Understanding Return Fraud: Definition, Examples, and Prevention Tips

Unravel return fraud! Explore its meaning, see examples, and get prevention strategies

D2C online ecommerce stores offer utmost convenience to both merchants and consumers (predominantly customers 😉) 

But sometimes, people use the flexibility of online return policies for self-benefits that give rise to online return frauds.

Merchants at times are short on quality, because of which some consumers tend to look toward Ecommerce Return fraud. This brings us to today’s topic of discussion, Understanding Ecommerce Return Fraud: Definition, Examples, and Prevention Tips 

Why picture this? → stores losing sales, profits, and growth. 😟

When Return fraud can be reduced by >65%

Find out all the scoop on Return fraud- types, consequences and prevention in this blog. 

What is Return fraud?

Return fraud, also known as retail Return fraud or consumer Return fraud, refers to consumers exploiting return policies for personal gain, resulting in financial losses, wasted manpower, logistics, and, most importantly, time. 

Ecommerce Return Frauds can take various forms, including:

  • Returning a product after using it once
  • Using a stolen credit card to buy an item
  • Returning a product after removing its valuable parts. 
  • Falsely claiming they have received an empty box
  • Changing a cheap price tag to an expensive one for more refund

Ecommerce Return frauds affect D2C merchants in multiple ways. First, they lose the profit from the original sale. But that's not all; they experience more losses coming from employee time spent handling returns, checking if items can be resold, and restocking. Losses grow further if they are bound to sell an item at a discounted price. 

What is a Purchase Return definition?

A purchase return, also known as a return of goods, refers to the process of a buyer returning merchandise to the seller for various reasons.

Purchase return definition are a standard part of retail and e-commerce transactions, and sellers often have specific return policies in place to govern the process and protect both buyers' and sellers' interests.

What are the types of Return fraud?

Online Return frauds are of several types, including:

  • Wardrobing: It involves ordering an item, using it once or twice, and then returning it for a refund. This usually happens with costly clothes, but it's also very common with things like costly phones, laptops and other gadgets. 

Mostly, customers purchase these items for one-time events like parties, festivals and return it back.

  • Empty box returns: Customers claim they received an empty box or a box with a completely different item inside. They then return the "empty" box for a refund or replacement. Logistics partners generally get blamed in these situations. 

  • Price switching: Some individuals may swap price tags on items, attaching a higher-priced tag to a lower-priced item in an attempt to pay less for the item or receive a larger refund.

  • Refund Scams: Fraudsters try to manipulate the refund process, claiming they didn't receive a refund when they did or falsely claiming that the merchant owes them a refund when they never made a purchase.

  • Counterfeit Returns: Scammers may return counterfeit or fake items, claiming they're genuine and demanding a refund.

  • Gift card fraud involves using stolen or fraudulently obtained gift cards to make purchases and returning the items for cash or a gift card refund.

What is the impact of Return fraud?

Ecommerce Return Fraud can significantly affect a D2C merchant’s profitability, operational efficiency, and customer trust. Here are some of the critical consequences of Return fraud:

  1. Financial loss

Return fraud results in direct financial losses for merchants. 

Untrustworthy returns lead to refunds or exchanges, causing a decrease in revenue and profitability of ecommerce merchants. In cases of "wardrobing" or "renting," where customers buy items for temporary use and then return them, causing merchants to lose out on potential sales.

  1. Increased costs
Return Fraud
The chain of logistic flow and reverse logistic flow.

Merchants incur additional costs associated with processing fraudulent returns. These include labour costs for processing and investigating doubtful returns and the cost of restocking, refurbishing, or disposing of returned items that can't be resold at full price.

  1. Inventory management issues

Return fraud can lead to inaccurate inventory counts and complicate inventory management.

Retailers may encounter discrepancies between reported inventory levels and actual stock, affecting purchasing decisions, restocking, and overall supply chain efficiency.

  1. Loss of trust

Ecommerce Return Fraud erodes customer trust in the retailer. 

Legitimate customers may become sceptical about the retailer's return policies, fearing being mistreated due to fraudulent activities. This loss of trust can lead to decreased customer loyalty and fewer repeat purchases.

  1. Negative customer experience

Legitimate customers may face inconvenience and delays when trying to return or exchange products due to increased scrutiny caused by fraudulent activities. This can result in a poor customer experience and lead to customer dissatisfaction.

