As frustrating as it can be to give customers their money back, returns are inevitable. Products fail to hit the mark for many reasons, eventually resulting in a return. But not all returns are genuine.
Shoppers often demand refunds for items they bought years ago, already used, or pretend they didn’t receive. These fraudulent return requests cause the biggest losses for 13% of all retailers, which is why return fraud has become more of a priority for 53% of all retailers.
In this guide, we’ll share the most common types of return fraud, with advice on how to detect and deter scammers from requesting illegitimate returns.
Table of Contents
What is return fraud?
Return fraud happens when shoppers try to deceive retailers throughout the product return process. It can take many forms, from returning items they’ve already used (i.e., wardrobing) to giving back stolen items in exchange for a cash refund.
The impact of return fraud
Return fraud is an expensive problem for retailers.
The National Retail Federation (NRF) found that for every $100 of returned merchandise, retailers lose $10.30 to fraud.
Those selling auto parts, apparel, and home improvement products are most likely to deal with fraudulent returns.
This type of retail fraud is most likely to impact your bottom line throughout the holiday season, where retailers see a 70% increase in fraudulent returns than other times of the year.
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Types of return fraud
- Receipt fraud
- Returning stolen items
- Switch fraud
- Employee fraud
- Empty box fraud
- Open box fraud
- Cross-retailer returns
- Price arbitrage
Fraudsters have found several ways to scam a retailer into processing a fraudulent return. Let’s take a look at the most common tactics.
Receipt fraud happens when customers attempt to return items using a fake receipt. Scammers produce their own receipts and pretend they’ve purchased an item in-store. They use the invalid digital or physical receipt to request a refund.
Wardrobing happens when customers buy an item in-store, use it, and later return it. It’s popular in the fashion industry: shoppers are known to buy items, keep the tag on, and return it for a full refund once they’ve worn it.
Steve Pogson, founder and ecommerce strategy lead at FirstPier, says,
“Consider someone who buys a certain dress for a particular occasion. Despite being utilized, the clothing is ultimately returned because they won't need it after that particular event. Wardrobing is frequently regarded as harmless by people who do it, yet it is still a fraud.”
“It can be helpful to carefully inspect objects for any signs of use when they are returned,” Steve says. “Using tags that would make it difficult to wear the item without first removing the tag can also deter fraudsters when it comes to apparel.”
Returning stolen items
Shoplifting has been plaguing the retail industry for decades, causing a $61 billion annual problem for retailers worldwide. Scammers enter the store and take items they haven’t paid for. Return fraud happens when they bring those stolen items back in exchange for a cash refund.
Bricking is a type of return fraud where a genuine customer removes components from a product and renders it almost unusable.
It’s especially common with electronic items. For example, customers can purchase a cellphone and strip it of its most valuable parts—such as the speaker or circuit board—to resell. The shopper then reassembles the phone, which looks like it’s now working, and returns it to the retailer for a full refund.
Switch fraud happens when customers swap parts of their order to fraudulently obtain a refund. There are two main types to look out for:
- Price switching: This happens when shoppers buy a low-cost item and replace the price tag with a higher-cost product.
- Receipt switching: This happens when customers use an older, stolen, or invalid receipt to return merchandise they’ve genuinely purchased.
Unfortunately, not all retail associates are trustworthy. A small number of them join forces with fraudsters to commit merchandise return fraud.
The most popular scenarios include processing refunds for a scammer who doesn’t have a valid receipt. Some employees help scammers steal items from the store for them to later fraudulently return.
💡 PRO TIP: With Shopify POS, you can assign different roles and permissions and set boundaries on what store staff can do in your POS system without manager approval—like changing a product’s price or applying a custom discount to a sale.
Empty box fraud
Empty box fraud is a problem for retailers that offer local delivery. It happens when a customer claims that the box they received their delivery in is empty. They either ask for a replacement or a cash refund, while secretly keeping the original item.
Open box fraud
Many retailers have an open box policy to sell opened or previously returned items at a lower cost, instead of scrapping it altogether.
Unfortunately, a retailer’s goodwill often encourages open box fraud. It happens when shoppers legitimately purchase a high-price item, return it to the store, and buy it at a cheaper price using the store’s open box policy.
Is a competitor selling a similar product at a much lower price? Be cautious of cross-retailer returns, which happen when shoppers buy a cheaper product from a competitor and return it to your store for a higher refund amount.
Price arbitrage happens when shoppers purchase a better, higher quality replacement of an item they already own. They later request a refund for the higher priced item, but return the original one instead.
Let’s put that into practice and say you’re selling second generation AirPods through your store. An existing customer who’s already purchased them later returns to buy the third generation pair. Soon after, they return to the store and ask for a refund on their second purchase but bring the second generation AirPods in the container. They get a refund for the higher-priced product by swapping them.
Return fraud detection
- Review historic fraud data
- Sudden increase in returns
- Return policies not being enforced
Now that we know the types of refund fraud your store is likely to contend with, here are three telltale signs that your shopper is requesting a fraudulent return.
Review historic fraud data
Keep an eye out for serial returners in your retail store—people who are always at the returns desk asking for a refund. While it may be an innocent customer with a serious bout of bad luck, it’s likely a scammer pushing their luck.
Research suggests that the number of serial returners is on the rise, with 42% of US retailers seeing an increase over the past 12 months.
