What is Return Fraud and How to Prevent It



return fraud

When bad actors take advantage of return policies, return fraud is the result. It’s the act of defrauding businesses using its return process and it’s a problem in the retail industry.

If you think fraudulent returns aren’t a problem, think again. American hospitality and retail sectors reported $33.9 billion worth of merchandise was affected in 2019.



What Is Return Fraud?

So what exactly is return fraud? Trying to return stolen merchandise for a cash refund qualifies as well as using falsified and/or stolen receipts. Other methods are called price arbitrage and open box fraud. Employees also work scams where workers return stolen merch for a full refund.

Long story short. It’s the crime of defrauding a retail store through its returns process. Here are some more numbers on the subject. The National Retail Federation reports the number of returns has jumped due to the pandemic. That means return fraud will also increase.

 

Why Does Return Fraud Happen?

People who commit return fraud are abusing a company’s policies. And the returns themselves are increasing. Deloitte expects the rate to hit 10% this year. And there’s increasing pressure on people like Amazon workers to process returns quickly.

Types of Return Fraud Tactics

Small businesses that want to minimize return fraud need to be able to identify it. Here’s a list of 7 types you need to be aware of when dealing with customer returns.


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Price Switching

This is about returning a purchase for the one bought at a lower price. Dishonest customers switch out the labels and they get the return for the higher price.

Receipt Fraud

This type of fraud can use someone else’s receipt or one that’s been stolen to secure cash refunds. Bad actors even falsify a valid receipt with this type of refund fraud.

What is Return Fraud and How to Prevent It

Open Box Fraud

Bad shoppers purchase an item. Then they return it opened to get it at a lower cost under the store’s open box policies.



Returning Stolen Items

In this case, fraudsters return merchandise they didn’t pay for. Finding receipts and shoplifting the same item is one way of committing this crime.

Employee Fraud

Employees help someone return stolen goods for full retail price with the sales tax.

What is Return Fraud and How to Prevent It

Switch Fraud

Bad actors start by purchasing merchandise that works. And they return a defective identical item that’s broken or damaged. This ties together with what’s called a cross retailer return. Where one item is switched out for a higher-priced item at another store.



Wardrobing or Free Renting

Clothing, computers, electronics, and tools get purchased and returned after being used. The intent makes this different from legitimate returns. Fraudsters only want to use the item for a short time.

Price Arbitrage

This occurs when scammers go about purchasing differently priced items. They return the cheaper item as the more expensive to pocket the difference.

Gift Card Fraud

In this scenario, scammers return items (often fraudulently obtained) in exchange for gift cards. They then sell these gift cards for cash, effectively laundering the money.

Serial Number Fraud

This involves tampering with or swapping serial numbers on products to return a different, often older or damaged item while keeping the new purchase.



Online Return Fraud

With the rise of e-commerce, there’s a growing trend of return frauds where customers claim the item was never received, or return a different or damaged item while claiming a refund for the original.

 

How to Identify Fraudulent Returns When They Happen

Being able to spot return fraud when it happens is essential. Here’s what to look for when fighting return fraud. These red flags will help you to stop losing money in your retail business. And spot bad actors when they are returning stolen merchandise.

1. A Jump In The Number of Returns.

Scammers work in groups. They focus on a weak retailer when they find one. If your returns suddenly increase, your business might be targeted. One way to find price tag-switching criminals is to know what the normal number of returns is. Your small business can keep track of return merchandise with the right software.

2. Watch for Serial Returners.

You can fight return fraud by watching other patterns too. A genuine customer who returns products constantly might be legit. Or they might make a few honest mistake slip-ups. More than likely they’re working on a fraudulent return. Watch for processing refunds to the same people at any retail store. Look at the types of products returned for a pattern.



3. Watch for Inconsistent Details

Friendly fraud attempts use fake information. For example, eCommerce merchants should look for different names used with the same email addresses for several purchases.

