After a period of presenting customers with discount codes, free delivery service and other incentives to maximise sales, the start of the year is a prime time for returns. An increasing number of retailers now allow customers to buy products and services online and return them to the nearest store. However, there are consequences of this convenient return service. So just how big is the return fraud problem?

Return fraud is on the rise, and in addition to the costs associated with processing returns (such as transportation, storage and order processing), there is potential for increased losses due to the returns system being misused. According to the National Retail Federation, for every $100 in returned goods retailers take back, they lose $10.40 to return fraud. The largest risk for online returns is in-store. BORIS (buy-online-return-in-store) return fraud for instance is estimated to be 48% higher than returns to non-store locations.

Methods of Return Fraud

Like most types of theft, the specifics of return fraud often vary and exist on a wide spectrum. From honest shopper mistakes to malicious operations, a fraudulent return can come in the form of wardrobing or free renting, opportunity and deliberate fraud. Other methods include empty box fraud and returning previously stolen merchandise.

When shoppers buy items with the intention of using them after one use, it can be seen by consumers as a victimless crime, however, according to a recent study, acts of return fraud like wardrobing amount to $12.6 billion in lost sales for retailers, so it’s far from victimless.

Not all return fraud is pre-planned, with some buyers selecting the wrong reason for a return in the moment, unaware that it will affect the seller. In contrast, deliberate fraud sees customers try to get products for free through the likes of creating multiple accounts, and returning the packages empty in order to try and claim a refund.

Stolen merchandise return is the most common type of fraud affecting merchants both online and in stores. A stolen credit card can be used to buy items online before they are returned for a refund. Without reliable cross-department information on buyers, this is very difficult to control, especially if the fraudulent order happened prior to the filing of a chargeback.

The hidden cost of returns

In previous years, shoppers were expected to return an estimated $41.6 billion worth of merchandise sold during the holiday season according to CNBC. 2022 was no different, with around 17.9% of merchandise sold over the festivities being returned. That accounts for a significant portion of total annual sales, recorded as up to $816 billion in 2022 by the National Retail Federation.

Loss prevention professionals need to be concerned about returned items because the reality is that many are presented without receipts and are potentially fraudulent. Every fraudulent return is a potential missed sale. Compounding the problem is that some retailers do not have a solid plan to properly process and store the returned merchandise.

Retailers see a 70% increase in fraudulent returns over the holiday season compared to other times of the year. However, as well as the obvious monetary losses, merchants need to also be aware of hidden costs related to return fraud. These are the additional financial damages not related directly to the value of the items. Return fraud has a direct impact on these costs and must be taken into account when calculating the overall impact from policy abuse and fraud.

It is important to consider the cost of returns and the risk of fraudulent transactions, but what strategies can retailers implement to stop fraud and improve the customer experience?

Stop return fraud with the power of RFID

Ensuring the right tools are in place will help loss prevention (LP) professionals build a solid plan for efficiently dealing with returns. Using RFID solutions for loss prevention is one of the most important things an LP professional can do to ensure success. With RFID tracking, employees know instantly if an item being returned was ever previously purchased and if it was purchased in-store or online, and are therefore able to realise significant refund fraud reductions by deploying loss-prevention solutions. RFID solutions also allow stores to curb the type of fraud in which suspects take items off the shelf and immediately present them to the returns desk for a refund without ever having purchased the item in the first place.

Using RFID at the checkout and return desk makes it possible to improve the speed and security of the return process, simultaneously improving the customer experience and reducing fraud. Scanning the RFID label at the POS (Point Of Sales) terminal generates data on when and where a product is returned, so integrating POS with an RFID database means that data is available about a specific item when scanning it, something which is of huge benefit to retailers.

Digital transformation in recent years has significantly impacted the retail risk landscape, making the likelihood of becoming a victim of fraud even higher. And while advanced monitoring technology is a highly effective strategy, omnichannel retailers need to do more. To have the best possible chance of limiting threats, brands must consider a multi-pronged approach that includes stricter returns policies and enhanced employee training that work in line with the technology so that incidents can be prevented before they occur.