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Plagued by return fraud? Here are some strategies to save your business

28 Jun, 2022 | Business Tips

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Do you want your customers to buy as much as possible from your store?

Of course, you do. We all want that, don’t we?

However, with robust sales, you are also often plagued by the curse of customer returns. As a product seller, you must strive towards minimizing the chances of returns in the most cost-effective ways. But how can you avoid fraudulent returns?

The National Retail Federation in its survey estimated that fraudulent returns in the retail industry surged during the fourth quarter of 2021. Now that’s a shocker, isn’t it?

But that’s not all.

Return fraud is slowly creeping its way into ecommerce too. Online retailers could face a 5.5% increase in fraudulent PayPal transactions in the near future, the NRF says. Online retailers saw a continued rise in 2021.

We’ll delve deeper into what return fraud is, but let’s first look at the psychology behind customer returns.

If you have a physical store, customers might return products for credit. For example, they may bring back clothes and say they were damaged when purchased.

If you have an ecommerce store, shoppers might return products if you have a free and flexible return policy. The most common reason customers state for returning items online is that the product received doesn’t match (in color, size, texture) what they saw online.

Are all customer returns genuine?

Unfortunately, some customers may not be honest. We’ve created a rundown on some common types of return fraud which you should know about before falling victim to this growing problem.


Common types of return fraud:

Wardrobing or free renting

Wardrobing is when a customer buys a product, uses it once and returns it for a full refund.

Returning stolen merchandise

When items are shoplifted from the store and returned as purchased items.

Price arbitrage

This involves buying similar-looking items that are priced differently, and returning the cheaper one as the more expensive item.

Shoplisting (also called shoplifting using found receipts)

People use stolen receipts and find corresponding products in a store and return them for a refund.


Signs that return fraud is affecting your inventory

Too many cases of return fraud can have a significant impact on your inventory. Look out for the following signs if you think return fraud is affecting your inventory levels:

  • Inventory shrink rate is high/too many returns,
  • Too many return frauds visible in your stock levels (you’ll notice a significant loss of inventory between accounting periods).

Obviously, too many returns can also equal too many return frauds. It often happens that unlawful customers can share their tactics with people who may also target your store.

It’s pretty evident that return fraud is an expensive issue for both store retailers and ecommerce sellers.

But what’s the solution to the problem?

Read on for some quick tips and advice from industry experts.


Have a clear return policy

Customers desire a seamless shopping experience that gives them the flexibility to “shop ’till they drop.” A return policy can be a unique selling point/proposition) USP for brands. But tread carefully, customers can take advantage of a return policy.

Businesses should clearly specify the terms and conditions for customer returns, including:

  • Duration for the return (such as seven or 30 days),
  • Specify the need to show the packaging, price tag, and receipt when returning the product,
  • Include return fees or shipping charges when accepting returns,
  • Ask for identification when accepting returns.


Record product pictures and documents

Dan DeBaun, the owner of Big Berkey Water Filters, has stressed on the importance of keeping records and pictures of the documentation involved every time a shipment is returned.

He says,

“Besides having a clear return policy on the website, we take multiple picture angles and create written documentation of all products returned to our warehouse. If a customer sends back a damaged product that cannot be resold (as detailed in our policy), we will not process the refund. We will contact the customer with pictures and documentation regarding our decision, again referencing the policy. If the customer then files a claim with their bank/credit card company, we provide this documentation to the dispute review agent. Our clear return policy combined with this photo/text documentation has resulted in our company winning claims 75-80% of the time.

When it comes to chargebacks, we also document the Matching AVS info from the credit card processor along with defaulting all packages shipped with a ‘signature required’ at checkout. If the customer waives this and chooses the ‘no signature required’ option, we explain how they are held liable for shipments that are shown as carrier delivered.”


Automation and AI

Automation can be a savior when it comes to preventing return fraud. to help you identify fraud by marking orders from unknown addresses or marking extremely large orders from any particular marketplace as fraud orders. All you need to do is identify possible or existing fraud behavior from your sales history or by general awareness, and set triggers in your inventory management software to automatically add tags like “possible fraud” to incoming orders from any such identified (verified or unverified) sources. This will warn you and your team well before these orders are processed.

Artificial Intelligence (AI) when integrated with machine learning, can analyze user behavior patterns such as too many returns from a specific account or pin code, or transaction problems. AI uses in-depth learning to correlate individual consumer’s shopping behavior or patterns and past return history to understand if a product may be returned.

Technologies such as these are major sources of data which greatly assist in inventory management since they record and analyze consumer buying behavior, including the purchase and return history of customers, to expose any discrepancies in stock levels by giving a fair idea about the personality of such shoppers.


Keep an eye on large orders

We asked Alex Reichman, CEO of iTestCash, how he deals with return frauds. “One thing that has helped me avoid return fraud is to analyze any big orders I receive.” He explains that most people won’t bother with return fraud on small orders.

Two effective tips to ensure yourself from fraud:

  • “Google the customer’s address to see that there’s no bad history associated with the address. I once saw an address that I Googled and something came up about it being a scammer’s address, and right there, I saved myself from a scammer.”
  • “Call the customer yourself! In most cases, scammers will provide fake numbers or won’t even pick up. If someone answers you can be straightforward and say we’re just double- checking to make sure the order is authentic and in most cases, a phone call can clear things up.”


Ban repeat offenders

Recently, Amazon has been closely tracking customer accounts with multiple returns. If the marketplace is suspicious about a customer, they usually issue a warning via email to that customer asking for an explanation.

Brian Sheehan, Marketing Manager at Hollingsworth, feels somewhat similar to Amazon and he has also provided some interesting ideas to tackle return frauds.

“We are a national supply chain and logistics company. We work with over 300 vendors and offer warehousing, fulfillment, and return logistics for certain clients. We service both B2C and B2B clients. When offering return logistics for a client, we have rules in place in terms of what to do with used and returned merchandise. If merchandise is in new and resellable condition, we will place it back on the shelves.

Some things that we check for are matching serial numbers. If someone returns a counterfeit or swapped item, we will make a note of it on their account. If it occurs more than once, we’ll then ban the buyer and inform our vendors. We also work closely with the National Retail Federation (NRF), to provide info to better assess and create parameters to prevent return fraud. The NRF makes it essentially difficult for people to return products on a continual basis by tracking ID information that is collected at the POS and again at the point of return (POR). Of course, we cannot track everyone who is making a fraudulent return at all times. We can only do our best to identify repeat offenders by banning them.”


Offers, low prices, and gift voucher options instead of free return policy

As mentioned above, fraudulent customers often take undue advantage of a free return policy. Too many returns can result in a major setback to your bottom line, inventory levels, carrying costs, and reverse logistics costs.

An interesting way to avoid return frauds is for sellers to provide competitive or low prices initially on their products instead of a free return policy. As mentioned above, customers will not bother with return fraud for orders of a small monetary value. If prices are low, there is no significant gain from a return.

You can also offer some respite to customers who don’t have a receipt. For example, JCPenney offers a merchandise voucher for whatever the item’s lowest selling price was within the last 45 days.

Target offers gift cards instead of traditional returns for customers without a receipt.


Prevent return fraud with DEAR Systems

Return fraud is a recurring problem for sellers, be it in physical or online stores. Taking a cue from the expert opinions above, sellers can curb the problem of online returns by keeping a vigilant eye on inventory management and by reviewing customer returns in order to avoid fraud. DEAR Systems can help you automate return fraud prevention across sales channels to safeguard your interests. Get in touch with our team to learn how DEAR Systems can help you grow your business while avoiding return scams.

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