The ultimate guide to preventing ecommerce return fraud
As a brand, it’s important to offer a generous returns policy that gives customers a chance to see if your product is the right fit for them. The cost of processing and refunding returns is a normal business expense that helps you build continued customer loyalty and satisfaction. In fact, 95% of customers say that a smooth returns process will encourage them to buy from a merchant again.
At the same time, it’s important to keep tabs on your return process to make sure it’s not being abused frequently. The rate of returns fraud has been jumping every year: In 2024, U.S. retailers lost $103 billion to fraudulent or abusive returns practices, representing 15.14% of total return volume.
In this guide, we’ll explore the state of ecommerce returns fraud today, and provide you with strategies that your brand can use to mitigate and combat fraudulent and abusive returns behavior, while still delivering a great customer experience for the rest of your customer base.
The state of returns fraud in 2024
Globally, retailers are seeing a jump in bad behavior when it comes to product returns.
Last year, Loop surveyed over 600 merchants in the U.S., U.K., and Australia to get their take on the situation. We found that 99% of all the brands we talked to have experienced fraud or policy abuse over the past 12 months, and 90% of them agreed that the incidence had increased from the previous year. Globally, our merchants said that returns fraud was the most significant challenge impacting their business operations today.
Returns fraud leads to negative consequences including loss of revenue (the top answer for 24% of respondents), as well as loss of customer trust, higher operational costs, and damage to brand reputation (tied for 16% of respondents).
To successfully combat returns fraud and abuse, retailers need to understand the different forms it can take, and build efficient processes for mitigating it.
Types of returns fraud and abuse
Bracketing
Bracketing is one of the most common types of returns fraud. It refers to the act of purchasing multiple products with the intention of sending some or most of them back—essentially, using your brand’s return policy as a home try-on service. While it may go against the intended use of your products, it’s a surprisingly common act, with nearly half of ecommerce customers admitting to bracketing, especially when sizing options aren’t clear.
Other common reasons customers bracket apparel? Because they’re not able to try on the items in a fitting room (36%), they’re unfamiliar with the brand (26%), or they’re not sure of their size after weight gain or loss (23%).
Of the customers who engage in bracketing, many do so with alarming frequency: Our Consumer Fraud Report found that 25% of these customers do so at least once a week.
How to address it:
Building the right approach to combat bracketing can be delicate. After all, you want to ensure that your customers find the right fit and style—but not at the cost of your profits, when less than half of all returned products can be resold at full price.
So what should you do? There are two competing strategies at play:
Embrace it
If you can’t beat ‘em, join ‘em. Some retailers have built their businesses around encouraging bracketing, at least for loyal customers. For example, Amazon Prime members are entitled to take advantage of the brand’s Prime Try Before You Buy program, in which they get to choose six items to try out at home for a week. They can return as many as they like, and are only charged for the items they wish to keep.
Taking this approach can help retailers set guidelines around behaviors that customers are likely to engage in anyway, and turn bracketing into a marketing strategy. It may encourage shoppers to try out more expensive products than they might otherwise select, which could result in a higher customer lifetime value for the products they decide to keep.
Discourage it
On the other hand, we’re not all trillion-dollar brands like Amazon. Smaller brands may prefer to discourage customers from bracketing, rather than embracing it.
In this case, it can help to implement return shipping fees on your returned products, which will lead shoppers to think twice before making a purchase they’re not confident that they’ll keep.
But in order to reward brand loyalty, consider offering free exchanges if the customer decides to swap out one size or color for another, or even to try an entirely different product from your shop. Using Loop’s Instant Exchange feature, they’ll be able to instantly apply their refund credit towards the new product, with waived return shipping fees. This approach can help you retain customers who might otherwise look for options elsewhere, fostering a continued relationship with your brand.
Improve your product descriptions and visuals
Whichever approach you decide to take with bracketing, you can help your customers feel more confident in their purchases in the first place by providing as much information up front as possible.
That means it’s important to prioritize high-quality visuals, including photography and videos, and encouraging customers to share their own user-generated content, along with reviews that share their perspectives on the products they’ve purchased. Size guides that include measurements and comparisons to other brands can also help customers feel more confident in their product sizing, so they’ll be less inclined to purchase multiple variants to try on.
By providing your shoppers with an abundance of information up front, you’ll help them gain confidence in their choices, discouraging bracketing.
Wardrobing
Another common form of returns abuse is known as “wardrobing,” and refers to the practice of purchasing an item just to use or wear it once, and then return the product for a full refund.
This form of returns abuse is especially prevalent in shoes, accessories, and apparel, with 37% of online shoppers admitting to taking part in this practice.
Shoppers often take part in wardrobing because they need an item for a one-time event, such as a wedding or dance, and do not want to pay the full cost of the item. Social media influencers, who are regularly showcasing their #outfitoftheday, are also prone to engage in wardrobing: Forter shared an anecdote about a fashion influencer who returned 85% of the merchandise she purchased from a retailer after snapping photos in the clothes.
Wardrobing was even more common than bracketing in our Consumer Fraud Report, with 30% of respondents who’ve engaged in returns fraud claiming that they’ve bought items they know they plan to return at least once a week.
