The 2023 Consumer Returns in the Retail Industry report (created by the National Retail Federation and Appriss Retail) uncovered some disturbing numbers when it comes to retail returns – and return fraud. Total retail returns added up to $743 billion in 2023, accounting for 14.5% of all sales. Of those returns, 13.7% (amounting to more than $100 billion) were fraudulent.
The costs of fraudulent returns go far beyond just the cost of goods. There’s also shipping, admin fees, and employee time spent trying to communicate with the end customer. All of this can add up fast, both for you and your retail client. That’s why it’s crucial for your 3PL to know how to spot and prevent returns fraud.
Top Types of Returns Fraud
As with any kind of crime, bad actors have many tactics to get money or merchandise (or both) from their targets. In the case of returns fraud, though, consumers may not even see what they’re doing as fraud – which further complicates efforts to thwart them.
The most common kinds of fraud reported by respondents to the NRF/Appriss report were:
Wardrobing (experienced by nearly 49% of respondents): In this type of fraud, an otherwise legitimate customer buys an expensive apparel item or accessory with the intent to wear it once, then return it for a full refund. This is one of the cases in which some consumers may not even see what they’re doing as fraud – which can encourage them to commit this act repeatedly.
Return of shoplifted/stolen merchandise (44%): Pretty self-explanatory. The perpetrator shoplifts goods in a store that offers receiptless returns, then takes advantage of that policy to get the cash amount for those products.
Return of merchandise purchased on fraudulent or stolen tender (37%): The fraudster uses counterfeit money or stolen credit card numbers to buy goods, then returns them for a cash refund – essentially exchanging fake/stolen funds for real money.
In addition to these mostly in-store types of return fraud, ecommerce has its own set of tactics to look out for. These include:
Merchandise exchange: The customer buys a new version of a product they already own, and return the old product in the new packaging. This is particularly common with smartphones and other electronics that may look very similar from version to version.
Bricking: Another way to take advantage of electronics sellers, bricking involves buying the product, removing valuable components from it to sell elsewhere, and then returning it.
Avoiding Returns Fraud for Your 3PL Customers
Counseling your 3PL’s customers to create strong return policies is a good first step to cutting down on fraud losses. At a minimum, a retailer’s return policy should include:
- Which products are eligible for return.
- What kind of compensation is offered for returns. For example, you may want to offer exchanges only for apparel, or store credit instead of cash refunds for some items.
- When the customer can expect a refund – for example, after the product has been thoroughly inspected and confirmed to be in new, working condition.
- How long after purchase the customer can request a refund.
Make sure your team members who will handle retail clients’ returns are well versed in each client’s return policies. Ensure the dispositioning workflow includes inspection criteria. For example, when checking in returns, look for signs of wear or tampering and make sure the version of the product being returned is the same as the one sold.
You should also watch out for serial return customers on behalf of your client – customers who frequently ask for refunds on their purchases. While they may not be committing actual fraud, they do tend to abuse return policies and can rack up significant shipping and restocking costs for your retail partners. You can head off these customers by requiring manual approval of their returns after a certain number, offer exchanges instead of cash back, revoke their “free” returns option and charge them restocking fees, or (if they’re seriously abusing the return policy) recommend your retail partner block them from future purchases.
For the best chance at preventing returns fraud, use a robust visibility platform that enables both you and your retail partners to track real-time inventory status for returns. Using fully guided workflows that walk employees through the inspection and disposition process for each return, integrated image capture to establish proof of condition, and other tools will make the returns process as stress-free (and fraud-free) as possible.