Return fraud in e-commerce: a billion-dollar dilemma

Return fraud. Abuse of return policies. Professional returns. Series return applicants. These are just a few of the terms that have become part of the vocabulary behind the scenes of e-commerce. Profiting from fraudulent returns has become a real market. AND, like so many other challenges, this is growing.

Return policies are an essential part of the consumer experience and a key element in modern e-commerce to ensure customer loyalty. According to a survey bySignifyd, global anti-fraud technology company, 83% of consumers would buy from a retailer again after a positive return experience and 75% would avoid buying again after a bad experience. 

However, the financial and operational challenges of online returns have been haunting e-commerce, once solutions focused on agility and customer satisfaction create gaps for fraud networks and return abuses, with direct losses for online retail without any type of return in customer loyalty, aggravating a large-scale problem in itself. 

In 2023, global retailers incurred return costs of approximately $700 billion; in the US alone the loss was US$101 billion. The global forecast is that this number will increase to $1 trillion by 2030, according to estimates from the National Retail Federation and Appriss Retail, that analyze the financial impact of returns in e-commerce. 

Not all returns that e-commerce has to bear are fraudulent. Many consumers return products for understandable reasons, as a size error, color or material. However, even among the returns made by legitimate consumers, some are more questionable, like impulsive purchases followed by regret or consumers who buy several versions of the same product to choose later. 

The issue related to the abuse of returns, in turn, emerge along with the cost to process an online return, what it equals, on average, 21% of the value of an order, with some retailers losing even more, according to a Pitney Bowes survey in 2024. "All these losses have led online stores to seek flexible return policies", that attract consumers, but also inhibit abuses and prevent frauds, says Gabriel Vecchia, senior commercial director of Signifyd in Brazil.

How are return frauds

Return fraud and abusive returns can take various forms.Among the most common are

• Wardrobing – common in the fashion industry, the customer buys a product, use it and then return it as if it were new.

• Bracketing – the customer buys several versions of the same product, test and return the ones you don't want, leaving the retailer with the shipping and processing costs. 

• Fraudulent exchange – return of a counterfeit or damaged item instead of the original.

• Return chargeback – the customer requests a refund claiming that they returned the product, but the retailer does not receive the item.

• Empty return – sending a box without the product or containing an irrelevant object, like a brick or a potato, to circumvent the refund system.

How to prevent fraud in returns without compromising the customer experience

The challenge for retailers is precisely in finding the balance between flexibility and security. Maintain the satisfaction of those who really need to return a product, but to stay protected from professional fraudsters and reduce abuses of your return policies. Some essential measures can contribute to this balance

1. Clear and structured return policy –inform transparently about deadlines, conditions and processes to avoid ambiguities and the creation of gaps that can be exploited by fraudsters.

1. Authentication of returns –check the weight of the package, the authenticity of the returned item and adopt conditional refund processes for high-risk customers, making the return process more difficult in a proportional way for those profiles that indicate a risk of fraud or abuse.

1. Restocking fees for high-value products – apply fees to cover logistical costs and discourage returns without justification, especially for high-value products or higher operational costs.
   
2. Monitoring return patterns through technology –identify consumers with a suspicious history of frequent or fraudulent returns, through AI-based anti-fraud solutions and data technology, capable of detecting anomalous patterns and preventing abuses.

An efficient return policy does not just mean accepting returns without criteria. The use of technology is today the greatest ally in this great challenge of differentiating legitimate consumers from fraudsters and ensuring the protection of e-commerce without harming the customer experience, not only during the purchase, but also in the post-purchase, reinforces Gabriel.