Retail is under siege by a sophisticated form of economic sabotage that threatens the very foundation of online commerce as it silently erodes retail profitability. Returns fraud and refund fraud have transformed from a minor inconvenience into a multibillion-dollar crisis that undermines the entire ecommerce ecosystem. In 2022, an estimated $816 billion of merchandise was returned in the United States, with a staggering $84.9 billion classified as fraudulent (more than 10%). The problem has grown rapidly, initially fueled by the explosive ecommerce growth during the COVID pandemic, with retailers experiencing a 67% increase in return rates over the past five years.

The Economic Impact

The scale of returns fraud is staggering, and the financial consequences extend far beyond simple refunds. Processing a single return costs an average of 20 – 30% of the original order value. The total annual cost of retail fraud has ballooned to $101 billion, with holiday seasons seeing returns fraud account for nearly 20% of all returns.

Examples of Returns Fraud:

1. Wardrobing: Consumers purchase apparel, footwear, accessories, or just about anything with the intention of wearing/using them temporarily and then returning them for a full refund. This is particularly common for luxury items that might be needed for one-time events or one-time use, such as parties, meetings, or to complete a non-recurring task. For example, a soccer mom who wants a lovely dress for a New Year’s Eve party, online personalities, and influencers would be highly likely to purchase elaborate clothing and supplies for use in videos, photos, and demonstrations and then return the items without significant wear, treating online retailers like free rental services.


2. Bracketing: A risk management shopping approach where customers intentionally order multiple variations of a product, knowing in advance that they will only be keeping one or a select few. For example, a shopper might order three sizes of the same collared shirt in different neck and/or arm lengths or multiple colors to try them on at home and then return all but the one that is needed. The convenience of browsing online catalogs and knowing that the returns will be free allows consumers to “try it before they truly buy it.”


3. Component Stripping: A fraudulent act primarily targeting high-end electronics; scammers purchase the devices, remove valuable components to sell them, and then return the items with the missing components. Often, retailers have no idea until the item is resold and doesn’t work for the next customer. For example, a fraudster might purchase a laptop, take out the RAM card or a graphics card, then return the machine with inferior parts in its place or no replacement parts at all, effectively stealing the valuable hardware while appearing to make a legitimate return.


4. Empty Box Fraud: The scammer reports that the box was delivered empty or missing some of the intended contents, requesting a refund or replacement without shipping anything back to the retailer.


5. Product Swapping: A type of return fraud where a new condition item is purchased and then an older, worn, or broken item is returned in the new product’s packaging. The business approves the refund, not knowing about the deception until the next customer has a bad purchase experience.

Examples of Refund Fraud:

1. Receipt Manipulation: Cybercriminals create and sell fabricated receipts or purchase confirmation messages on the dark web, enabling the purchasers to obtain refunds for products they never purchased. This intricate scheme targets both online and physical retail stores.


2. Chargeback Fraud: Customers dispute legitimate charges with their credit card company, claiming the transaction(s) were not unauthorized or that they never received the product (similar to making a No Delivery claim with the Seller). This forces the retailer to prove the order’s validity or lose the value of both the product and the revenue.


3. Price Switching: A deliberate manipulation requiring careful execution whereby barcodes are altered, or price tags are swapped between two items with distinctly different prices to obtain larger refunds. For example, one might purchase a higher and lower-priced item, swap price tags between the two, and then return the lower-priced item for the higher refund amount. Or they may modify the barcode on an item to trigger a more favorable refund.


4. No Delivery Claim: Customers claim their order was not delivered and claim a full refund when the item(s) were indeed delivered; they keep both the item and the refund.


5. Bogus Product Defect: A customer falsely claims that a product was delivered damaged or otherwise defective to either secure a refund without returning the item or to receive a replacement and complete the transaction, having acquired two for the price of one. This involves fabricating or exaggerating product flaws to trigger the retailer’s return or replacement policy without genuine grounds for the claim.

Summary

Returns fraud represents a complex economic challenge requiring continuous monitoring and adaptation. Retailers must remain vigilant and leverage the latest fraud detection tools and technology while designing a returns program that protects their bottom line while encouraging customer trust and loyalty.

By employing technology, training employees to spot patterns, and consistently enforcing return policies, retailers can prevent systemic abuse and minimize the impact of returns and refund fraud on profitability.

The battle against returns fraud transcends simple loss prevention. The ability to detect, prevent, and mitigate fraudulent returns and refunds will separate successful retailers from vulnerable targets.

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