For every $100 in returned merchandise, retailers lost $13.70 to return fraud in 2023. With e-commerce and online shopping on the rise, it’s become easier for illicit activities like fraudulent returns to go undetected, putting retailers at a higher risk of loss. At the same time, 70% of consumers are reluctant to buy from retailers with complex return policies. So, how can you mitigate this challenge and balance customer satisfaction with protecting your business?
The solution is to leverage fraud detection and prevention software along with returns management strategies focused on verifying returns and validating customer identities. With the right solution, you can continue providing excellent customer service while protecting your bottom line.
Read on to learn how to handle customer returns and discover the best practices to curb fraud in returns management.
What is return fraud?
Return fraud occurs when a scammer exploits a businesses refund or return policy to receive store credit, replacement goods, or money by bringing back items in bad faith. In practice, this type of policy abuse can be carried out in many ways. For example, customers might use an item before bringing it back, return goods swapped for a cheaper or alternative product, or make false claims about the item being faulty. Not only restricted to retail businesses, return fraud can occur across many industries. Without fraud detection and prevention software and strict returns management controls in place, deceitful return practices have the potential to result in significant inventory shrinkage, chargebacks, and monetary losses for businesses.
How does return fraud occur?
To best mitigate return fraud, it’s important to understand how these scams are carried out. Let’s take a closer look at the most common types of return fraud:
- Wardrobing: A customer wears an item for personal use and returns it, pretending it was never worn.
- Receipt fraud/stolen goods returns: Someone returns a shoplifted item with a forged receipt or a real proof of purchase stolen from someone else.
- Employee fraud: A worker takes advantage of their position to improperly process returns, perhaps to help a friend perpetrate fraud.
- Price differences: A customer buys an item at your lower price but returns it after a competitor runs a sale at a higher price point.
- Cross-store returns: An item purchased from one store is returned to a different location, playing on differences in policies between locations.
- Bricking: Valuable electronics parts are removed from inside a device, leaving an empty shell that is returned as defective.
- Tender liquidation: A purchase is made with a stolen payment method and then returned for a refund, turning the theft into untraceable cash.
- Previous defects: A previously owned broken item is falsely presented as a new purchase that is eligible for a full refund.
Why is managing return fraud so essential?
Ineffective return management leads to many negative consequences, including financial losses cutting into profits, less efficient operations, and reduced satisfaction among trusted customers. Let’s examine how carefully overseeing returns management helps minimize risks to your business.
Effective returns management:
- Minimizes financial losses: Robust returns management safeguards your profit margins and improves your business’s financial stability. With less loss to fraud, you have greater flexibility to invest in growth.
- Stabilizes inventory management: Precise inventory records allow you to forecast stock needs accurately and ensure the right items are available for genuine customers. This benefits both your customers’ shopping experience and your ability to manage warehouse space and shipments effectively.
- Streamlines operations: Less time spent sorting through potentially fraudulent returns means your employees can focus their efforts on efficiently serving and assisting your customers.
- Preserves customer trust: Customers are more likely to feel loyalty when shopping with a business that has fair policies and provides a shopping experience that is not undermined by the dishonesty of others.
- Protects against policy abuse: Strong return management policies prevent exploitation and ensure fair treatment for all customers, hindering bad actors who might seek to take advantage of lenient systems.
- Enhances security measures: Strong security measures across your entire business help reduce vulnerabilities and weaknesses that fraudsters could exploit.
- Improves fraud detection: Return management enables the prompt identification of irregularities, allowing you to respond quickly before losses accumulate. Early intervention also discourages such harmful behavior from continuing or spreading.
The 7 best practices for managing return fraud
To combat return fraud, you should develop comprehensive strategies and leverage advanced fraud detection and prevention technologies. With a proactive approach to identifying and deterring return fraud, you can minimize losses, protect your profits, and create a more secure and profitable retail environment.
