Have you ever felt the frustration of dealing with deceitful return practices? You’re not alone—most retailers are all too familiar with the challenges of payment fraud. While return fraud can negatively impact the success of retailers, there are actionable steps you can take to protect your organization, improve your customer experience, and drive secure growth. In this blog post, we’ll explore the most common types of return fraud and provide guidance on how to effectively detect and prevent this form of fraud.
What is return fraud?
Return fraud refers to the practice where individuals or groups attempt to exploit a retailer’s return policy for financial gain. This involves illegitimate merchandise returns, often using deceitful means to obtain refunds, store credits, or replacement items. Fraudsters use various techniques to conduct return fraud, including price switching, receipt fraud, and open box fraud. Return fraud also frequently encompasses other types of payment fraud, including chargebacks.
While return fraud mitigation poses a significant challenge for retailers, a robust defense strategy can effectively prevent return fraud and help companies grow securely. A successful fraud defense strategy includes bulletproof return policies, receipt verification systems, and fraud prevention and detection software.
Return fraud vs. refund fraud
Return fraud and refund fraud are distinct, yet interconnected, schemes targeting retailers. Return fraud capitalizes on exploiting a store’s return policy, and entails purchasing an item and abusing the returns process in order to receive refunds, store credits, or replacement items. On the other hand, refund fraud involves falsely claiming the item was returned when it was not, manipulating the refund process to gain financial advantage.
When combatting return and refund fraud, retailers must balance customer satisfaction and protect themselves from financial losses due to fraudulent activities. This is made easy with the help of fraud detection and prevention software. This adaptive technology helps retailers safeguard every step of the customer journey, improve customer loyalty, and accelerate growth.
Types of return fraud
Return fraud continues to evolve as fraudsters devise new methods for taking advantage of return policies. Using a fraud detection platform keeps your company one step ahead of return fraud, regardless of the changing tactics.
While there are many types of return fraud, here are some of the most common methods currently used by fraudsters.
Stolen merchandise return
Stolen merchandise return scams involve individuals returning stolen items, often using fabricated receipts or no receipts.
Empty box scams
Empty box scams exploit retailers by purchasing products, removing the contents, and returning the sealed but empty box while falsely claiming the product was missing or defective.
Wardrobing abuses lenient return policies as individuals buy clothing or items, use them once, and then return them for a refund, effectively allowing them to rent items without paying the full cost.
Price switching is a fraudulent practice where individuals swap labels or tags on items with those from lower-priced products and then attempt to return them, misrepresenting the item’s value for a higher refund than initially paid.
Switch fraud involves replacing a purchased item with a less expensive one before returning it. This deceptive practice enables the fraudster to obtain a refund or store credit under false pretenses while retaining the original item.
Cross retailer return
Cross-retailer return fraudsters buy an item from one retailer and try to return it to a different retailer for a refund or credit, targeting those that charge a higher price. This fraud takes advantage of the differences in return policies between retailers.
Bricking is the intentional act of damaging an electronic device before returning it to the retailer. This often includes the fraudster stripping valuable parts from the electronic item, reselling them, and keeping the product refund.
Receipt fraud involves creating and using counterfeit receipts to make it seem like a legitimate purchase occurred. This scam exploits gaps in receipt verification processes, posing a challenge for retailers trying to prevent illegitimate returns.
Employee fraud entails internal collusion, where employees may process illegitimate returns for a share of the refund or allow fraudulent practices within the company’s return system.
Open box fraud
Open box fraud involves buying a new item, using or removing its contents, and returning the opened box. Fraudsters then falsely claim the product was defective or missing components.
How to detect and prevent return fraud
Without a clear strategy, retailers lose over $100 billion annually to fraud. Your company can easily avoid becoming part of that statistic by following these simple steps to detect and prevent return fraud.
- Create a clear and bulletproof return policy: Develop a transparent return policy with clearly defined terms and conditions.
- Strictly enforce your return policy: Consistently enforce the return policy without exceptions. This discourages fraudulent attempts.
- Ask for a receipt and ID: Require customers to present a valid receipt and identification when processing returns to verify purchases.
- Offer credit instead of refunds: Limiting refunds minimizes the appeal of fraudulent returns.
- Use fraud detection and prevention software: Advanced software automates fraud detection and prevention to proactively stop fraud losses, streamline operations, and eliminate false positives.
- Analyze historical data to spot suspicious activity: Leverage historical transaction data to identify patterns of suspicious behavior. Analyze customer return histories and look for unusual trends or repetitive activities.
As fraud continues to evolve, technology is necessary to keep up with the fast pace and complexity of fraud schemes. The world’s leading retailers already use fraud detection and prevention software to automatically protect against the risks and impacts of payment fraud.
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Sift’s Digital Trust and Safety Platform enables retailers of all sizes to eliminate fraud, reduce manual reviews, lower false-positive rates, and safeguard every step of your customer journey.
Sift’s solution uses advanced machine learning, real-time monitoring, and adaptive risk scoring to improve customer loyalty and drive secure growth. Our customers, including DoorDash, Paula’s Choice, and Patreon, use intelligent automation to save thousands of dollars daily on fraud losses, improve the customer experience, and maximize revenue growth.
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