Merchandise returns are a regular part of doing business whether online or in person. Customers expect returns policies to enable them to return unwanted items quickly and easily. However, many fraudsters aim to exploit a merchants return policy to their advantage for monetary gain. This kind of fraud is called ‘return fraud’ or ‘policy abuse’.
Table of contents:
- What is return fraud
- Different types of return fraud
- The impact of return fraud on merchants
- Are merchants tracking returns?
- Can return fraud be prevented?
- What tools are available to merchants to prevent return fraud?
What is return fraud
Return fraud is a type of friendly fraud that occurs when consumers defraud merchants through their return policy. Essentially fraudsters exploit a merchant’s return policy in order to steal money or merchandise. Despite being one of the most common forms of retail and ecommerce fraud, it is also one of the most difficult to prevent. According to a recent survey by the National Retail Federation, in the last year alone, US merchants lost over $25.3B to return abuse and fraudulent returns.
Below is a list of the different types of return fraud:
Different types of return fraud
- Stolen Merchandise Return: Shoplifting merchandise or purchasing the item online using stolen payment methods with the goal to return the goods for a full price refund, plus any sales tax. This becomes more difficult when merchants or retailers require customers to produce receipts for the purchase. But even if a fraudster purchased the item via CNP transaction, they can still produce a receipt and return the item for store credit or cash. This is by far the most common type of return fraud
- Receipt fraud: Occurs when fraudsters utilize a reused, stolen or falsified receipt to return merchandise for profit. Alternatively, returning goods purchased on sale or from a different store location at a lower price with the intention of profiting from the difference.
- Employee or insider fraud: When a fraudster receives help from employees to return stolen goods for full retail price.
- Price switching: Taking a higher price sticker or label and placing it on lower priced merchandise with the intention of returning the goods at a higher price than what they purchased for.
- Price arbitrage: Purchasing differently priced, but similar-looking merchandise and returning the cheaper item as the expensive one.
- Merchandise switch fraud: Purchasing a working item, and returning a damaged or defective identical item that was already owned.
- Bricking: Bricking fraud typically involves purchasing a working electronic item, and deliberately damaging or stripping it of valuable components to render it unusable, then returning the item for profit. Sometimes fraudsters simply take the valuable electronics from inside the item and replace them with a heavy weight to give the illusion that the item is intact. The item is then returned and oftentimes resold. When the new buyer discovers the damaged item, they return it again–causing double the damage to the merchant and possibly hurting their reputation online.
- Cross-retailer return: Returning or exchanging an item purchased at another retailer (usually at a lower price) for cash, store credit, or a similar higher-priced item at another retailer.
- Open-box fraud: Purchasing an item from a store and returning it, opened, with the intent to re-purchase it at a lower price under the store’s open-box policies. A variation of price-switching fraud.
- Wardrobing Fraud: Wardrobing fraud involves fraudsters wearing a fashion item once or twice and then returning it as new and never used.
In a recent survey by the National Retail Federation, merchants have listed which type of return fraud they have been impacted by the most. More than half of all merchants questioned identified stolen merchandise returns as the leading cause of return fraud.
The impact of return fraud on merchants
Besides the obvious monetary losses that result from fraudulent returns, merchants need to also be aware of hidden costs related to return fraud. These hidden costs are the additional financial damages not related directly to the value of the merchandise. However, return fraud has a direct impact on these costs; they must be taken into account when calculating the overall impact from policy abuse and fraud.
Online Reputation – In some cases of bricking fraud, sophisticated fraudsters cleverly reseal the returned merchandise. Unsuspecting employees avoid inspecting the packages in more detail and restock the goods as ‘open box’ or ‘refurbished’ items. Consumers may be aware of the risk of buying these kinds of items, but oftentimes online merchants do not make the distinction clear and simply resell the items as regular inventory. Once a consumer receives a bricked item, they often post pictures on social media leading to negative reviews and impact on the merchants reputation. For example here is a video from a customer who bought an expensive camera from Amazon but received a brick instead. The video has garnered over 300k online views.
Manpower – many merchants employ a dedicated team to handle and manage returns as well as investigate fraudulent returns. As return volumes grow this team becomes backlogged and bogged down. During holidays and peak times, merchants require to hire additional staff in order to cope with the additional return volume.
Sales Tax – Since the cost of the returned item must be refunded, the sales tax must also be refunded. According to a National Retail Federation survey merchants lost an estimated $2B in lost local and federal sales tax revenues due to fraudulent returns.
Are Merchants Tracking Returns?
Most merchants keep track of returns — but the data collected is typically very basic and does not include personal information from the customer. The data is often not shared with eCommerce teams which creates a vulnerability in the merchants ability to identify fraudsters. It’s crucial that as much data as possible is collected from fraudulent returns. Building this kind of omnichannel database greatly reduces the gap in the merchant’s abilities to properly track and identify bad actors.
Can return fraud be prevented?
As with all types of fraud, it is impossible to completely prevent return fraud, but merchants can take steps to mitigate the impact from return fraud on their business. As mentioned above, collecting fraudulent return data greatly improves the merchants ability to mitigate future return fraud, especially in omnichannel retail where purchases are made online and returned in-store. In addition many of the current traditional card-not-present fraud solutions are expanding their offerings to also address return fraud.
In addition to this many retailers do not request any kind of proof of purchase when completing a return. They rely on the product SKU which is much more open to merchandise switching and price switching frauds.
What Tools Are Available to Merchants to Prevent Return Fraud?
Preventing return fraud is now considered an essential service by many of the top online fraud prevention solutions. They use the same methods to prevent it as they do for other forms of card not present fraud. This includes using their collective merchant network to identify users which violate policies frequently, scoring each user, and flagging them in their network. This means that if one fraudster abuses return policies in one merchant it will be much more difficult for the same fraudster to attempt return fraud on another merchant within the same network. As machine learning fraud solutions become more effective and sophisticated, they make card-not-present fraud much more difficult to execute. As such fraudsters will turn to easier avenues to pull off their crimes such as policy abuse.
