What is Returns Fraud 

In an online marketplace, returns are inevitable. Customers want to see, feel, and test out a product first before committing to keeping it. In 2023, close to $816 billion worth of online sales were returned. With such a large volume of returns, bad actors are bound to happen. It is estimated by the National Retail Federation that 13.7% of returns were fraudulent in 2023, making this an approximately $111 billion dollar problem. 

Returns fraud is a deceptive practice with high associated costs to e-commerce merchants. It occurs when customers abuse return policies for financial or material gain. There are several ways that this fraud can occur in the online landscape. Common types include:

1. Package pilfering: Returning boxes with missing items or replaced with cheaper alternatives.
2. Counterfeit product returns: Returning fake items purchased elsewhere for genuine product refunds.
3. Empty box scams: Claiming to have received an empty box instead of merchandise and requesting a refund
4. Bricking: Removing parts from a product to make it almost unusable, especially common with electronics
5. Employee fraud: Staff members assist in fraudulent returns, often in exchange for a cut of the profits.

Returns fraud has a large impact on businesses from obvious financial losses to stricter return policies affecting honest customers that could negatively affect customer acquisition and retention. 

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Merchant Considerations

According to ReBound, “15%-20% of your consumers generate 80% of all refunds.” With that in mind, it can be natural to think this is an easy fix. However, there are often little consequences for returns abusers since it can be hard for merchants to detect and prove.

Merchants can try to ban serial returners, but it can be difficult to determine what threshold is appropriate to set. On the other hand, a catch-all ban could include some of your most profitable customers that buy in large quantities and inevitably end up returning items.

Another thing to consider is to stay competitive in the e-commerce marketplace, merchants often feel pressured to offer similar returns policies to retain customers. To gain customer satisfaction with ease of returns, “keep it” policies have been used. Keep it policies require the merchant to absorb the cost of the item, while allowing them to reduce an average of $30 in returns processing. This practice can encourage fraud when customers know that they can both keep the item, and get their money back.

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Prevention Strategies

Returns are here to stay, so what can merchants do to combat this growing fraud issue? Here are some strategies to consider:

1. Implement robust tracking systems
2. Require identification for returns
3. Adjust return policies from keep it to charging a fee
4. Updating product pages to reduce the need for returns in the first place
5. Use data analytics to identify patterns and build dynamic workflows to fight fraud at scale

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Conclusion

While most returns are legitimate, merchants must balance customer service with fraud prevention to protect their bottom line. Data analytics is proving to be a helpful tool in combating returns fraud and allowing merchants to make more informed decisions about this balance. Keeping an eye on patterns of potentially fraudulent activity can save merchants lots of money over time. See how Deliverlitics’ is leveraging AI to reduce e-commerce fraud here