When bad actors take advantage of return policies, return fraud is the result. It’s the act of defrauding businesses using its return process and it’s a problem in the retail industry.
If you think fraudulent returns aren’t a problem, think again. American hospitality and retail sectors reported $33.9 billion worth of merchandise was affected in 2019.
What Is Return Fraud?
So what exactly is return fraud? Trying to return stolen merchandise for a cash refund qualifies as well as using falsified and/or stolen receipts. Other methods are called price arbitrage and open box fraud. Employees also work scams where workers return stolen merch for a full refund.
Long story short. It’s the crime of defrauding a retail store through its returns process. Here are some more numbers on the subject. The National Retail Federation reports the number of returns has jumped due to the pandemic. That means return fraud will also increase.
Why Does Return Fraud Happen?
People who commit return fraud are abusing a company’s policies. And the returns themselves are increasing. Deloitte expects the rate to hit 10% this year. And there’s increasing pressure on people like Amazon workers to process returns quickly.
Types of Return Fraud Tactics
Small businesses that want to minimize return fraud need to be able to identify it. Here’s a list of 7 types you need to be aware of when dealing with customer returns.
Price Switching
This is about returning a purchase for the one bought at a lower price. Dishonest customers switch out the labels and they get the return for the higher price.
Receipt Fraud
This type of fraud can use someone else’s receipt or one that’s been stolen to secure cash refunds. Bad actors even falsify a valid receipt with this type of refund fraud.
Open Box Fraud
Bad shoppers purchase an item. Then they return it opened to get it at a lower cost under the store’s open box policies.
Returning Stolen Items
In this case, fraudsters return merchandise they didn’t pay for. Finding receipts and shoplifting the same item is one way of committing this crime.
Employee Fraud
Employees help someone return stolen goods for full retail price with the sales tax.
Switch Fraud
Bad actors start by purchasing merchandise that works. And they return a defective identical item that’s broken or damaged. This ties together with what’s called a cross retailer return. Where one item is switched out for a higher-priced item at another store.
Wardrobing or Free Renting
Clothing, computers, electronics, and tools get purchased and returned after being used. The intent makes this different from legitimate returns. Fraudsters only want to use the item for a short time.
Price Arbitrage
This occurs when scammers go about purchasing differently priced items. They return the cheaper item as the more expensive to pocket the difference.
How to Identify Fraudulent Returns When They Happen
Being able to spot return fraud when it happens is essential. Here’s what to look for when fighting return fraud. These red flags will help you to stop losing money in your retail business. And spot bad actors when they are returning stolen merchandise.
1. A Jump In The Number of Returns.
Scammers work in groups. They focus on a weak retailer when they find one. If your returns suddenly increase, your business might be targeted. One way to find price tag-switching criminals is to know what the normal number of returns is. Your small business can keep track of return merchandise with the right software.
2. Watch for Serial Returners.
You can fight return fraud by watching other patterns too. A genuine customer who returns products constantly might be legit. Or they might make a few honest mistake slip-ups. More than likely they’re working on a fraudulent return. Watch for processing refunds to the same people at any retail store. Look at the types of products returned for a pattern.
3. Watch for Inconsistent Details
Friendly fraud attempts use fake information. For example, eCommerce merchants should look for different names used with the same email addresses for several purchases.
4. Store Location Matters
A franchise owner needs to watch for return abuse patterns. A spike at one store can mean a receipt switching scammer has targeted that place.
5.Keep An Eye On The Holidays
Fraud.net reports the return request numbers jump after a customer shopping list spikes. They say 25% of returns happen between Thanksgiving and New Year’s Day. Genuine customers need to be considered here to strengthen your customer experience. But there are scammers trying to steal money too.
| Identifying Fraudulent Returns | Description |
|---|---|
| 1. Increase in Returns | Scammers often work in groups and target weaker retailers. Sudden spikes in returns could indicate targeted fraud attempts. Tracking normal return rates can help identify abnormal patterns. Utilize software to monitor return merchandise. |
| 2. Serial Returners | Consistently returning products might signal legitimate customers or fraudulent behavior. Watch for refunds being processed for the same individuals across different retail stores. Analyze the types of products frequently returned for patterns. |
| 3. Inconsistent Details | Fraudulent attempts might involve using false information. For instance, in eCommerce, watch for different names associated with the same email addresses across multiple purchases. |
| 4. Store Location | Franchise owners should be cautious of return abuse. An unusual surge in returns at a specific store might indicate receipt switching scams or targeted fraud attempts. |
| 5. Holiday Patterns | Return request numbers tend to increase during shopping spikes, such as holidays. While many are genuine customers, scammers also take advantage of this time. Consider both scenarios to enhance customer experience and prevent fraudulent activities. |
Tips for Preventing Return Fraud at Your Business
Good fraud prevention is about being proactive. Here are some ideas for tweaking the way you return items.
