The easy way to handle return fraud.

Many ecommerce brands live in fear of falling victim to return fraud. We’re here to tell you why this shouldn’t be your primary concern and explain how to mitigate the risks.

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It seems like every article out there is talking about how brands are hemorrhaging money as a result of return fraud. Today we want to challenge that point of view.

But the truth is that only 5% of returns are fraudulent. Yes, you read that right - only 5%.

That’s why you shouldn’t build your return policy for the minority of people that will abuse it. Instead, we’ll explain how to put the right checks and balances in place to offset the potential effects of return fraud.

Focus on providing the best experience for the majority of customers

It may be tempting to hone in on that 5% and dedicate resources to protect your brand. This usually takes the form of inflexible policies, lots of legalese on your website, and a complicated returns process. 

While this might shield you from occasional return fraud, it’ll also lead you down a path that creates a subpar experience for most of your customers. Worse experience means less repeat customers.

Here is how you should approach building your return policy:

Build your return policy for the 95%, not the 5%. When you focus on trying to prevent the 5% from breaking the rules, you’re penalizing the 95% of customers who aren’t doing anything wrong. Instead, build for the customers who will be returning items as intended. This means being flexible, straightforward, and customer-focused in your policies and processes. 

Assume good intent. Nobody wants to be treated with mistrust. So always assume good intent in your customers unless they prove otherwise. Remember that customer retention leads to profit, so don’t put that in jeopardy. If you do experience return fraud, you can handle those situations on a case-by-case basis as they happen.

Ask yourself if you actually need to insure against return fraud

There are some tools that will issue a refund instantly upon customer request. If the item never comes back, they’ll cover that loss as well. Sounds great, right? While this may seem like a good idea on the surface, but it does have its flaws.

You pay more than you protect

Any tool that is offering to cover your return fraud is going to charge you a premium per return/exchange for that insurance. For argument's sake, let's say its 10% per return processed. Your brand gets 1,000 returns per month and at a 5% fraud rate, 50 of them will be fraudulent.

If you are paying for return fraud insurance or risk protection make sure the fraud you are seeing is worth the cost. Only 5% of returns are lost to fraudulent activity.

Again for argument sake, let's say your brand’s average return item value is $20. That means that you could expect to lose $1,000 to fraudulent activity in the month (more on how to minimize this later). If you elected to pay 10% to insure all your returns that would have cost $2,000 to save you from $1,000. Ask yourself how high you anticipate fraudulent behavior to be. Unless you think you will have more than the average brand you will be paying more to protect against it than it will actually cost you.

In summary:

1,000 returns x 5% = 50 fraudulent returns

50 returns x $20 = $1,000 lost to fraud

or

1,000 returns at $20 = $20,000 in return value

$20,000 x 10% = $2,000 to protect against fraud

Your return fraud rate should decline over time

In the next section, we will be going over a few ways you can build a process that minimizes fraud while still providing a great customer experience. Many tools allow you to block and limit how customers interact with your return policy. 

Reporting and admin tools allow you to see customers who are abusing the system and you can take action right away to prevent further abuse. As you find these customers and adjust your policy you will find that you can drive your return fraud rate down as you learn.

Finding the right balance of protection and customer experience

So what’s the best way to balance protecting yourself and still providing an amazing customer experience? How can you minimize the potential losses around return fraud without compromising your return policies experience?

Use different processing events for different types of returns

If a customer is looking to expose your return process online, 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 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 customers.

Processing a return once scanned at the post office is a great compromise

Returns are most susceptible to fraud when the return is processed instantly. That means that the customer is given the funds back as soon as they complete a return request. 

This is done so that customer vulnerability is removed quickly, and they now know they have the funds to make another purchase. From a customer experience standpoint, this is great, but it does leave you unnecessarily vulnerable. 

There is now zero incentive for the customer to actually send back what they are returning. They now have what they wanted from you… they have accomplished their goal. This will cause customers to delay when they actually send the product back and can actually encourage people to abuse your return process completely on accident.

Processing a return when the customer gets the package to the post office is a great way to put them in control of when they get thier return.

A great compromise is to process the return as soon as the package is scanned in at the post office. It encourages the customer to get the package into the mail and allows them to be in control of when the return is processed (as drop off) instead of waiting for someone else to receive and review at some point in the future. The longer the customer waits the more vulnerable and frustrated they become.

Add customers who abuse the system 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 customers to the block list. Essentially, what this means is that if a customer 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.

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 customers 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 the 95%.

Want to learn more about how Loop can help you optimize your returns process? We would love to show you how. Just get in touch with our team.