Explore the cost of Return fraud

Returning is a completely unavoidable situation.

Return Fraud

But with better services, retailers can curb return rates. Then what is the answer to Return fraud?

All Online Return fraud scams are not exclusively executed by individuals; they can also involve large, multinational criminal networks - Retail Return Fraud

Understand the composition of Return frauds with this image. 👇

retail fraud types
The Retail Equation’s estimate of the frequency of various types of Return fraud and abuse. 

Return fraud caused at least ₹22 crore in losses. Understand it more deeply with the following statistics:

➡️The chance of exchange fraud with counterfeit or stolen items is around 40% for mobile phones and 90% for big household appliances.

➡️82% of large merchants considered fraudulent returns a significant problem, which would reduce retail profits by 10–20%

➡️The Appriss Retail report found the returns of online purchases were worth ₹4100 crore in total, where 35% (about ₹1400 crore) were retail return frauds.

‍How to detect Return Fraud

As we have discussed in the above sections, it’s clear that Online Return Fraud can take various forms, right from returning stolen merchandise for cash to bypassing store return policies for personal gain. 

So let us help you with some of the most common methods and strategies that businesses commonly use to detect return fraud:

Analyze return patterns

Retailers can use data to detect unusual return patterns, such as an excessive number of returns from a single customer, returns without receipts, or returns of high-value items shortly after purchase.

Monitor return behaviour

Keeping an eye on customer return behavior can help identify suspicious activities. For instance, frequent returns of similar items or returning items that are often associated with fraudulent behaviour can raise red flags.

Require identification

Requiring customers to present identification when making returns can deter fraudulent activities. This helps track and limit the number of returns made by an individual.

Check serial numbers or tags

Verifying serial numbers, tags, or other unique identifiers on merchandise can help ensure that returned items match the ones originally purchased. This can prevent the return of stolen or counterfeit goods.

Implement return policies

Establishing clear and strict return policies can help prevent fraudulent returns. Limiting the timeframe for returns, requiring original packaging, and issuing refunds in the original form of payment can deter fraudulent activities.

Use technology solutions

Implementing technology solutions such as fraud detection software can help identify patterns and anomalies in return transactions. These systems can analyze data in real-time to flag potentially fraudulent activities.

We have discussed more about the technology solutions in the below section.

By combining these strategies, businesses can minimize the impact of ecommerce return fraud on their operations and bottom line.

How to prevent Return fraud?

Preventing Return fraud is essential for businesses to protect their revenue and maintain customer trust. Here are some strategies to help prevent Return fraud.

  1. Implement clear return policies

Develop and communicate a well-defined return policy to your customers. 

Ensure it includes details about time limits for returns, conditions of items being returned (unopened, unused, in original packaging), and acceptable reasons for returns. By having a transparent policy, customers will better understand what to expect when returning items. 

  1. Require identification for returns

Request a valid form of identification (like a driver's licence or ID card) for processing returns. 

This adds an extra layer of accountability, linking the return to a specific individual. Keep a record of these IDs and the return transaction details, aiding in tracking and analysing potential fraud cases.

  1. Leverage technology

Here is the list -

  • Barcode/Serial number scanning: Use barcode or serial number scanning systems to match returned items with original purchase records.

  • Unique labels: Use security labels or seals that are difficult to replicate to prevent counterfeit returns.

  • Digital receipts: Offer digital receipts that are linked to customer accounts, making it harder to create fake paper receipts.

  • RTO suite- Use a return management tool that offers behaviour and historical analytics, media upload and verification, and logistical intelligence.
  1. Offer credit or gift receipts

To deter Return fraud, offer Credit or Gift Receipts instead of cash refunds

This ensures customers receive value for returns while minimising abuse. Credit Receipts provide store credit, and Gift Receipts enable exchanges. This policy safeguards against fraudulent returns, promoting fair transactions for all customers.

Utilise an omnichannel inbox and AI-enabled chatbots for efficient and speedy communication for such things.

  1. Train employees and monitor behaviours

Educate your employees about Return fraud indicators and prevention techniques. 

Encourage them to observe customer loyalty and behaviours that might raise suspicions, such as frequent returns without receipts or a tendency to return high-value items. 

