According to the National Retail Federation, return fraud is estimated to cost retailers $17.8 billion each year. If you’re an online merchant with a return policy, you may be at risk. 

Loss of revenue due to wear and tear, added operational expenses due to cost of processing returns, and restocking inventory are all factors contributing to the high annual loss due to returns abuse, and it doesn’t seem to be going away. With the majority of customers only shopping from websites with a clear return policy, we may be looking at a steady uptick in return fraud. However, there is much to be done to protect against this. 

It’s important to note that not all return fraud cases are carried out with malicious intent. In many cases honest customers may commit fraud without even realizing it by, for example, returning an item to a merchant that unknowingly is not eligible for return. Despite good intentions, these cases still cause companies to lose revenue and must be stopped. 

However, there are cases of meticulously executed returns orchestrated by professional fraudsters that are causing harm to merchants on a regular basis. Sometimes fraudsters may have multiple bots lined up to carry out attacks on several websites simultaneously. Some may do it themselves as a means of income, and some may do it as a one-off because they’ve found themselves in a financial tight spot and could use the extra cash. 

Types of Return Fraud

The art of scamming merchants out of their money is something that has been around for eons, the changing variable being the way in which it’s carried out. The most common forms of return fraud that we see in eCommerce are: 

• Claiming the item was never received (when it was) and demanding a refund, known as INR (item not received) abuse 
• Claiming the item is defective (when it’s not) and demanding a refund
• Claiming the item was returned and stolen along the way and sending an empty box
• Purchasing an item with the intention of returning it after use, better known as ‘wardrobing’ 
• Buying an item online and returning it in store as the policies are more beneficial, known as Omnichannel Returns Fraud or BORIS (buy online, return in store)

Fraudsters are getting more creative as time goes on and therefore this list will no doubt grow over the years. What is also growing, however, are the ways in which we can fight this with knowledge, tools and technology. 

Forecasting the Peaks in Return Fraud 

The majority of online purchases are made in the holiday season. Last year, the National Retail Federation claimed that the estimated cost of these holiday returns is $171 billion. Due to the high volume of purchases from Thanksgiving to New Years, companies will often relax their return policies in order to keep up with the onslaught of returns, effectively leaving them even more vulnerable to attacks. 

During economic uncertainty, there is an increase in cases of customers regretting the purchase and therefore claiming their money back, as well as wardrobing–when a customer buys a garment with the full intention of returning them after wearing it. While these may seem harmless to some, they without a doubt a types of fraud that must be identified and controlled. 

An Ounce of Prevention is Worth a Pound of Cure

Online purchases are CNP, or card not present, by nature, making them easier to commit and harder to catch. The criminals are faceless and anonymous. It is therefore critical that online businesses begin to take notice of the red flags we see during transactions and returns and make all the necessary precautions. 

1. Validate your customers’ identities

Technology once used mainly by the big eCommerce merchants is now available, not to mention necessary, for any business with online transactions. Knowing where your buyer comes from and if they can be trusted is key in knowing whether or not to raise or lower the amount of friction they experience. With Multi-Party Computation, Identiq has created a network that allows you to communicate anonymously with other eCommerce companies to check if they’ve ever dealt with one of your new users and if they can be trusted. 

2. Have a clear, identity-based return policy 

Leave no room for error or misunderstandings on the part of the customer. Ensure that your return policies are unequivocally stated on your website to avoid confusion or claims of ignorance regarding the necessary procedures, and hold the customer accountable for their understanding of company policy. By implementing an identity-based return policy, you’re able to identify the ‘serial returners’ and adjust the policy in real time. 

3. Cross-organisational collaboration 

Omnichannel returns, for example, is a form of refund abuse that could be prevented if the eCommerce platforms would communicate and align their return policy with brick and mortar stores.Effective collaboration between teams within an organization is essential in preventing returnsabuse. Once clear communication channels are established between teams like fraud prevention, customer service, and IT teams, they are able to not only identify behavioral patterns that indicate fraud, but can also share best practices and strategies in mitigating refund abuse. 

Always Be One Step Ahead 

Return fraud is a growing concern for businesses but it’s not an insurmountable challenge. By staying on top of trends and collaborating with peers, along withadvanced analytics and technology, businesses can protect themselves against this fraudulent activity. Take proactive measures to prevent it in order to stay one step ahead. 

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