Return Fraud: What is it and How to Prevent It

Return fraud is a major issue for retail businesses and any businesses that supply goods directly to consumers – or even other businesses. 

This article will take a deep dive into return fraud. We start off by examining what, exactly, it is before examining the different types, how it can be detected and prevented, before underlining its damaging consequences.

What is return fraud?

Return fraud refers to the extremely deceptive practice of exploiting a retailer's return policies to gain financial or material benefits unlawfully. 

Despite this relatively simple definition, it can take multiple forms, which we will discuss later in this article. However, it is important to stress that return fraud can have devastating effects for businesses of all sizes, including a significant loss of revenue which can then lead to price increases to cover these losses, resulting in honest customers having to pay higher prices for items than they would otherwise. 

There is also the concept of refund fraud which, although related, takes a slightly different format. 

Difference between return fraud and refund fraud

Here we analyse the similarities and differences between return and refund fraud – both concepts which can lead to substantial losses for businesses. 

What is refund fraud?

Refund fraud refers to deceptive activities aimed at exploiting a retailer's refund policies to gain money, goods, or other benefits illegally. 

It often involves manipulation of the refund process without a legitimate basis for the claim, with the most common types including:

1. False Claims: Here, fraudsters falsely claim they did not receive an item they purchased online, even though it was delivered. They might request a refund or replacement from the retailer.
2. Receipt Fraud: This involves the use of a fake, stolen, or altered receipt to request a refund for items not purchased in the first place.
3. Return of Stolen Goods: This is the shoplifting of items and then returning them to the store for a refund.
4. Exploiting Policy Loopholes: This involves abusing "no questions asked" refund policies by repeatedly requesting refunds for legitimate purchases.
5. Refunding Without Returning: This involves claiming an item is defective or unsatisfactory to secure a refund while keeping the item.

Refund fraud vs return fraud

Refund fraud and return fraud are both forms of retail fraud aimed at exploiting a company's policies, but they differ in their methods and goals.

The similarities include the fact that they both centre on the exploitation of retail policies, by taking advantage of a retailer's refund or return policies to gain financial or material benefits unlawfully. As a result, both result in monetary losses, increased operational costs, and potential harm to customer trust. 

Both may involve deception, such as using fake receipts, stolen goods, or false claims, with fraudsters exploiting loopholes in lenient or poorly enforced policies.

When it comes to key differences, refund fraudsters are often motivated by obtaining money or financial compensation, whereas return criminals are likely to want either store credit or an exchange. The item itself is likely to not be returned with refund fraudsters, although it will be with return fraudsters – but it is likely to be used or even stolen. 

What are the different types of return fraud?

Return fraud can take multiple different formats. The most common include the following:

1. Wardrobing (or Renting): This involves buying an item, using it temporarily, and then returning it for a full refund. An example of this is the purchase of an electronic gadget for an event and returning it afterward. The retailer will often find this difficult to prove if the item is returned in its original packaging and in good order. 
2. Receipt Fraud: Using a fake, stolen, or altered receipt to return items for cash or store credit. For example, printing a counterfeit receipt for a high-value item and using it to request a refund. The rise of sophisticated technology is making this much more common – and harder for a retailer to detect.
3. Returning Stolen Goods: This might involve shoplifting items and then returning them to the store for a refund or store credit. This is a common tactic used by organised gangs – who place store loss teams under increased pressure as their number increases.
4.  Price Arbitrage: This takes the form of swapping the price tag of a lower-priced item with that of a higher-priced item, purchasing it at the lower price, and then returning it for the higher price. For example, criminals might switch a £20 tag onto a £100 item, purchase it for £20, and return it for a £100 refund.
5. Switch Fraud: The purchase of a product, replacing it with a cheaper or older version, and returning it as if it were the original. For example, buying a new appliance, replacing it with an older model, and returning it for a full refund.
6. Employee Fraud: This could involve collaborating with store employees to bypass verification processes for fraudulent returns. As an example, an employee might process a return without requiring proof of purchase, allowing the fraudster to receive a refund for stolen goods. This can be especially hard to detect, as employees will be much more aware of internal processes and how to either exploit or bypass them.
7. Cross-Retailer Fraud: This is the purchase of an item from one retailer and attempting to return it to another retailer with a similar product line. A criminal might buy a product at a discount store and returning it to a high-end retailer for a full-price refund. Although at first glance this might seem obvious, those stores with a lenient returns policy might well find it hard to argue. 
8. Fraudulent Gift Returns: This is claiming to return a gifted item without a receipt to receive store credit or cash. For example, using stolen goods and claiming they were gifts to avoid providing proof of purchase.
9. Refurbished Item Returns: Returning used or refurbished items as if they were new, e.g. buying a new phone, replacing it with a used or refurbished one, and returning it for a refund.
10. Bricking: This type of fraud involves the deliberate damage or tampering of electronics before returning them. Such a practice has a detrimental impact on warranties and returns process, making it much harder for people who have genuine issues to report. 