To prevent them committing fraud in your store:
- Manually approve orders from suspicious customers
- Only offer like-for-like swaps instead of cash refunds
- Add them to a blocklist (if they’re a serious returner)
Sudden increase in returns
Many scammers are involved in tight communities, each helping one another out when they find a weak retailer. A sudden increase in customer returns is an indicator that your store might be under attack.
Know what a “normal” number of returns looks like for your store. Educate your team on this, explaining what return rate should be cause for concern. A sudden increase in returns will be obviously highlighted and investigated before even more money is lost through return fraud.
Return policies not being enforced
Return policies exist to prevent and deter fraud. If you spot that store associates are processing refunds that don’t enforce your policy, ask them why. Some may not be keen on the confrontation that a scammer brings when they’re trying not to get caught. Others may be involved in return fraud themselves.
Don’t give staff any excuse to go against your returns policy. Have the document printed and shown clearly at the register. Provide regular training that shows staff how to handle tricky return situations (like irate customers who get upset because they’ve lost their receipt).
💡 PRO TIP: With Shopify POS, you can accept exchanges for purchases made online or at another store location and your inventory will be updated instantly–no manual reconciliation required.
How to prevent return fraud
- Eliminate cash refunds
- Implement a time limit on returns
- Require IDs for returns
- Thorough record-keeping
- Train employees to spot fraud
- Use fraud protection software
Ready to stop losing money through fraudulent returns? Here are six fraud prevention techniques to prevent scammers from draining your store of profits.
Eliminate cash refunds
Cash refunds can be a huge incentive for customers to commit return fraud. Removing that altogether will deter scammers from returning items that don’t qualify for a refund.
Keep legitimate customers happy by substituting cash refunds for store credit, gift card, or like-for-like exchanges. That way, genuine customers can return items they no longer want or need, and scammers aren’t incentivized to commit return fraud.
💡 PRO TIP: With Shopify POS, you can sell physical and digital gift cards that can be redeemed both in store and online. Sell physical gift cards in store, email digital gift cards to customers, and let them redeem their gift card wherever they prefer to shop.
Implement a time limit on returns
For many retailers, time brings change—both in terms of sale prices and product quality. Prevent customers from committing refund fraud through switching by implementing a time limit on their return.
If your return window is 30 days, for example, it prevents customers from returning older, lower-quality products with a genuine recent receipt.
Alternatively, if you don’t want to risk upsetting genuine customers who want their money back, offer a longer return period for like-for-like refunds. You could offer a 15-day return window for cash refunds, or 45 days for store credit and exchanges, to convince customers to take the latter option. It’s the type of easy returns experience that influences 96% of people to shop with a retailer again.
Require IDs for returns
Ask shoppers for identification when they’re bringing an item back in-store for a refund. That could be:
- Photographic ID that matches the customer name (which can flag identity theft)
- The payment method they used to make the purchase
- Confirmation of the last four digits on the credit card they paid on
It’s also smart to require receipts for all returns.
An estimated 16.6% of all returns are non-receipted return fraud (compared to 3.6% fraudulent returns that supply receipts).
Customers requesting legitimate returns are often happy to supply this in exchange for their refund.
💡 PRO TIP: With Shopify POS, shoppers can return or exchange items they bought in store or online as many times as they need to be satisfied with their purchase. You don’t have to resort to issuing store credit or gift cards, and customers have the freedom to choose being refunded or exchanging their purchase for another product.
“Possessing robust and thorough record-keeping practices is the greatest approach to stay one step ahead of scammers,” according to Brian Case, director of ecommerce and retail at Selkirk.
“Systems should gather and assemble receipts, and secure databases should hold the purchase history of your customers. The addresses and contact details of clients should always be kept up to date by retailers. If the retailer has less faith in the authenticity of the client data, it will be more difficult to identify a phony account.”
Pay close attention to retail metrics that’ll help you detect fraudulent shoppers before they request a refund. In Shopify POS, for example, you’ll see important return data like:
- Number of returns by employee/customer
- Date and location of last return (if you operate multiple stores)
- SKUs previously returned
Co-founder Callum Dooley adds that Elite Wine Refrigeration has “guidelines in place for what to do with used and returned goods when providing return logistics for a client.
“We will restock items on the shelf if they are brand new and marketable. We look for things like matching serial numbers among other things. We will record it on the customer’s account if they return a fake or a switched item. If it happens more than once, we’ll blacklist the buyer and let our suppliers know.”
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Train employees to spot fraud
Retail store associates will be the people processing your returns. As part of their training, bring staff up to speed with the telltale signs of return fraud. Asking a few extra questions during the refund process, such as “What didn’t you like about the product?” can weed out bad actors from legitimate returners.
It’s also worth training retail staff on quality standards required to process a refund. Bricking can affect future customers if store associates accept the return and put a now-unusable product back on the shelf.
Use fraud protection software
As much as you can train staff on how to spot return fraud, they’re only human. Fraudsters are smart and constantly find new ways to slip through the cracks.
Bolster your store’s protection from scammers with fraud prevention software such as:
Gerrid Smith, chief marketing officer at Joy Organics, adds,
“Retailers who want to combat fraud must optimize their return rules as well as pay attention to consumer return patterns in order to identify the worst offenders and stop further fraudulent return transactions from occurring.”
Protect your store against return fraud
Returns are an inevitable part of running a retail business. That doesn’t mean every refund you’re processing is genuine.
Get clued in on the types of return fraud. From bricking to cross-retailer returns, educate your team on the red flags that indicate it’s happening inside your store. Above all, have a strict returns policy that’s enforced at all times. It’s better to err on the side of caution than lose money through fraudulent returns.
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