Return fraud: The price we pay for e-commerce
A surge in online shopping has unsurprisingly brought about a spike in online returns. As reported by the National Retail Federation, nearly 20% of the purchases end up being returned. In 2022, total US online sales reached approximately $1.29 T, with around $212 B of those purchases being returned, out of which $22.8 B (10.7%) were identified as fraudulent. Let’s delve deeper into the world of return fraud.
Decoding return fraud
Return fraud occurs when someone obtains money or goods through deceitful means by returning goods they did not purchase, or by making false claims about a product to receive a refund. It is essentially a form of theft that targets businesses and their return/refund policies against online and in-store transactions. This can be done by creating fake receipts, stealing/shoplifting merchandise and returning it for a refund, or by using stolen credit cards to make purchases and then returning items for cash.
A classic example of return fraud - Doctoring the return label
Return fraud vs. refund fraud
Return fraud is closely related to refund fraud, but there are a few differences between the two. Return fraud mandates returning an item that has been used or manipulated, while refund fraud means usurping a refund without the actual return of any merchandise. Hence, businesses lose revenue from the initial sale in return fraud, but they may be able to resell the item. However, businesses lose both the revenue from the initial sale as well as the product in refund fraud. In terms of policies, return frauds abuse return policies or manipulate them to their advantage. Whereas refund frauds use false claims to return a product altogether.
Return fraud mandates returning an item that has been used or manipulated, while refund fraud means usurping a refund without the actual return of any merchandise.
Common return manipulations
There are several routes that fraudsters can take when it comes to return frauds. Retailers need to be mindful to sidestep these and remain vigilant against such tactics in all their transactions.
• Fake receipt fraud: Such frauds happen when customers attempt to return items using a fake receipt.
• Returning pilfered products: malicious customer returns pilfered merchandise, though lacking a receipt to claim a refund or store credit.
• Receipt switching: Fraudsters acquire an identical item and exploit the original receipt to obtain a refund for the second item instead of the original product, essentially acquiring the first item at no cost.
• Wardrobing: Scammers purchase an item, use it, and then return it to the store for a refund.
• Price swapping: This tactic entails buying a low-value product and changing the price tag to a higher-priced product while returning.
• Merchandise exchange (Arbitrage): This occurs when a customer buys a new product but returns an old or counterfeit product. In such an exchange fraudsters can swap an expensive item for a cheaper one and return it instead.
"Malicious customer returns pilfered merchandise, though lacking a receipt to claim a refund or store credit."
Combatting return and refund fraud
Staying one step ahead of such fraud requires retailers to proactively detect fraudulent transactions and take measures to prevent them.
• Mandate ID and contact information for returns: To prevent refunding items bought with stolen cards, retailers can cross reference online purchases with buyer’s contact details and have access to fraud investigation tools to check for flagged orders. Receipts may not always be required for refunds.
• Restrict cash refunds: Provide credits/gift receipts over cashback options to customers who have returned the product.
• Return policies: Preventing return and refund fraud by strengthening applicable policies. Transparent and secure policies can ensure visibility and reduce any room for errors.
• Fraud screening: Even with precautions, refund fraud can occur. It is imperative for retailers to screen for fraudsters by detecting potentially risky transactions and declining purchases from policy abusers.
The proposition of BORIS
The surge in online retail during the pandemic has resulted in a spike in return-related challenges. In order to provide customers with greater convenience and flexibility and reduce return shipping costs for retailers an option of BORIS – Buy-Online-Return-In-Store – was introduced. A retail practice, BORIS allows customers to purchase items from an online store and then return those items to a physical store as an alternative to shipping them back.
Anand Chandrashaker, Senior Domain Principal, Digital Transformation Services, Infosys BPM
While BORIS provides significant benefits for the business and customers, there are also a few drawbacks to consider which are susceptible to certain types of fraud such as customers returning used, stolen, counterfeit, and low-value items, or products without original packaging or receipts.
Additionally, cashiers at POS terminal may also exploit the process by converting the actual return to a fake return and pocketing the amount in the form of gift cards.
Hence, even though BORIS can relieve customers of the hassles of returning, it is also necessary to keep a stringent watch on the final execution of the process to nip fraudulent activities in the bud.
A costly affair, return frauds not only put the merchant and customer security at risk, but also damage the seller’s reputation. In fact, according to the return fraud statistics, retailers face a loss of $10.40 for every $100 worth of accepted returned merchandise. Retailers must deploy cutting-edge solutions to help fortify their transactions against such fraudsters and deliver secure and seamless transactions to their customers.