4. Store Location Matters

A franchise owner needs to watch for return abuse patterns. A spike at one store can mean a receipt switching scammer has targeted that place.

5.Keep An Eye On The Holidays

Fraud.net reports the return request numbers jump after a customer shopping list spikes. They say 25% of returns happen between Thanksgiving and New Year’s Day. Genuine customers need to be considered here to strengthen your customer experience. But there are scammers trying to steal money too.

Identifying Fraudulent ReturnsDescription
1. Increase in ReturnsScammers often work in groups and target weaker retailers. Sudden spikes in returns could indicate targeted fraud attempts. Tracking normal return rates can help identify abnormal patterns. Utilize software to monitor return merchandise.
2. Serial ReturnersConsistently returning products might signal legitimate customers or fraudulent behavior. Watch for refunds being processed for the same individuals across different retail stores. Analyze the types of products frequently returned for patterns.
3. Inconsistent DetailsFraudulent attempts might involve using false information. For instance, in eCommerce, watch for different names associated with the same email addresses across multiple purchases.
4. Store LocationFranchise owners should be cautious of return abuse. An unusual surge in returns at a specific store might indicate receipt switching scams or targeted fraud attempts.
5. Holiday PatternsReturn request numbers tend to increase during shopping spikes, such as holidays. While many are genuine customers, scammers also take advantage of this time. Consider both scenarios to enhance customer experience and prevent fraudulent activities.

Tips for Preventing Return Fraud at Your Business

Good fraud prevention is about being proactive. Here are some ideas for tweaking the way you return items.



1. Offer store credit instead of cash refunds

A cash refund is tempting to bad actors. Offer store credits, exchanges off the store shelf, and gift cards instead.

2. Make your return policy clear

Put a reasonable limit on the time a customer can return something. Seasonal return policies can combat someone who likes to steal receipts.

What is Return Fraud and How to Prevent It

3. Consider a restocking fee

If you implement these on items like clothing and electronics, you put a kink in a fraudster’s plan. These fees work best on an item purchased for high-end functions and/or seasonal events.



4. Track shipments

This makes it hard for people to report they didn’t get an item delivered at all.

What is Return Fraud and How to Prevent It

5. Require proof of purchase

Asking for receipts is your best line of defense against return fraud. Watch out for invalid receipt red flags like a faded logo.

More Return Fraud Tips

For Price Switching

  • Implement advanced tagging systems that are difficult to tamper with.
  • Regularly audit pricing and tagging processes.

For Receipt Fraud

  • Use digital receipts and link them to customer purchase history.
  • Implement a system to verify and track receipt authenticity.

For Open Box Fraud

  • Clearly mark and track open box items.
  • Offer a different return policy for open-box items with stricter conditions.

For Returning Stolen Items

  • Cross-reference returned items with sales records.
  • Implement security measures like CCTV to deter shoplifting.

For Employee Fraud

  • Conduct regular audits and monitor employee transactions.
  • Implement strict policies and consequences for employee-involved fraud.

For Switch Fraud

  • Verify the product’s condition and serial number before processing returns.
  • Keep a database of product serial numbers to match during returns.

For Wardrobing or Free Renting

  • Implement restocking fees for items likely to be ‘rented’ (e.g., formal wear, electronics).
  • Use return tracking software to identify habitual returners.
  • Set a stricter return policy for high-value items.

For Price Arbitrage

  • Monitor and compare prices across different platforms to identify discrepancies.
  • Establish a clear policy regarding price-matching and returns.

For Gift Card Fraud

  • Limit the cash value available in return for gift cards.
  • Validate the original purchase before issuing a gift card.

For Serial Number Fraud

  • Maintain a detailed record of serial numbers from the point of sale to return.
  • Train staff to check serial numbers during the return process.

For Online Return Fraud

  • Use reliable shipping and tracking services for online orders.
  • Implement a verification process for returns claimed as ‘not received.’