How to detect return fraud

Return fraud detection involves implementing a combination of technology, processes, and training to identify suspicious patterns and prevent fraudulent activities.

One vital method involves monitoring customer behaviour and patterns. Red flags to look out for include the prevalence of frequent returns, especially for high value items, returns without receipts or with suspicious receipts, or multiple returns from the same customer across different stores or online platforms. A method to manage this process includes the use of customer relationship management (CRM) or fraud detection software to track and analyse return history.

It is also important to verify receipts and proof of purchase paperwork. Issues that should cause concern include receipts that appear altered, photocopied, or printed at home, or the presence of returns without proof of purchase, especially for high-value items. Here, a solution might include the use of digital receipt systems or barcodes on receipts to verify authenticity.

Returned items should also be inspected – thoroughly. Items that appear used, worn, or damaged but are returned as "new" should raise concerns, as should switched or counterfeit items in packaging and empty boxes or boxes with weights like rocks or other fillers – highlighting the need to double check everything. Here, one of the key methods to fight this is to train or motivate employees to thoroughly inspect returned items for signs of use, damage, or tampering.

As technology becomes more sophisticated, we are seeing the introduction of important fraud preventative tools. Fraud detection software that uses machine learning to identify anomalies and alert staff is becoming much more common as a tool to fight the issue. Retailers or suppliers can also invest in a centralized system to track returns across stores and online platforms, flagging unusual patterns.

We have already touched upon the importance of training employees correctly – but this should be underlined again. They should be informed how to spot customers exhibiting nervous or evasive behaviour during returns, or to see any inconsistent stories about the purchase or item condition.

How to prevent return fraud

Preventing return fraud requires a combination of clear policies, technology, and employee training to deter fraudulent activities while maintaining a positive experience for legitimate customers.

Firstly, clear and strict return policies need to be implemented, leaving no room for doubt for anyone. This might involve define time limits by setting a clear return window, strictly requiring a proof of purchase, specifying clear requirements such as the goods must be unused and in original packaging, and even introducing restocking fees. This is where, for certain items such as electronics or seasonal goods, a restocking fee is charged to discourage misuse.

Advanced technology also provides a myriad of benefits. Fraud detection software can employ tools that analyze return patterns and flag suspicious activities. Serialized barcodes or RFID Tags can track individual items to ensure returned products match the original purchase. Furthermore, digital receipts can be linked to customer accounts to prevent counterfeit or altered receipts, while AI and machine learning can be deployed to identify unusual patterns in return activity, such as excessive returns from a single customer.

Identification can also be required as a core part of the returns process. ID verification for returns without receipts can be used to log customer return history and identify serial offenders. This can result in fraudulent customers becoming blacklisted.

E-commerce tools can also be used to follow tracking numbers to confirm delivery before issuing refunds for online orders. Also, photo verification can be used to encourage customers to submit photos of defective or damaged items before approving returns.

However, retailers need to tread a very delicate path. While they need, of course, to protect themselves against fraudulent activities, they cannot afford to alienate their honest customers with a genuine return or complaint. If they do this, it could cost them even more dearly, with regular customers venting their frustration online and even deserting the retailer completely. 

What are the consequences of return fraud?

Return fraud consequences can have far-reaching implications for businesses and even their customers.

One of the most obvious consequences involves the financial losses for businesses. Fraudulent returns result in direct monetary losses as businesses refund money for stolen, counterfeit, or non-resalable goods. Operational Costs are also increased due to additional resources needed to process fraudulent returns, with further losses resulting from the fact that returned items may be unsellable due to damage, use, or substitution with counterfeit goods.

Strained customer relationships may also develop from the introduction of stricter policies, inconveniencing legitimate customers. Honest customers may feel mistrusted or penalized due to measures like requiring IDs or limiting return windows. Customers are also likely to become annoyed if prices need to be increased to cover losses experienced because of fraudulent claims. 

There is also the threat of damage to a brand’s reputation – which can be especially damaging in today’s word of online review forums and feedback sites. Legitimate customers may lose trust in a brand if they feel unfairly treated due to anti-fraud measures – and be very willing to share this feedback with millions of other people online. 

Further consequences include the fact that return fraud can be part of larger organized retail crime schemes, contributing to systemic theft and black-market activities. It can also have impact on staff members - handling potentially fraudulent customers can create stress and dissatisfaction among workers. It can also cause operational disruption for businesses as time and resources spent investigating fraudulent returns detract from other activities.

Conclusion

As we have seen, return and refund fraud comes in many different formats, but they all have one thing in common – they cause a huge negative impact for businesses, ranging from a direct hit to profitability to long-term reputational damage, and from an increased cost to genuine customers to increased frustration levels from them. 

It is therefore vital to fight back and ensure those responsible are not allowed to get away with it. 

The good news is that there are now systems available that can fight against the criminals, improve business profitability and streamline operations. 

To learn more about return fraud detection and prevention, please contact Claimlane. 

‍