How to address it:
Set a strict returns policy
When it comes to wardrobing, a clear-cut returns policy is your best defense. You may want to set restrictions on the condition of items that can be returned for a full refund, specifying that items must be in new, unworn condition with the original tags still on. If items have been worn, you may still offer some leniency, but offer these customers access to an exchange or store credit, rather than a full refund. Loop makes it easy to set conditions on returns and ask customers the right questions to ensure that they’re not abusing your returns policy, offering them either a refund or an exchange depending on the circumstances.
Of course, if an item is truly defective, it’s important to stand behind your product with a strong warranty, offering either a repair, replacement, or refund—but if there’s nothing wrong with the product, you’re entitled to build returns policies that protect your brand from abuse.
Identify and blacklist repeat offenders
When it comes to wardrobing, you’ll also likely find a lot of repeat offenders. If certain customers have a habit of repeatedly returning merchandise that shows signs of wear, you may choose to blacklist them from shopping with your brand in the future after an initial warning. While it’s always worth making concessions for great customers, those who take advantage of your brand aren’t worth fighting for.
With both types of returns abuse, it can also be a helpful deterrent to make sure that customers understand the repercussions of returns fraud.
Of our Consumer Fraud Report survey respondents that never engage in returns abuse, their reasons included ethical/moral guilt (67%), have a fear of the legal consequences (14%), or worry about the impact on the business/retail industry (13%). Additionally, 23% said they’d be less likely to make a return if they knew it had a negative environmental impact.
By providing messaging around your returns process that shows the negative impact that fraudulent returns can have to both your business and the environment, you can make sure that shoppers think twice before ordering products they don’t intend to keep.
Organized returns fraud
Wardrobing and bracketing are frustrating, but most customers who participate in them aren’t willfully attempting to defraud your store. That’s not the case for these organized forms of returns fraud, which are sophisticated schemes perpetuated by groups of scam artists, with the intent to deceive merchants. Such groups often take advantage of retailers with vulnerabilities in their returns processes.
Return fraud with a stolen credit card
In some cases, a fraudster will purchase items with a stolen credit card, and then attempt to have the refund processed to their own credit card. While this doesn’t impact your store directly, you can stop this type of fraud in its tracks by ensuring that refunds are processed to the original method of payment.
Returning an empty box or different item
Some con artists will request a return and then send back an empty box or an item worth less than the original—or in some cases, they may send back the original item with expensive components taken out. They trust that they’ll receive their refund before the merchant has inspected the merchandise. You can get around this by processing refunds only after inspection rather than at the post office.
Refund fraud
Retailers lose millions annually to refund fraud, in which criminals exploit generous returns policies to profit from stolen merchandise. Strategies may include saying that the item never arrived to get another one for free; requesting a refund and taking advantage of a “keep item” strategy to resell the original product; and in some cases, even paying off an employee to mark items as returned even though they were never sent back.
How to address it
Remember that customer retention leads to profit, so don’t put that in jeopardy by creating strict policies that treat all your customers like criminals, when only a small fraction are abusing your policies. Instead, focus on building safeguards and controls around high-risk transactions, and use AI fraud detection tools to alert you when something looks suspicious.
To prevent return scams, you can try the following tactics.
Use different processing events for different types of returns
If a shopper is looking to profit from stolen merchandise, they are usually doing so by keeping the product and sending you back an empty box, a fake product, or a package of rocks. They are hoping that the refund is issued before you see that they have defrauded you.
This is only an effective tactic when the return is for a refund to the original payment method. If they are getting store credit or a new product, it is way less effective of a scam.
That is why we recommend better return policies that involve processing the return at different points for different types of returns.
- 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
By processing the non-refunded returns at the post office, you are striking a great balance of protection and speed for your shoppers.
Add shoppers who commit return fraud to a block list
One of the easiest ways to deal with return fraud is to simply block those who are being fraudulent. Building a policy that tries to eliminate all fraud often leads to a bad customer experience for the majority.
At Loop, you simply add shoppers to the block list. Essentially, what this means is that if a shopper commits return fraud, you can block them in your system. If that same person tries to process another return, they won’t be able to do it automatically and will be required to talk to the customer service team to prevent them from abusing the system again.
Use Loop’s Fraud Model to flag high-risk return transactions
Loop’s custom AI model is built from the data around millions of returns transactions, including those that have been verified as fraudulent, and has unlocked actionable insights from all that data. Our smart fraud protection tool can successfully detect $0.87 of every $1 of confirmed fraudulent transactions, flagging high-risk behavior so that your team can conduct a manual review and take action against the fraudster. Using our AI tool, you’ll be able to stop fraudulent transactions from slipping through the cracks, and protect your brand’s profit margins.
Don’t let return fraud ruin the experience for everyone
Avoid the mistake of inflating the potential impact of return fraud on your business. The truth is that most shoppers follow the rules and want to build a positive relationship with your brand. Use these tips to minimize the risk of the 5% but, otherwise, stay focused on creating a great customer experience for the 95%.
Want to see how Loop can help you curb returns abuse and fraud? Book a demo.
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