15% of all US returns in 2024 were fraudulent, resulting in a loss of $103 billion for merchants. As an industry, it’s past time to change our approach, stop making excuses for the thieves, and start preventing losses of this magnitude.
Here’s what I don’t think retailers understand: You can stop theft without harming customer experience. In fact, when you start doing it right, you’ll improve your customers’ experiences. Once you realize that, it stops being a question of, “Should we do something about this?” and becomes, “When can we start?”
Refunding & Returns
If you missed my review of a fascinating step-by-step guide by a fraudster on how to commit refund fraud, I highly recommend catching up on it. The guide shows the extent to which fraudsters have invested in perfecting refund fraud. It’s now as finely tuned a process as credit card fraud attacks.
Just like credit card fraud, returns fraud has become a big criminal business, and fraudsters have become extremely creative about circumventing the measures put in place to stop their theft.
With the losses mounting for merchants due to this creativity, some have turned to restrictive returns policies that harm customer experience for everyone. Zara, for example, changed its U.K. policy so that customers had to pay a fee to return online purchases to third-party drop-off points. Even Bath and Body Works, famously generous in its approach to returns, has brought in some limitations, and L.L. Bean, also well known for its time-honored liberal returns policy, no longer has a lifetime returns guarantee.
These approaches hurt good customers—who are still the majority—which in turn harms the business’s success. Even worse, they don’t work to stop theft at scale because the real pros (like the fraudster from the guide and everyone he’s taught) know how to get around these traps.
When Returns Go Over to the Dark Side
The real pros are so creative regarding returns fraud that I’m not the only fraud fighter I know who has stopped in awe and horror more than once when hearing about the latest dodge. Here are some of the examples that have stood out to me the most memorably:
- Rocks, potatoes, and poker chips: Plenty of retailers have a policy that they’ll refund as soon as you send proof that you’ve sent off the return parcel. They check that the weight on the sticker matches what’s expected for the product (so that people can’t ship an empty box and keep the item). To make up for the weight, boxes have been found containing rocks, potatoes, and even poker chips.
- Dry ice: An even better way of circumventing the weight problem, dry ice weighs the right amount at the start of its journey as a return but disappears by the time it gets to the retailer. The customer can then claim that the items must have been “lost in the mail” while, in reality, keeping the goods for themselves for free.
- Disappearing ink: Many retailers have an early stage in their returns process by scanning barcodes on the outside of an envelope or package before sending it on to be reviewed, reshelved, or discarded. A fraudster who puts the sticker on an envelope and uses disappearing ink for the rest of the information sets up a scenario in which the refund enters the system (through being scanned), after which the item appears to disappear from the warehouse entirely when the blank empty envelope is inevitably thrown in the trash.
- Water: Liquids are too easy to replace with plain water or water with food coloring. Many merchants working with items like paint, perfume, and so on ask employees to check whether the tub or bottle is full, but they don’t demand an assessment of the viscosity and texture of the liquid inside!
- Knock-off items: This one gets high-end retailers, and it’s cunning. Employees assessing returned items are told to check to see if it’s a shirt, a bag, or whatever is supposed to be in the box, but that mechanism can be circumvented by a fraudster purchasing a cheap shirt (or bag, or whatever) for a few dollars and putting that in instead.
Some of the sneakiest of these get past the employees checking the returned items when they arrive in the warehouse, leading to preventable customer disasters later on. When the product looks pristine, but the paint or perfume has been replaced with water, or the “sealed” box filled with rubbish, it’s often sent on to the next customer to order the item from the store — who is then in for a very nasty surprise when it arrives on their doorstep.
It’s Not Abuse, It’s Theft
Fraudster: “It’s like pulling off a heist in broad daylight with the store’s blessing.”
The fraudster from the guide describes returns fraud in this way, and they’re right. In the conversations that our industry has around this challenge, the context is abuse. Where should you draw the line? How important is customer experience to your brand? What amount of risk are you willing to take? How much loss are you willing to swallow as a business in order to prioritize customer satisfaction? And so on.
That’s the wrong conversation, and we need to stop having it. This isn’t abuse, it isn’t small scale, and it isn’t legitimate customers trying to cheat a bit to stretch their budgets. This is theft; we shouldn’t be a party to letting it happen.
Stop Theft Like You Stop Fraud
When you effectively stop fraud, you improve your customer experience. You can make more and better offers, and offer better incentives and experiences, because you can be confident that you’re only offering them to the good customers you want to attract.
Returns fraud needs to be the same. Just like regular fraud, it all comes down to identity. Your systems already have all the information you need to personalize your returns processes, tailoring them to the customer.
Customers want that — according to the 2024 Trust Premium Report, 89% consider return policies essential in deciding where to shop, while 22% of consumers abandoned a cart in the last three months due to restrictive return policies.
If you ask the right questions about your customers—such as their historical behavior with your brand and with returns—you can ensure that you’re offering a seamless, generous returns experience to the users who deserve it while protecting the business from theft by the ones who don’t.
Doriel Abrahams is the Principal Technologist at Forter and host of ‘What the Fraud?,’ where he monitors emerging trends in the fight against fraudsters, including new fraud rings, attacker MOs, rising technologies, etc. His mission is to provide digital commerce leaders with the latest risk intel so they can adapt and get ahead of what’s to come.