How to Protect Your E-commerce Business Against Returns Fraud

There’s no easy way around it. E-commerce returns are all part of the business. But, returns fraud shouldn’t be.

According to the National Retail Federation (NRF), retailers in 2020 lost roughly $25.3 billion due to fraudulent returns. However, before you create a no-return policy or make it difficult to return your products consider this.

According to a study conducted by Narvar, 95% of consumers believe that a positive experience when returning items will help drive loyalty to that brand. Another study conducted by UPS found that 73% of consumers who returned a product said their experience would affect their decision to buy again.

It’s a fine line that online stores have to walk on, but understanding the different types of return fraud and how to prevent fraudulent returns will be important in how you shape your return policy and how you manage returns.

What is Returns Fraud?

Return fraud in e-commerce is when individuals manipulate the returns process in order to gain financially while your business loses inventory and profits. There are multiple ways that individuals can defraud e-commerce merchants, and it is important to prevent this type of behavior while maintaining a friendly return process, which will aid in creating loyal customers and return purchasers.

What Are The Types of E-commerce Returns Fraud?

Fraudulent returns can show up in a number of different ways but some of the most common are:

Wardrobing

• This is most common for e-commerce sites in the areas of high-end fashion or apparel. It involves customers who purchase the item with the intention of using it only once and then returning it for a full refund. This could be for a special event such as a wedding or a more seasonal event like Halloween. Recent reports indicate that one in five shoppers have admitted to buying an item with the intention of only wearing it once and then returning it. The customers involved in this are not doing anything particularly nefarious though wardrobing has cost retailers billions in processing returns.

Swapping Merchandise, aka “Switch Fraud”

• This is one of the more costly forms of returns fraud. It involves customers purchasing a new item from your website then returning an older or damaged item instead of returning the new purchase. The customer would then have a new item and get their money back while you lose inventory and now have an unsellable item taking up space at your warehouse or storage center. This is common with e-commerce companies that sell tech gadgets.

Friendly Fraud

• Customers that are involved in this type of fraud claim that they never received a product they ordered or claim that they were charged for a product that they never ordered. For example, after ordering a product from your e-commerce site they will request a refund from your CS team saying that their package never came in when in reality it did. Having a paper trail in these instances will be key for your business to make a case against these claims.

Return Scam

• In this form of return fraud, customers aren’t returning anything at all. Instead, they are buying your products, returning empty boxes, getting a refund, and then reselling your product for a profit. One of the ways in which these fraudsters thrive is through making multiple accounts so that they stay untraceable.

Credit Card Fraud

• While issuing a refund to a different card than the one used at purchase may seem harmless on the surface, it could be aiding in credit card fraud. This involves the customer having used a stolen credit card to make the original purchase for the sake of having the refund sent back to their bank account.

How To Know Your Business is a Victim of Return Fraud

There are essentially three things to look out for when looking to see if you’re a victim or returns fraud.

You’ll want to check your inventory levels to see if there has been an inordinate amount of inventory shrinkage. Check to see if there has been an unusually high number of returns recently, and check to see if there has been an excessive amount of decreased profits that have come from returns.

In more obvious cases, you’ll find empty return boxes or damaged products in returned packages.

Spotting fraudulent returns can involve multiple people within your business including those that work in customer service, those in warehousing, and those in finance. But there are a number of different steps to take in order to protect your business from returns fraud or stop it right in its tracks.

Ways to Protect Your E-commerce Business From Fraudulent Returns

Craft a Clear Returns Policy

Crafting a clear return policy is essential for handling all returns, but the way in which you write it may help in deterring fraudulent customers. There are a number of aspects to keep in mind when writing out your policy including:

• Proof of purchase on returns: This could be receipts, invoices, or other documents that prove the initial purchase. This could help deter any people from asking for a refund for stolen items.
• How customers receive refunds: Ensuring that refunds will be sent back to the card originally used during the purchase can help deter any sort of credit card fraud. Only giving back store credit could also deter fraudulent returns but you do run the risk of having lower customer satisfaction in the post-purchase experience.
• When customers receive refunds: You have the option of issuing refunds after customers initiate the returns process after return labels have been scanned, or after you have received and inspected the product. By utilizing the last of those options you can help spot and stop customers who are swapping merchandise or sending back nothing at all. This will again affect the smoothness of the returns process on the customer side but could be a sacrifice worth making.
• Who pays for the return shipping: By making the customers pay for shipping returns you could help deter fraudsters from making an initial purchase. However, this could also deter new customers from making a purchase as well. Instead, consider adding a restocking fee for big-ticket items. This can help new customers feel more comfortable with making an initial purchase for most items and make fraudsters think twice before making a large initial purchase.
• How long the customers have to make a return: About 62% of customers expect to be able to make a return within 30 days. E-commerce businesses tend to have longer return windows during the holiday season. Having a shorter return period can make fraudulent returns harder to make. However, this could also negatively impact the returns process for regular customers. Finding the right balance will be key.

Implement Tracking For All Shipments

Every shipment should also include a tracking number. The tracking number allows the carrier that is delivering the package to show both the customers and the merchant where the package is at all times. If a customer is unsure where their package is, they can use the tracking number to find out where their order is in the delivery process. The tracking number could also prevent them from claiming that they never received their package because you’ll be able to see on your end when and where the carrier dropped off the package. With Shippo, merchants can provide tracking numbers to their customers so that both parties know where packages are at all times.

Add Signature Confirmation to Shipments

Adding signature confirmation is especially useful when delivering big-ticket items like furniture or jewelry. For one, it limits the potential for porch pirates to come and steal the package before the customer received their order. Secondly, it prevents customers from saying they never received a package and demanding a refund. If someone isn’t there to sign for the package that delivery goes back to the carrier’s retail space where it will be stored safely until someone is there to sign for it and confirm it.  Shippo users can also give the option of including signature confirmation or make them a mandatory part of their shipping policy.

Issue Refunds After Receiving and Inspecting Returns

Issuing refunds to customers as soon as they begin the returns process is a great way to provide a customer-centric return policy. However, if you’re worried about returns fraud you may want to wait and inspect the item before you provide a refund.

For example, in 2019 a man in Spain defrauded Amazon for almost $370K by sending back packages weighted with dirt. Having your fulfillment provider or in-house team inspect the returns first will allow you to make sure that your products are undamaged, resellable, and most importantly there before you issue a refund. The key here will be to communicate this in the refund policy before customers make a purchase.

Blacklist Serial Returners

One of the more severe actions you could take is to blacklist serial returners. One way in which you can do this is by making every customer input their name and other basic personal information and assign them an ID number before making an initial purchase from your site.

From there you can see if this same person is making a suspicious amount of returns. If that happens to be the case, you can then suspend that person’s account and blacklist them from making future purchases. Having returns fraud detection software can help to make sure that you’re understanding the patterns of these customers and taking the right course of action when dealing with them.

Shippo also has partners that specialize in returns and that offer different solutions to help combat against returns fraud.