In 2021, a National Retail Federation survey demonstrated that for every $100 in returned merchandise, retailers are losing $10.30 to return fraud. Roughly 10% of all returned goods are based on fraudulent returns and manipulation of return policies, and though companies remain vigilant, it is an extremely difficult form of fraud to detect and prevent, as many stores cannot simply eliminate their return policies.
So what exactly are fraudsters doing that they can get away with defrauding stores to such an extent without being detected? To find out, let’s get started with the basics of what refund fraud is.
Return fraud - also called refund fraud or refund theft - is the act of abusing a return or refund process for monetary gain. There are many types of return fraud, but most commonly, it consists of obtaining an item from a store (through purchase or theft), and then defrauding the store by returning it for a refund.
Return processes are offered to customers to help them in a legitimate way; for example, you buy a shirt, and it doesn’t fit, so you return it. However, there are many different ways to abuse a return process, many of which can lead to monetary gain and all of which are to the detriment of the store in a way that was not intentional based on their return process.
Shoplifting an item and then returning it to the store without a receipt for a full refund, or falsifying a receipt to make it look like you purchased an item are both common examples of refund fraud.
Yes, return fraud, refund fraud, or return theft are all illegal. Many fraudsters believe this to be a ‘victimless crime,’ but by governing bodies, they are considered a form of theft, as they can only occur by means of defraudation of stores and online eCommerce platforms.
This crime is prosecuted much the same way as any type of theft, and the punishments - though varying from state to state or country to country - can include punishments such as:
In 2019, for example, a Florida woman was charged for defrauding T.J. Maxx of $160,000 by means of a handbag scam that utilized return fraud. This fraudster bought expensive designer handbags as well as knockoffs from Amazon, switched the tags, and then returned the knockoffs to T.J. Maxx for a full refund.
Many stores and eCommerce companies have struggled to combat return fraud, as it is very difficult to detect, and harder still to prevent because the regular refund policy often remains in effect even when fraud is detected.
However, there are some typical ways return fraud occurs that leave some markers of how it can be detected.
There are a number of different types of return fraud, but the process of committing it is relatively similar across the types. This is typically what refund fraud entails:
Here’s one concrete and common example of how return fraud might be committed:
A fraudster finds a receipt in the parking lot of a store for 2 packages of Duracell AA Batteries. They then walk into the store with the receipt and pick up the same 2 packages of batteries off the shelf, bring them to the return counter, and ask for a full refund. The fraudster walks out of the store $40 richer having never purchased the items in the first place.
This also creates inventory management issues; the store now thinks it received 2 items back, but in reality, it didn’t. Their inventory will show that there are 2 extra packs of batteries that they don’t actually have. This can lead to issues with inventory and supply chain management for companies.
While refund fraud may seem straightforward, there are actually a myriad of ways that fraudsters can take advantage of a marketplace’s refund policies. These are some of the most common types of refund fraud used in this process:
For most marketplaces, refund policies aren’t just an option - but a must-have. While these policies can be fairly lenient or extremely rigid with allowing returns, it’s paramount for companies to have clear guidelines and rules about when and how products can be returned.
Since most marketplaces allow some means of returning a product or service, it’s impossible to eliminate the problem fully. Fraudsters will always look for refund policies with loopholes that can be exploited for personal gain.
Any organization that facilitates a return policy will face this type of fraud in some shape or form. While the methods used will vary based on the industry and return policy being used, fraudsters will attempt to take advantage in any way they can.
It’s therefore always important to consider how refund policies could be abused, especially concerning your product or services. Design the policy to be as air-tight as possible, with clearly defined rules on how specific incidents are handled. Provide the policy to employers, making it accessible and facilitating adequate training to go with it. Make sure team members know how to handle different situations and how to enforce the refund policy.
For online marketplaces, transaction monitoring will be extremely valuable, flagging suspicious transactions - even those that are being returned. Leverage activity monitoring to truly understand user behavior; and develop rules that look for certain series of activity that could signal refund abuse.
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