Return fraud is on the rise, and it’s threatening to take away the profits of many businesses. It’s estimated that return fraud costs businesses billions of dollars each year, so it’s imperative that companies learn how to detect and fight it. The key to combating return fraud lies in understanding what it is and how it works.
Return fraud includes any attempt to return an item that was not actually purchased, or to return a different item than the one purchased. It can also involve returning stolen merchandise, returning used items as if they were new, or trying to get a refund for a counterfeit item.
Fortunately, there are several steps businesses can take to detect and fight return fraud, including verifying customer information, verifying purchase information, and tracking return patterns. By understanding how return fraud works and implementing the necessary measures to detect and fight it, businesses can protect their profits and keep their customers safe.
What is Return Fraud?
Return fraud, also known as return abuse or scamming, is one of the most common types of retail fraud. It is the act of purchasing or receiving products and then dishonestly returning them for a refund or store credit, in other words purchasing items with the intention of receiving a refund for them. While it can be done online and in-store, an increasing amount of return fraud is occurring online.
Note that there are many types of return fraud, which we’ll explain in more detail below. But the general idea is that fraudsters are taking advantage of retailers’ return policies to obtain products or money for free.
Why is it Important to Detect Return Fraud?
Return fraud is an ever-growing problem that affects retailers worldwide. That’s why it’s so important to detect return fraud in order to protect your business and your customers. Return fraud can take many forms such as return schemes, deceptive returns, and fraudulent returns. These schemes can cost retailers millions of dollars in lost revenue each year.
Detecting return fraud can help to reduce this cost by identifying suspicious returns and preventing them from being accepted. It also helps to protect customers from being scammed or taken advantage of by fraudulent returns. So, the next time you’re considering accepting a return, make sure to take the time to detect return fraud. It can help protect your business and your customers from costly losses.
As the retail industry continues to shift towards e-commerce, it’s more important than ever for retailers to be on the lookout for return fraud. Customers expect fast and easy returns if they’re unsatisfied with their purchase. As such, retailers need to find ways to curb fraudulent returns without putting up unnecessary roadblocks for legitimate customers. Otherwise, they risk compromising the customer experience.
Moreover, if retailers don’t detect and stop return fraud, they can become the victims of more serious crimes like identity theft or money laundering. So, it’s not just important to be able to detect return fraud; it’s also essential for retailers to stay one step ahead of scammers.
Impact and Losses of Return Fraud for Businesses
Return fraud is a costly problem for businesses. Not only is it an expensive issue to deal with, but it can also damage a company’s reputation and put its customers at risk. According to research, businesses can lose up to 3% of their annual revenue to return fraud. This includes both losses from dishonest customers as well as mistakes made by the company itself.
The impact of return fraud also extends beyond the bottom line. Customers may become wary of making purchases if they think their returns won’t be accepted. This could lead to a decrease in sales, as well as a loss of trust in the company.
Businesses must be aware of the consequences of return fraud and take precautions to protect themselves from losses. They should also educate their employees to recognize signs of fraudulent returns and advise customers on the company’s return policy. By taking these steps, businesses can reduce the impact and losses of return fraud and protect their customers.
Perhaps the most immediate impact of return fraud is on a company’s bottom line. When fraudsters obtain products for free or with a significantly reduced price, retailers lose money that they would have otherwise made. In fact, “The National Retail Federation (NRF) found that for every $100 of returned merchandise, retailers lose $10.30 to fraud.”
That amounts to roughly 24 billion USD annually in losses across the retail sector. Beyond lost revenue, return fraud can also lead to other impacts on businesses. It can also be damaging to businesses’ reputations and relationships with customers. If retailers are seen as being lax or too permissive with their return policies, it can lead to a loss of customer trust.
Types of Return Fraud
In order to prevent return fraud, retailers must first understand the different types of return fraud they may encounter. They should be prepared for all the following events:
Returning stolen items
A common type of return fraud is when thieves steal products and then return them for a full refund. Often, these high-value items like electronics or jewellery can be refunded quickly for cash. They may or may not have the receipt for the item, but they always find a way to get a full refund.
On the other hand, receipt fraud occurs when scammers use fake receipts or their own receipts to obtain refunds. They create these sophisticated counterfeits by altering existing receipts or even creating new ones from scratch.
Employee fraud is when employees engage in deceptive practices, such as stealing, embezzlement, or return fraud, that financially impact the business.The inside job can have some of the most devastating effects on retail businesses. This is when employees participate in return fraud, either by stealing products or accepting a cash refund for items that were never purchased. Hardly any industry is immune to this type of return fraud.
For this type of return scam, scammers will switch item price tags. This might be done subtly or more obviously, but it is always to their advantage. For example, they may purchase an item for $50 and then slap on a higher price tag of $100 before returning the product for a full refund.
