppers mistakenly return ineligible items.
- Prevention: Clear return policies and a configured returns portal.
- Wardrobing: Customers use items and return them for refunds.
- Prevention: Strict return conditions or a lenient try-before-you-buy policy.
- Stolen Credit Card: Fraudsters use a stolen card for purchases and try to get refunds on their own card.
- Prevention: Refunds are processed to the original payment method.
- Returning an Empty Box or Different Item: Scammers return an empty box or a lesser item for a refund.
- Prevention: Refunds are issued only after a thorough inspection of returned items.
How can you prevent fraudulent returns?
1. Use Different Processing Events for Different Types of Returns
If a shopper is looking to expose your return process online, they’re hoping that the refund will be issued before you see that they have defrauded you.
Instead, try processing the return at different points, depending on the type of return.
- Refund: Process once the return is inspected at the dock.
- Store Credit: Process the return when scanned at the post office.
- Exchange: Process the return when scanned at the post office.
How you can automate returns processing: Loop Workflows allow you to create customized returns scenarios, outside of your standard return policy, giving you the control you need to adjust for different risk levels.
2. Add Shoppers Who Commit Return Fraud to a Blocklist
Plain and simple, implement a policy to block fraudulent shoppers.
By adding them to a blocklist in your system, they will be unable to process returns automatically in the future. Instead, they will need to contact customer service for any return attempts.
This prevents them from abusing the system again without overly impacting the customer experience for honest shoppers.
Proof These Solutions Work
- Loop identified a 4.2% year-over-year increase in manual processing for fraud prevention, showing that merchants are putting more rigor around when they issue a refund or process a return.
- All-time, Loop merchants have used workflows to flag over 37,000 returns as potentially fraudulent, suspicious, or abusive of the return policy. As of Feb 2024, the total value of the flagged returns was just over $7.91M
Return Fraud Predictions
“In 2024, we expect to see a major shift in focus toward reducing e-commerce fraud and returns policy abuse to optimize the most costly returns and transactions that hurt the bottom line. From instituting return fees to tighter return windows, brands will utilize all the tools available to dissuade the worst offenders among their customer base. The trick is to do this surgically, strategically adding friction where its warranted and ease where it’s not”
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