The golden rule of an eCommerce business is to convert your goods or services into cash as quickly as possible. But not every sale increases your profit margin. Some transactions turn to losses due to return and refund fraud.
Deloitte predicts the online return rate could reach ~10% this year. A similar report found that 20% of e-commerce refunds are fraud, costing merchants $24 billion yearly.
Apart from increased buyer's remorse ushered in by the pandemic, the spike in return and refund fraud is fueled by emerging eCommerce trends such as Buy Online; Return In-Store (BORIS). These trends make it easy for professional return fraudsters to game the system.
If you keep reading, you will learn exclusive best practices to help you stop return and refund fraud, enhance your customer experience and drive new revenue growth.
A Closer Look at Return and Refund Fraud
What is refund fraud? It's simple. Return fraud is when a shopper steals from a merchant by returning items that do not qualify for a return or refund. Sometimes, return scams are unintended. The shopper made an honest mistake. But, as we noted earlier, many returns are orchestrated by bad actors swindling businesses by returning stolen, tampered with, used, or worn items labeled as final sale.
In other instances, you have the case of barefaced fraudulent refund requests; customers claiming an item was not received and requested a refund.
It is easier to detect and deny these meritless refunds when they occur in person. However, because most retail transactions now happen online and returns are mostly contactless in person, retailers don't often detect the abuse until much later.
But not just that. Many retailers often take a deep sigh and grant the refund, even when they smell a rat, because they don't always have a surefire way of proving the customer wrong. More so, they don't want to alienate a prospective customer.
The result? Operational issues and income loss – even worse if a customer files a chargeback to reclaim their money.
How do Fraudsters Commit Return and Refund Fraud?
Before we continue, it's crucial to note that although a flexible order return policy often opens a loophole for return fraud, having a strict policy is a double negative – it hurts you too. According to Shopify, 80% of consumers check retailers' return policies before making a transaction. Plus, 68% of buyers see a free return policy as an incentive to purchase.
Notwithstanding, you should also know that return fraudsters are continually devising new ways of abusing the system. Below are notable examples of return fraud:
- Returning stolen goods: Shoplifting to return the items for full price and taxes. The crook steals items, then returns them without a receipt for a refund or store credit.
- Receipt fraud: Using repurposed, stolen, or forged receipts to fraudulently return products. Returning products acquired on sale or from a different retailer at a lower price to profit from the difference.
- Wardrobing: Ordering expensive merchandise, hiding the tags without removing them, and returning them after initial use. One survey found that 37% of respondents committed wardrobing fraud in 2020.
- Employee fraud: Employees assisting in the "return" of stolen products for total retail price.
- Price switching: Putting higher-priced labels on items to return them for a higher price than the purchase price.
- Price arbitrage: Buying two items with differing prices but similar appearances and returning the cheaper item as the more expensive one.
- Switch fraud: Purchasing a functional item and returning an identical previously owned item that was damaged or defective.
- Bricking: Bricking is the practice of purchasing a functional electronic device, destroying or stripping it of valuable components to render it unusable, and then returning it.
- Cross retailer return: Returning or exchanging an item purchased (usually at a lesser price) at another retailer for cash, store credit, or a similar, higher-priced item at another retailer.
- Open-box fraud: Purchasing something and returning it after opening, intending to repurchase it at a lower price under the store's open-box regulations. With a twist on price switching.
How the best Shopify Merchants are Fighting Fraudulent Return and Refunds
As return and refund fraud keeps growing, you do your business a disservice if you don't put in the mechanisms to minimize your exposure. Here's how eCommerce veterans are fighting back:
Enhanced eCommerce return policy
The first step in preventing potential return fraud is to have a well-defined and easily accessible return policy. It's critical to make returns as simple as possible for honest clients but not so easy that scammers can take advantage of it. Consider the following factors when revising your eCommerce returns policy:
- Return window length: A short return window will discourage wardrobing. Be sure that your sales-final window is transparent and understandable.
- Proof of purchase: Evidence of purchase, such as email, paper receipts, or confirmation codes, will prevent criminals from returning stolen products.
- Original packaging: Requiring original packagings, such as tags, labels, stickers, and plastic bags, can deter wardrobers and swappers.
- Product condition: To avoid swapping and temporarily using products, inspect the returned product for stains, damage, or odors.
- Refund method: Make sure to return the refund amount to the original payment mode so that fraudsters are hesitant to collect the refund on a stolen card that they no longer own.
As returns and refund fraud peak during the holiday season, temporarily adjust your return policy to include a holiday returns cut-off date. That modification will encourage honest customers to act quickly and dissuade any plans to use the product before returning it fraudulently.
But if you're still unable to handle your returns due to vast operations, you can adopt automated return solutions to enhance your processes. ReturnGO's automatic Return and Exchange management app helps you retain your sales while also cultivating excellent, long-term relationships with your customers.
Better shipping measures
While tracking a shipment would not prevent determined friendly fraud artists, it will make many others think twice about reporting the item as not having been delivered at all. It will also provide documentation if the customer files a chargeback with their credit card company.
Your return policy for broken items should include a request for a photograph of the damaged item. That measure will slow down friendly fraud, but it will also assist you in determining whether or not there is a problem with your packaging or delivery processes. If the same item is being reported as damaged repeatedly, it may be time to investigate why. You'll improve the consumer experience while also avoiding losses.
Require Proof of Purchase and Upsell with Exchanges
Retailers demand anyone retrieving a purchase to present identity and proof of purchase to prevent Buy Online Pickup In-Store (BOPIS) fraud. The same standard should apply to Buy Online Return In Store (BORIS) transactions.
Request a receipt and valid ID or the original purchase method. If you want to accept the return, consider giving store credit. That can help deter fraud-for-hire schemes while allowing you to keep the money.
Spot Fraudulent Customers and Block them
You should avoid customers with an unusually high return rate at all costs. Mark them as potentially fraudulent consumers in your system if their explanations for the return raise red flags. If you believe they are engaging in return fraud, you can thoroughly verify such clients' returns before processing the refund. Or refuse to fulfill their purchase order.
Boost the Cushioning to Minimize Losses
A restocking fee for high-end equipment and special-occasion clothing will be a stumbling block in a con artist's scheme. Make sure to choose carefully selected products or cases. Focus on seasonal electronics and fashion goods frequently worn to higher-end gatherings.
Include Fraud Prevention Tools in Your eCommerce Site
When clients shop across many channels or accounts, having reliable data analytics tools and proven fraud prevention systems can help you recognize existing customers and properly vet new ones.
The correct fraud prevention systems may help you recognize your real consumers. No matter what device or channel they use to make a purchase, you can track that data while reducing friction in the purchase process, protecting merchants from bogus declines, and offering chargeback protection.
And when the scammers force their way with a chargeback fraud, Chargeflow's automated chargeback management system helps vendors reach, on average, a 75% success rate in chargeback recovery. You can slide into our main website and read our documentation for more details.
What are the common red flags to look out for when processing returns and refunds on Shopify?
Some common red flags to look out for when processing returns and refunds include: high volumes of returns from a single customer, returns of high-value items, returns from different addresses, and returns for items that appear to have been used. Additionally, merchants should be cautious of customers who are eager to receive a refund before returning the item, and those who have a history of making fraudulent returns.
How can Shopify merchants collaborate with their payment provider to minimize the impact of Return and Refund Fraud?
Shopify merchants can collaborate with their payment provider by sharing information about suspicious or fraudulent returns and refunds, and working together to develop a fraud prevention strategy. Payment providers can also provide valuable tools and resources for detecting and preventing Return and Refund Fraud, such as advanced fraud detection software and chargeback management services.