Return fraud is often a huge challenge for eCommerce merchants and can be hard to prevent. Learn how to spot retail fraud and mitigate damages.
People are shopping online more than ever, and as a Shopify merchant, having easy returns is essential for customer loyalty and satisfaction. Unfortunately, this poses a challenge for fighting return fraud.
Return fraud is a form of online scam in which someone claims an invalid refund. The return may violate your store’s policies, or the fraudster may attempt to swap the new product for a used, broken, or lower-quality item and then return it for a refund.
The US retail industry suffers annual losses of about $24 billion in return fraud and policy abuse, accounting for an average of 8% of returns.
How can you spot fraud and take action to prevent it? Let’s break it down.
5 Most Common Types of eCommerce Return Fraud
Wardrobing is a form of retail fraud where a consumer purchases an item while planning to only use it for a short period of time and then return it after use. Although wardrobing sounds like it might be only for clothing, it can apply to any item someone may want to use only once or twice.
For example, someone might buy an expensive dress for a special occasion, wear it with the tags hidden or removed, and then return the dress with the tags attached under the claim that it was the wrong color or size. Another example is where someone purchases plates, uses them for a dinner party, and then repackages them and asks for a refund.
Fraudulent returns of this type take advantage of the store’s return policy.
2. Retail Sabotage
Retail sabotage is a type of fraud where a competitor purchases large numbers of an item to deplete your inventory or floods your system with small purchases with the intention of damaging your business.
Bricking is a form of fraud that typically happens with electronic devices. The buyer removes valuable parts of the device to resell for a profit and then returns the item as defective or without even mentioning the removed part, which poses a challenge for you since you might unknowingly resell the now-defective device.
4. Empty Box Fraud
Empty box fraud is when customers claim they received an empty box and request a refund while secretly keeping the item. Alternatively, they may claim that they never received the package at all, or return a box filled with something to simulate the weight of the product, while keeping the item.
5. Stolen Merchandise Fraud
Stolen merchandise fraud is when someone makes a purchase on a stolen credit card and then returns the stolen item for cash or credit on another credit card.
Alternatively, a fraudster may use a stolen credit card to buy the item online, and then return the stolen item in-store for a refund. Without reliable cross-department tracking, this can be difficult to catch.
Other Types of eCommerce Return Fraud
A few other common forms of online return fraud are:
- Purchasing two similar-looking but differently-priced items and returning the cheaper item as the more expensive one.
- Purchasing a working product and returning a previously-owned damaged or defective item.
- Stealing or falsifying receipts to return items. Another version of this is purchasing a product at a low price from one store and returning it to a different store where it is more expensive.
How to Prevent Online Return Fraud
With the right processes in place, you can minimize eCommerce fraud attempts. This is a delicate balance between preventing fraud and providing good customer service.
Following these steps can help minimize return fraud:
1. Immediately Inspect Returned Packages
Inspect packages as soon as they are returned and don’t issue a refund until you are sure this is the same product that was ordered.
2. Place Product Tags in Visible Locations
The tags should be visible on products so fraudsters can’t remove and replace the tags or wear the item with the tags hidden. Additionally, when you receive a returned product, look for signs of wear such as make-up, deodorant, or scuff marks.
3. Require an ID and Contact Information for Returns
When processing a refund, retailers often require only a receipt, making it hard to prove the validity of the transaction. Ask for customers’ contact information and cross-reference it with the order details to prevent fraudulent returns.
4. Fine-Tune Your Return Policy
Your return policy is one of the most significant factors in preventing eCommerce return fraud. While it is important to have a convenient return policy for your customers’ peace of mind, having a lenient return policy can also leave you vulnerable to fraud.
Prevent return fraud by having a clearly-defined return policy with a limited return window, clearly defined conditions for product returns, and refunds only in the form of store credit or refund to the original payment method.
5. Don’t Offer Cash Refunds
Instead of offering cash refunds, either apply the refund to the original method of purchase or issue store credit or gift cards. Issuing the refund in a certifiable way helps deter criminals who are looking to launder money through your store.
Retail return fraud is a big problem in the eCommerce world and can lead to huge revenue loss. Implementing some best practices can mitigate the damage caused by fraudulent returns.
Having a good return management system in place can help you manage and monitor return requests. Avoiding fraudulent returns is easier when you can track your customers’ orders, define return conditions, and implement your return policy all in one place.