Fraud Prevention Blog

The Troubling Pervasiveness of Return Fraud - and What You Can Do About It

Posted by Stephanie Cho on Wed, Dec 28, 2016 @ 09:34 AM

TABLE OF CONTENTS
What is Return Fraud?
Return Fraud Statistics
Why is Return Fraud such a Problem?
How to Prevent Return Fraud

In the post-holiday season, you can expect a different set of crowds shopping: people who are taking advantage of the year-end deals to make purchases for themselves and people who are returning unwanted items that were received during the holidays.

Taking advantage of the large numbers of people who are sure to make post-holiday returns are criminals camouflaging themselves as shoppers with legitimate returns.


What is Return Fraud?

Simply put, return fraud occurs when the return process is manipulated to defraud a retailer.

There are several ways the return process can be manipulated:

  • returning stolen merchandise for cash or gift cards/store credit
    • gift cards/store credit are then sold for discount prices
  • returning merchandise purchased using fraudulent means, such as counterfeit cash
  • using stolen receipts/receipt tape to enable a false return
  • adjusting data on e-receipts for merchandise purchased online to fraudulently return in-store for a profit
  • return abuse’ – purchasing a product with the intent of returning it after it is used; also known as ‘wardrobing’ or ‘free renting
    • ex: buying an expensive camera to take graduation pictures
  • price switching’ - switching the labels of merchandise with higher prices with the labels of merchandise with lower prices before purchase to pay the lower prices, but returning the merchandise for their actual higher prices
  • switch fraud’ – returning something other than the correct merchandise
    • ex: a boxed printer that is returned, but found to have a candy-filled piñata inside instead (this is actually happened!)
    • in some switch fraud cases, in order to replace the defective merchandise at home, functional merchandise is purchased but the defective merchandise is returned in its place
  • cross-retailer return’ – some savvy criminals take advantage of the sales/reduced prices on merchandise at one retail location in order to return the merchandise for their full price at another retail location that didn’t have the sales/reduced prices

Return fraud can also occur with the help of employees:

  • with the help of a store employee or employees, stolen merchandise is returned to the store for the retail price

Return fraud is commonly associated with organized retail crime (ORC), which describes, put simply, professional criminals who prey on retailers for profit; one shoplifter does not an organized retail crime make. ORC participants work in teams, often creating distractions while other members of their teams steal merchandise in order to later return them for cash/store credit.


Return Fraud Statistics

Throughout the course of a year, about $260.5 billion in merchandise is returned to retailers – and about 3.5% of that amount can be expected to be fraudulent returns. This means that annually about $9.1 billion in returns are fraudulent, which is a huge loss that is absorbed by retailers.

According to the National Retail Federation (NRF) and the Loss Prevention Research Council, retailers lost about $3.6 billion from holiday return fraud alone.

The following is a list the different types of return fraud that retailers experience and the percentage of retailers that have experienced them during the past year:

  • Returning stolen merchandise – 91.9%
  • Return abuse/wardrobing – 72.6%
  • Returning fraudulently purchased merchandise – 75.8%
  • Returns made by Organized Retail Crime groups – 71%
  • Return fraud through the help of employees – 77.4%
  • Return fraud through manipulated e-receipts – 33.9%

In addition, 30% of retailers have reported seeing an increase in the return of merchandise ‘purchased’ using counterfeit money. More unnervingly, a whopping 60.7% of retailers have reported seeing an increase in the amount of returns of stolen merchandise exchanged for gift cards/store credit.


Why is Return Fraud such a Problem?

Return fraud is such a problem because the consequences go beyond the obvious monetary loss from stolen/lost/damaged inventory – the consequences from return fraud tend to punish loyal shoppers who do not fraudulently conduct returns.

In order to offset the monetary loss from return fraud, most retailers have traditionally turned to raising the prices of their merchandise in addition to creating more restrictive return policies, such as a ‘no receipt, no return’ policy.

It’s not hard to see why retailers respond to return fraud by placing restrictions on their return policies: just about every retailer experiences an overwhelming amount of attempted and successful return fraud.

For example, as mentioned above, about 9 out of every 10 retailers surveyed by the NRF have experienced the return of stolen merchandise. And nearly 3 out of every 4 retailers surveyed said that they have experienced ‘wardrobing’ - the return of used and/or damaged merchandise, disguised as merchandise that has not been used.

Often, merchandise that is returned, especially those returned during the course of a return fraud scheme, needs to be marked down in order to be resold due to:

  • merchandise, such as clothing, being out-of-season
  • merchandise being damaged/visibly used

Returned merchandise sometimes needs to simply be discarded upon return, further increasing monetary loss to retailers:

  • merchandise that is too damaged/visibly used that it is essentially worthless
  • merchandise that has sanitary issues, such as undergarments

The problem with combating return fraud in this manner – placing the costs and consequences on the paying customers – is that overly restrictive return policies tend to scare away loyal shoppers, which can have obvious devastating, long-lasting effects on a retailer’s ability to remain in business. If there the customers disappear, how can a business survive?


How to Prevent Return Fraud

Taking steps to prevent return fraud can lead to the following positive effects:

  • reducing costs – for both the retailer and its customers
  • preserving/increasing net profits
  • reducing the amount of inventory shrink
  • providing a better customer experience
“Return fraud remains a critical issue for retailers with the impact spanning far and wide, in-store and online. . . . When it comes to retail fraud, retailers can build taller walls, but criminals continue to find taller ladders.”
– Bob Moraca, NRF Vice President of Loss Prevention

As mentioned above, retailers have historically passed the costs of return fraud onto their customers in one way or another: once a restrictive return policy is implemented, fraudsters find a loophole around that policy, prompting the retailer to create even more restrictive return policies, and so on.

This has inevitably led to some legitimate customers running to other retailers who have not placed such costs onto their customers. And so, more and more retailers have been considering and implementing other methods of preventing and addressing return fraud.

One method of combating return fraud is through the use of software that analyzes the behavior of customers and returns, helping retailers to determine whether or not a return is valid or not. While this helps to reduce the overall amount of guesswork by linking statistics to behavior, this method will not work well for smaller retailers, even though it would likely work for larger retailers.

This is due to the fact that statistics require a large sample size in order to be accurate – the smaller the sample size, the more inaccurate the results of a statistical analysis. In other words, with a small sample size, such as the amount of customers a small retailer has, any ‘patterns’ observed during the return process will not be reliable enough to build an entire, working return policy around.

And so, in order for smaller retailers to effectively battle return fraud, they have to turn to other methods to effectively prevent return fraud – or at least prevent it well enough that the costs do not have to be passed onto their customers.

An emerging method of battling return fraud that doesn’t rely solely on statistics is identity verification. Identity verification can be as simple as making sure that customers, especially when making returns, are who they say they are by checking their identity document, such as a driver’s license, and can be an effective, affordable solution in the battle against return fraud.

In fact, it is so effective and affordable that between 2014 and 2015, the amount of retailers who required an identification document, such as a driver’s license, in the event of a receipt-less return made an impressive jump from 70.9% to 85.2%.

Regardless of whether or not a statistical analysis of customer behavior is used to combat return fraud, verifying customers’ identities at every junction of the return process is highly recommended.

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Topics: retail fraud, fraud prevention, fraud, holiday season, return fraud

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