The Impact of Return Fraud: A Closer Look

Return fraud has significant implications for businesses and the retail industry as a whole. This section delves deeper into the consequences and challenges associated with return fraud.

  • Financial Losses
    • Return fraud leads to substantial financial losses for businesses, impacting their profitability and sustainability.
    • The reported $33.9 billion worth of merchandise affected in 2019 underscores the magnitude of this issue.
  • Erosion of Trust
    • Return fraud erodes customer trust in businesses’ return policies.
    • Legitimate customers may hesitate to make returns, fearing that their actions will be misconstrued as fraudulent.
  • Resource Drain
    • Businesses need to allocate resources to investigate and handle fraudulent returns.
    • These resources could be better utilized for improving customer experiences and expanding services.
  • Operational Disruption
    • Dealing with return fraud disrupts normal business operations.
    • Employees must spend time identifying and addressing fraudulent activities, diverting their attention from core tasks.
  • Negative Customer Experience
    • The impact of return fraud can trickle down to genuine customers.
    • Lengthier return processes and stricter verification measures might inconvenience honest shoppers.
  • Legal Consequences
    • Businesses must navigate legal proceedings to address return fraud cases.
    • Penalties and fines for perpetrators vary based on the severity of the offense and local laws.
  • Industry Reputation
    • A high prevalence of return fraud tarnishes the retail industry’s reputation.
    • Consumers may perceive retail environments as less secure and reliable.

By understanding these ramifications, businesses can appreciate the urgency of combating return fraud and implement strategies to mitigate its impact.

What Happens If When Someone Commits Return Fraud?

Return fraud carries different consequences. An empty box scam might just be a misdemeanor. But you can still spend a year in jail and pay up to a $1,000 fine. A more serious offense can cost you $10,000 and three years behind bars.

Is Refund Scamming Illegal?

Yes. According to the law, it’s like petty theft or shoplifting. But the intent to steal must be proved according to California law.



Return Fraud: FAQs

What is return fraud?

Return fraud refers to the act of defrauding businesses by exploiting their return policies. It involves abusing the return process to obtain refunds, often through dishonest or fraudulent means.

How prevalent is return fraud?

Return fraud is a significant issue in the retail industry. In 2019, the American hospitality and retail sectors reported $33.9 billion worth of merchandise affected by return fraud.

What constitutes return fraud?

Return fraud includes various deceptive practices such as attempting to return stolen merchandise for cash refunds, using falsified or stolen receipts, engaging in price arbitrage, and taking advantage of open box policies.

Why does return fraud happen?

Return fraud occurs when individuals exploit a company’s return policies for personal gain. Increasing pressure on retail workers to process returns quickly and the rising rate of returns contribute to this issue.

What are the types of return fraud tactics?

Return fraud tactics encompass several methods, including price switching, receipt fraud, open box fraud, returning stolen items, employee fraud, switch fraud, and wardrobing/free renting.

How can businesses identify fraudulent returns?

Businesses can identify fraudulent returns by watching for red flags such as an unusual increase in returns, patterns of serial returners, inconsistent details in customer information, and store-specific spikes in returns.

How can businesses prevent return fraud?

Businesses can take preventive measures by offering store credit instead of cash refunds, clarifying return policies, implementing restocking fees, tracking shipments, and requiring proof of purchase like receipts.

What are the consequences of committing return fraud?

Return fraud can lead to legal consequences. While penalties vary, individuals involved in return fraud might face fines, jail time, or both, depending on the severity of the offense and local laws.

Is refund scamming illegal?

Yes, refund scamming is illegal and can be compared to petty theft or shoplifting. However, proving the intent to steal is essential in legal proceedings, as required by relevant laws.

How can businesses combat return fraud?

Businesses can combat return fraud by employing vigilant staff, educating employees about fraud prevention, adopting advanced software for tracking returns and implementing robust customer verification processes.

Image: Envato Elements


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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

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