How to identify and prevent return fraud in e-commerce

Question: What keeps e-commerce retailers up at night?

Answer: Abandoned carts. Competition. Customer Acquisition Costs. Delivery Issues. Keeping up with technology. Unforeseen events. Return fraud and many others.

• Last year 13.7% of retail returns were fraudulent, up from 10.4% a year earlier. [1]

The financial toll is staggering, but the damage extends far beyond the monetary loss. This pervasive issue undermines consumer trust, jeopardizes business reputation, and disrupts the overall functioning of e-commerce platforms. 

The purpose of this article is to shed light on the pressing issue of fraudulent returns. As an online store owner or manager, you need to understand the mechanisms behind this fraud, the common tactics employed by scammers, and how to fortify your business against such deceptive practices.

What is online return fraud?

Online return fraud, as the name suggests, is an illegitimate practice where a customer abuses a company’s return policy for their own financial benefit. The methods used in this form of fraud are diverse and can range from returning stolen items to making false claims about product defects or delivery errors. This fraudulent activity is not just confined to the virtual world. It extends across multiple channels, and this includes instances where a customer purchases an item online and then makes a return at a physical store, taking advantage of multiple delivery options.  

Example of return fraud

A customer purchases a high-priced laptop from an online store. They initiate a return process, claiming that the laptop has a manufacturing defect. However, the crux of the matter lies in the deceitful intent of the consumer. The aim is not to return a faulty product, but to exploit the return policy for financial gain.

In this scenario, instead of sending back the original item, the consumer cunningly substitutes it with a counterfeit product. This counterfeit may appear identical but is of lower quality or even damaged. The exploiters of return policies often resort to this tactic, swapping original products with counterfeits. The importance of thorough product inspection upon return cannot be overstated in such cases, as it’s the first line of defense against this kind of fraud.

Beyond the receipt: understanding different types of return fraud

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In the vast landscape of e-commerce, it’s essential to understand that return fraud isn’t confined to a single type. There is a variety of fraudulent practices that dishonest customers might employ to exploit your return policies. To safeguard your business, you must familiarize yourself with the different types of return fraud.

Wardrobing

Wardrobing is a deceptive practice where customers purchase products, mostly clothes or high-end items like electronics, use them briefly, and then return them claiming they were never used. This fraudulent act not only leads to financial losses due to refunds for used items but can also cause an increased workload for your customer support team. Moreover, it can potentially damage your business’s reputation if not handled effectively.

Empty box returns

Empty box returns occur when a customer claims to return a product for a refund or replacement, but instead, they ship back an empty package. The customer then falsely accuses the retailer or the shipping company of losing the product, creating a challenging situation for the business to navigate. 

This is why offering optional shipping insurance during checkout can be beneficial. While it won’t prevent empty box returns entirely, it can provide some financial protection in case the carrier loses the package or the customer initiates a fraudulent return claim. 

Multiple returns

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This type of fraud involves a scammer repeatedly buying and returning items, capitalizing on incentives like welcome discounts, cashback offers, or other promotional deals. The negative impact it can have on a business is considerable, affecting both the bottom line and reputation. 

Recognizing the patterns of this fraud is the second step in combating it. Retailers must monitor the frequency of returns vigilantly, particularly during promotional periods. A common sign of this fraud is a customer who makes purchases, avails of discounts or cashbacks, and then quickly returns the items. This pattern may be repeated multiple times if the store has a lenient return policy.

How to protect your business against return fraud

There are several strategies you can employ to minimize the risk of falling victim to this type of fraudulent activity. Let’s dive into some of the key tactics you can use to fortify your business against return fraud.

Use a fraud prevention software

Cyber threats come in many forms:

• scraper bots can scrape your return policy, stealing valuable information and causing potential harm to your business;
• account takeover bots attempt to break into user accounts, often with the aim of committing fraud;
• carding bots are designed to commit payment fraud.

With the right fraud prevention software, you can protect your business against these different types of threats, ensuring the safety of your business and your customers. From effective carding prevention to accurate return fraud detection, these tools can significantly increase the security of your website or mobile app.

Choosing the right fraud prevention software is key. It should suit your business needs and provide the best protection possible. Here are some factors to consider:

• Does the software provide comprehensive protection against all types of cyber threats?
• Does the pricing structure align with your budget?
• Is the software user-friendly?
• Does the provider offer reliable and responsive customer support?
• What do other users have to say about the software?

Sharpen your return policy

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Your return policy is your first line of defense against return fraud. A well-crafted return policy can not only deter potential fraudsters but also protect your business from unnecessary losses.

• Define the return criteria. Be specific about what types of goods qualify for a return and refund. For example, you might accept returns for items that are damaged, defective, or not as described. You may also choose to accept returns for change of mind, although this is not a requirement. It’s essential to clearly state any exceptions, such as personalized or perishable items that cannot be returned.
• Outline the return process. Make it clear what the customer needs to do to return an item and get a refund. This could include providing a receipt or proof of purchase, and returning the item in its original packaging. You might also specify that the item must be in a certain condition, such as unused and with all tags attached. This ensures that customers know exactly what to expect when they want to return an item, reducing the chance of disputes.
• Decide who will cover the return costs. You have a few options here. You can absorb the costs yourself, ask the customer to cover them, or share the costs. Whatever you choose, make sure it’s clearly stated in the policy.
• Use clear and understandable language in your policy. Avoid legal jargon and keep sentences short and clear. Customers should be able to understand your policy without needing a law degree.
• Monitor returns. By monitoring return patterns, you can identify potential fraudulent activity. Red flags might include: unusual return volume, short return windows, inconsistent reasons for return, and mismatched products. 

Keep detailed records

Keeping detailed records is a fundamental step in managing your business and protecting it from return fraud. This involves diligently documenting all transactions, including sales, payments, and returns. Such a practice is pivotal in spotting patterns and identifying potential fraud cases. When you regularly track customer histories, you can easily detect any unusual activity, such as frequent returns, which could indicate fraudulent behavior.

Train your employees

It’s important to note that this education should not be limited to your IT team. Every member of your workforce should be well-versed in the concept of return fraud, including what constitutes it, the various types it can take, and the tactics employed by scammers. This comprehensive understanding will empower your employees to be vigilant and proactive in the fight against fraud. 

Delivery Management Software: a guardian against return fraud

A powerful DMS like Innoship acts as a sentinel against return fraud. It offers features such as real-time tracking, enabling businesses to monitor the statuses of their orders and cash-on-delivery reimbursements constantly. By having a seamless oversight of the entire delivery process, businesses can ensure that the return requests align with the actual delivery status, significantly reducing potential fraud. 

Additionally, DMS offers comprehensive insights into orders, finances, and alerts about unforeseen incidents. With all these data in one place, you can make informed decisions, preempt potential fraudulent activities, and maintain customer satisfaction.

Remember, a proactive approach, effective technology, and employee training can go a long way in safeguarding your business against the detrimental effects of return fraud. Stay vigilant, stay informed, and above all, stay prepared. You’ve got this!

Sources
[1] Zak Stambor. “Return Fraud Is on the Rise.” EMARKETER, EMARKETER, 9 Feb. 2024, www.emarketer.com/content/return-fraud-on-rise. Accessed 17 May 2024.