Fraud is a persistent issue causing great harm to businesses regardless of industry.
From basic lost revenue to the damage caused by different aspects such as false declines, it’s in everyone’s best interest to take preventative measures and minimize fraud in all of its forms.
The problem is, there are some types of fraud that can be more difficult to keep track of. Such as return fraud.
What is return fraud, exactly? We’re here to answer some of the more common questions surrounding return fraud and offer solutions for minimizing its impact on your business.
Definition of Return Fraud
Putting it simply, return fraud is the act of returning items to a merchant that do not qualify for a return, essentially stealing from the merchant. While there are cases of return fraud that turn out to be an honest mistake on the customer’s behalf, the overall number of return fraud cases with malicious intent is on a rise.
It’s also important to note that the intent behind return fraud doesn’t change the fact that, mistake or no mistake, return fraud costs merchants big in the long run.
How Return Fraud Affects Businesses
“So how is my business actually affected by return fraud? Is it only my revenue that’s affected?”
Return fraud actually affects businesses in a few different ways. Including:
- Lost profit
- Increased operational costs
- Poor customer experience
As you can see, there’s more to return fraud than simply missing out on profit from sales.
Types of Return Fraud
As we’ve mentioned, return fraud can be done innocently, with the returnee not even knowing that they’ve committed return fraud in the first place. For example, perhaps they didn’t properly read a merchant’s return policy and unknowingly returned an item that shouldn’t have been eligible for a refund.
But what about the cases where return fraud is committed intentionally? Which tactics are these fraudsters using to commit return fraud?
There are several different tactics employed by fraudsters to steal from merchants. Some of which include:
Receipt fraud involves the thief attempting to return merchandise with an ineligible receipt. The receipt could be an older one being passed off as new, a stolen receipt, or even a fabricated receipt, with many websites selling fake physical or digital receipts.
Price tag switching
When the thief purchases a higher ticket item by switching the price tag to a lower cost tag and then proceeds to return the item after switching the tag back to the higher price tag.
Returning shoplifted items
This scenario involves the thief stealing items only to attempt to return them later. Returning shoplifted merchandise typically only works in stores without a proper return policy involving a receipt, since the thief won’t have a receipt for the goods.
This type of return fraud involves an individual purchasing an item, uses it once or a few times, then attempts to return it by pretending that it’s an unused item. This type of return fraud is most commonly seen amongst fashion retailers, where the fraudster will purchase an outfit, wear it once for some type of event, and then return it by passing it off as brand new.
Shoplisting is named as such due to the fact that a found or stolen receipt is used as a “shopping list”. The fraudster finds the items listed on the receipt, gathers them, and attempts to return them having never bought them in the first place.
Is Return Fraud a Crime?
The short answer to this question is yes. Return fraud is a crime.
However, what can vary is the punishment depending on the state you find yourself in.
For example, in California, depending on the value of the goods involved, return fraud can lead to criminal prosecution for either petty theft, shoplifting, or even grand theft. This would mean that the thief would be responsible for repaying the value of the goods stolen, incur serious fines, receive house arrest, probation, or even face jail time in the case of grand theft.
Ecommerce Return Fraud
You might think that return fraud is only prevalent in person, with some of the more common tactics, such as price tag switching, being applicable only to a brick-and-mortar retailer.
The fact is, return fraud is equally as common with ecommerce stores.
With the pandemic running rampant throughout 2020 and forcing most shopping to be done online, the US had $565 billion in ecommerce sales. Of the amount returned, an alarming 7.5 percent was found to be fraudulent.
This makes return fraud prevention equally as important for ecommerce.
Signs of Return Fraud
How can you tell if your business is experiencing a higher amount of return fraud? For most, it can be tough to figure out if you’re not sure what to look for.
Thankfully, there are some early warning signs of return fraud to be wary of. Some of which include:
- A sudden or steep increase in the amount of goods returned
- The number of markdowns from returned merchandise increases
- Inventory shrink rate increase (The difference in lost inventory count from one count to the next)
- Returns processed from customers out of town
- Returns processed at times where employee presence is lower
- Higher ticket items being returned without a receipt
Analyze these signs to determine whether or not your business has an issue with return fraud. This will make it easier to implement processes to prevent return fraud down the road.
How to Prevent Return Fraud
With return fraud being this prevalent, it begs the question: Should stores continue allowing returns?
The short answer is yes. A smooth return process is a vital component of maintaining a positive relationship with your customers. In fact, up to 95% of customers who are content with a merchant’s return process say they will shop from the same merchant again.
If that’s the case, how do we prevent return fraud without eliminating the ability to return merchandise?
Here are some tips to keep return fraud to a minimum:
- Make sure your return policy is clear and easily accessible for customers
- Issue cash returns only to those with a receipt in hand
- Limit cash returns as much as possible (issue store credit instead)
- Place a time limit on returns
- Look into restocking fees, where applicable and legal
- Require identification or specific contact information for returns
When fine-tuning your return policy or other store procedures to combat return fraud, it’s important to remember the customer experience as well. If you make your return policy too convoluted, customers will look elsewhere. The challenge is to strike a perfect balance: Your return policy is clear and concise enough to minimize return fraud, but your customers still have a smooth return experience.
Fraud in general costs businesses big, regardless of the type of fraud in question.
However, since return fraud often flies under the radar and can be difficult to spot or prevent, it can have an especially negative effect on a business’s bottom line.
Hopefully, armed with this information, you can spot the signs and prevent return fraud from affecting your business.
Learn More About Return Fraud With Forter’s Report
To better understand return fraud and how to keep it to a minimum, download Forter’s “Return to Sender” return fraud report.