6. Offer store credit instead of cash refunds
A cash refund is tempting to bad actors. Offer store credits, exchanges off the store shelf, and gift cards instead.
7. Make your return policy clear
Put a reasonable limit on the time a customer can return something. Seasonal return policies can combat someone who likes to steal receipts.
8. Consider a restocking fee
If you implement these on items like clothing and electronics, you put a kink in a fraudster’s plan. These fees work best on an item purchased for high-end functions and/or seasonal events.
9. Track shipments
This makes it hard for people to report they didn’t get an item delivered at all.
10. Require proof of purchase
Asking for receipts is your best line of defense against return fraud. Watch out for invalid receipt red flags like a faded logo.
The Impact of Return Fraud: A Closer Look
Return fraud has significant implications for businesses and the retail industry as a whole. This section delves deeper into the consequences and challenges associated with return fraud.
- Financial Losses
- Return fraud leads to substantial financial losses for businesses, impacting their profitability and sustainability.
- The reported $33.9 billion worth of merchandise affected in 2019 underscores the magnitude of this issue.
- Erosion of Trust
- Return fraud erodes customer trust in businesses’ return policies.
- Legitimate customers may hesitate to make returns, fearing that their actions will be misconstrued as fraudulent.
- Resource Drain
- Businesses need to allocate resources to investigate and handle fraudulent returns.
- These resources could be better utilized for improving customer experiences and expanding services.
- Operational Disruption
- Dealing with return fraud disrupts normal business operations.
- Employees must spend time identifying and addressing fraudulent activities, diverting their attention from core tasks.
- Negative Customer Experience
- The impact of return fraud can trickle down to genuine customers.
- Lengthier return processes and stricter verification measures might inconvenience honest shoppers.
- Legal Consequences
- Businesses must navigate legal proceedings to address return fraud cases.
- Penalties and fines for perpetrators vary based on the severity of the offense and local laws.
- Industry Reputation
- A high prevalence of return fraud tarnishes the retail industry’s reputation.
- Consumers may perceive retail environments as less secure and reliable.
By understanding these ramifications, businesses can appreciate the urgency of combating return fraud and implement strategies to mitigate its impact.
What Happens If When Someone Commits Return Fraud?
Return fraud carries different consequences. An empty box scam might just be a misdemeanor. But you can still spend a year in jail and pay up to a $1,000 fine. A more serious offense can cost you $10,000 and three years behind bars.
Is Refund Scamming Illegal?
Yes. According to the law, it’s like petty theft or shoplifting. But the intent to steal must be proved according to California law.
Return Fraud: FAQs
What is return fraud?
Return fraud refers to the act of defrauding businesses by exploiting their return policies. It involves abusing the return process to obtain refunds, often through dishonest or fraudulent means.
How prevalent is return fraud?
Return fraud is a significant issue in the retail industry. In 2019, the American hospitality and retail sectors reported $33.9 billion worth of merchandise affected by return fraud.
What constitutes return fraud?
Return fraud includes various deceptive practices such as attempting to return stolen merchandise for cash refunds, using falsified or stolen receipts, engaging in price arbitrage, and taking advantage of open box policies.
Why does return fraud happen?
Return fraud occurs when individuals exploit a company’s return policies for personal gain. Increasing pressure on retail workers to process returns quickly and the rising rate of returns contribute to this issue.
What are the types of return fraud tactics?
Return fraud tactics encompass several methods, including price switching, receipt fraud, open box fraud, returning stolen items, employee fraud, switch fraud, and wardrobing/free renting.
How can businesses identify fraudulent returns?
Businesses can identify fraudulent returns by watching for red flags such as an unusual increase in returns, patterns of serial returners, inconsistent details in customer information, and store-specific spikes in returns.
How can businesses prevent return fraud?
Businesses can take preventive measures by offering store credit instead of cash refunds, clarifying return policies, implementing restocking fees, tracking shipments, and requiring proof of purchase like receipts.
What are the consequences of committing return fraud?
Return fraud can lead to legal consequences. While penalties vary, individuals involved in return fraud might face fines, jail time, or both, depending on the severity of the offense and local laws.
Is refund scamming illegal?
Yes, refund scamming is illegal and can be compared to petty theft or shoplifting. However, proving the intent to steal is essential in legal proceedings, as required by relevant laws.
How can businesses combat return fraud?
Businesses can combat return fraud by employing vigilant staff, educating employees about fraud prevention, adopting advanced software for tracking returns and implementing robust customer verification processes.
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