Let’s look at best practices for how to handle customer returns:
- Draw up clear return policies: Start by defining precise policies that outline the conditions and timeframes for returns. The policies should clearly state what items can be returned, when they need to be returned by, and any other relevant details. Clear policies eliminate loopholes and make it harder for fraudsters to exploit the system for return fraud and chargebacks.
- Use receipt verification technology: Use technology that checks receipts to verify their authenticity and that they haven’t been duplicated or altered. It can also track how often certain customers return items without a convincing reason.
- Make use of data analytics: Fraud detection technology can provide analytics insights into customer return behaviors over time. Abnormal patterns compared to average customers help pinpoint areas to examine more closely for fraud.
- Incorporate identity verification systems: Requiring identity verification for returns adds an additional layer of validation. It confirms that the customer making the return matches the name on the receipt or account, reducing the chances of non-customers attempting to return goods fraudulently.
- Train employees on fraud awareness: Educating your team is crucial, as they are the first line of defense against fraudulent returns. By knowing which signs to look out for, such as suspicious behavior, damaged items, or inconsistent stories, they will be better able to recognize attempted fraud. Training should also guide them in how to handle suspicious attempts to return goods, perhaps by referring customers to management or following specific protocols.
- Monitor employee transactions: Establishing systems to track employee activities and monitor transactions can help prevent issues with internal fraud. Technology can keep tabs on employee returns using logs and flag any unusual patterns for review. It can also detect if workers are processing their own returns or frequently assisting others, which could point to fraud.
- Partner with fraud prevention experts: Working with experienced providers who specialize in fraud prevention gives you access to cutting-edge tools and expertise. Advanced fraud detection and prevention software, such as Sift, enhance your fraud defenses. Sift’s expertise and innovation help you stay ahead of constantly evolving fraud risks.
Watch this webinar to learn more about strategically enhancing fraud management for your business.
How to choose the right return fraud management solution
When you select the right partner, you’ll have a solution to return fraud that can grow alongside your business. Consider the following factors for the best solution:
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Scalability
To avoid bottlenecks down the road, look for a scalable fraud detection and prevention system that can effortlessly expand to meet your future needs and dynamically allocate resources during peak periods.
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Seamless integration
Ask providers what platforms they currently integrate with and find out if they’re open to custom configurations if required. Consider a partner with open APIs for developers and well-integrated solutions to avoid process disruptions for employees.
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Real-time monitoring
Look for providers who continuously analyze activities as they occur and flag suspicious orders in real time. Platforms offering only periodic reports may fail to catch fraud as it’s happening.
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Comprehensive coverage
As more forms of fraud are discovered and companies put protections in place, fraudsters continue to upgrade their techniques. In this arms race against fraud, it’s crucial to future-proof your business by choosing a solution that safeguards against these constantly evolving risks.
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User-friendly experience
Genuine customers deserve an easy return experience, so ensure you select a fraud detection and prevention solution that doesn’t inject unnecessary friction into the customer journey.
Why Sift is your best choice for return fraud management
Managing returns fraud poses challenges, especially for businesses with limited resources or those facing rapidly evolving tactics. An effective approach requires the right partner. Sift offers an AI-powered fraud detection and prevention platform that can block fraudulent returns, reduce manual reviews, and lower false-positive rates.
Sift’s platform can provide the following benefits to your business:
- Real-time fraud detection: Sift’s machine learning models analyze thousands of signals in real time, allowing suspicious returns to be identified and prevented before they occur.
- Automated decision-making: Sift’s Workflows streamline the returns process with customizable rules and criteria, reducing manual effort and boosting efficiency.
- Comprehensive analytics: Sift’s data insights help you gain visibility into patterns, trends, and root causes, empowering optimized strategy decisions.
- Global data network: Sift’s global data network processes trillions of events annually to stay ahead of emerging risks by tapping into industry-wide knowledge.
- Easy integration: Sift’s platform seamlessly integrates with your existing systems for a simple implementation experience.
Learn more about how Sift’s AI-powered solution can transform returns management by scheduling a demo.