In some cases, no laws are broken, but returning merchandise might cost the company anyway. They may not have the receipt and they might even acknowledge that they are returning something that is no longer in its original packaging or condition. But they still try to get a full refund because it seems like an easy way to make some cash on the side.
The old “switcheroo” is exactly what it sounds like. This return fraud occurs when a customer purchases an item for one price and then switches it out for another used or damaged item before returning the product for a refund.
In some cases, customers will return an item that is completely non-functional. This type of return fraud is known as “bricking.” It occurs when a customer intentionally breaks the item before returning it. An electronic item is especially vulnerable to this type of return fraud.
Like price arbitrage, cross-retail return occurs when a customer purchases an item in one retail store and returns it to another location. Often they will target different locations of the same chain so that they can’t be easily caught.
Empty box fraud
There are two methods of empty box return fraud. The first is when a customer purchases an item online, and then claims that the item never arrived (or that they received an empty box). The second is when a customer ships an empty box during the return process instead of the product in question.
Some stores sell open-box products or floor models for discounted prices. Scammers will take advantage of this by purchasing the more expensive boxed product, returning it, and purchasing the open-box product instead. The scammer essentially makes a profit on their purchase and the retailer takes on the cost of shipping and restocking.
The term wardrobing comes from the fashion industry, where it refers to returning clothing after wearing it once or twice. It’s essentially a form of return fraud that applies to any industry, where customers purchase an item to use it temporarily, then return it for a full refund. This could be returning a coat after wearing it for a single event or returning a TV after watching one movie on it.
Which Businesses Might Be Affected by Return Fraud?
Return fraud affects various businesses, from big-box retailers to online marketplaces. Online sellers are particularly vulnerable, as fraudsters can easily obtain products and return them for full refunds or store credit. This allows them to keep the products for free or sell them elsewhere for 100% profit.
Businesses that ship physical goods have the most to lose from return fraud. Since a third party (the shipping company) is involved, it can be more challenging to detect and prosecute fraudsters. But any retailer that offers easy returns, whether in-store or online, is also at risk for return fraud.
Return Fraud Detection
So, how can retailers protect themselves from return fraud? The first step is to be proactive and develop a system for detecting and combatting return fraud. There are several strategies that retailers can use to identify fraudulent returns, including:
Reviewing historical data: By analysing data from past return fraud cases, retailers can identify common characteristics or red flags. This information can help them spot potential scams and take the appropriate action to prevent losses.
Monitoring returns: A sudden increase in the number of returns may indicate that scammers are targeting a certain retailer or product. Retailers can thus keep a close watch on return rates to spot any suspicious activity.
Optimise return policies: Retailers can also minimise risks by tweaking their return policies. They should be clear and fair while still taking measures to prevent fraud and abuse of the system. Furthermore, employees should be well-trained in spotting suspicious behaviour, and businesses should monitor return activity for any employees who may be engaging in return fraud themselves.
How to Prevent Return Fraud
Following the above, there are several actions that retailers can take to prevent return fraud. These include:
Educating employees: Businesses need to make sure their employees know how to spot and respond to suspicious behaviour. Regular training sessions and guidelines posted in the workplace can help employees recognize red flags. Keep them aware of common scams, like gift card tampering
Some employees may be hesitant to call out suspicious customers, so retailers should ensure that there are no repercussions for reporting fraud.
Stop giving cash refunds: Many return fraud cases involve scammers returning stolen or counterfeit goods for a cash refund. With no traceable record, it can be difficult for retailers to prove fraud. Retailers can reduce their risk by giving refunds in store credit or vouchers instead. And if the purchase was made with a debit or credit card, the retailer could simply refund the purchase price directly to their account.
Verify customer identity: Another way to prevent return fraud is to ensure that the customer returning an item is the person who bought it. Some retailers require customers to present a valid ID or confirm their identity using other methods (such as through security cameras and facial recognition software). This can help deter scammers and reduce fraudulent returns.
Implement a time limit: Retailers can also help prevent return fraud by placing time limits on returns. For example, they may impose a strict 14-day limit on returns to deter customers from returning items months or years after purchase.
Our Solution – aiReflex
Finally, the most effective solution for retailers to prevent return fraud is using artificial intelligence (AI). Fraud prevention software is the best way to automate and streamline the detection of scams.
aiReflex is a powerful tool that uses machine learning and other AI techniques to detect and prevent return fraud. With its advanced algorithms, aiReflex can quickly analyse large quantities of data and spot patterns or anomalies that could indicate fraudulent activity. You’ll receive a risk score for each return so that you can act quickly to prevent losses.
If you’re looking to stay one step ahead of scammers and ensure that your customers are always satisfied with their returns, aiReflex is the solution for you. Visit our product page to learn more.