Establish a system for reporting unusual activities or suspicions internally. Regularly reviewing returns and transactions can help you spot anomalies and take appropriate action promptly.

  1. Utilise restocking fees

Introduce restocking fees for returned items, especially those frequently targeted by Return fraudsters (like electronics or luxury goods). 

These fees can deter opportunistic fraud attempts, as fraudsters may be less willing to pay extra charges. Ensure that the restocking fee policy is communicated to customers at the time of purchase.

Using fraud detection software to fight Return fraud

Using a Return management system will make your job easier than having a separate team to deal with fake Returns. In fact, as a D2C brand scales and more orders pour in, it is next to impossible for employees to identify return fraud potentials manually. It will only waste their time, leading to no results. 

Now, your martech stack might be overloaded, so the wise choice is to select software that not only helps you subside fake Returns but also provides plenty of other meaningful services.

A return management software offers two distinct services to reduce losses:

✅Return management

✅RTO algorithm 

Here’s how a return management software generally works: 

➡️It performs an In-depth behaviour analysis on historic data from consumers across 450+ brands to identify RTO potential flag fake orders.

➡️ It verifies details such as address, Pincode, phone number etc., and auto-corrects critical information if needed. 

➡️ Orders from temporary residences such as hostels, resorts, paying guests or high-risk pin codes get flagged automatically

➡️ All placed orders are cross-referenced with other e-commerce sites to check the users for past RTO history, order cancellations and other fraudulent behaviour

With the Pragma’s Return management system, you can:

  1. Build branded Returns page as per your brand’s guidelines and custom domain names

Return Fraud
Enable/Disable image verification

  1. Perform media upload & verification
Return Fraud
Choose Delivery Partners

  1. Customise Return timeframes according to SKUs (Stock-Keeping Units), product categories, or seasonal sales

Return Fraud
Control the flow of packages

  1. With Logistical Intelligence, control the flow of packages based on a rule-based reverse shipment generation mechanism
Return Fraud
Select the delivery partner

  1. Offer smooth connections to all courier firms for managing Return shipments, complete with creating automatic AWBs for reverse shipments once approval is granted.

Here is what users believe about Pragma.

Return fraud
Testimonial from the Founder of Prolixr

Key takeaways: Reducing Return scams

Remember, a balanced approach is key. While implementing strict measures can prevent fraud, maintaining a positive shopping experience is crucial for customer satisfaction and loyalty.

Return fraud management requires a deep understanding of purchasers' history and intent, and with a Return management tool, you can do this job easily.

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What is the meaning of Return fraud?

Return fraud refers to dishonest practices where individuals improperly exploit return policies to gain financial benefits. This can involve returning stolen, used, or counterfeit items or manipulating the return process to unfairly acquire refunds or store credits.

Is returning items fraud?

Returning items isn't inherently fraud but becomes Return fraud when done deceitfully or against store policies. Legitimate returns adhere to store guidelines, while fraudulent returns involve tactics like using counterfeit receipts, returning stolen goods, or abusing lenient return policies.

How do you catch Return fraud?

Return fraud detection involves methods like using technology, such as barcode scanning and serial number tracking, to match returned items with purchase records. Monitoring return patterns for anomalies and analysing data helps identify suspicious behaviour. Training staff to recognise signs of fraud also plays a role in detection.

What is the most common Return fraud?

The most common form of Return fraud involves returning stolen merchandise. Thieves shoplift items and then attempt to return them for cash or store credit. This exploits the return process and results in financial losses for businesses.

What is an example of Retail Return fraud?

An example of Return fraud is when a person purchases an electronic device, swaps it with a faulty one, and then returns the faulty item claiming it's the original purchase.  This fraudulent activity seeks to obtain a refund or replacement for an item that was deliberately tampered with.

You can also search for “Return frauds Reddit” for personal stories.

What is "friendly fraud" in return scenarios?

"Friendly fraud" in return scenarios refers to customers falsely claiming non-receipt or damage to an item they received, often to obtain unwarranted refunds or replacements. It can lead to business financial losses and complicate the return process for honest customers.

What are the legal consequences of Return fraud? 

Return fraud can result in serious legal consequences. Depending on the jurisdiction, it may be considered a criminal offence leading to charges like fraud or theft. Return fraud punishment includes facing fines, penalties, and even imprisonment, highlighting the importance of ethical and honest return practices.

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