Strategies to Safeguard Your Business From Returns Fraud
With the explosion in B2C and B2B e-commerce, there’s been a corresponding increase in online crimes and scams. It is estimated that retail returns fraud and abuse costs the US retail industry $24 billion annually. It’s arguable that these types of fraudulent practices have been around since the beginning of commerce in civilization.
But the speed and scale of the Internet and online trading has made the problem widespread, more prevalent, and very global. Unfortunately returns fraud is probably one of the most common problems facing retailers and wholesalers today. Traditional brick-and-mortar businesses are not spared either. Wherever there’s a loophole to be exploited with returns fraud, you can bet that someone or a syndicate can be working on it.
Here we’ll cover what is exactly meant by returns fraud. Then we’ll list some types of returns fraud faced by retail and wholesale businesses, both online and offline. Finally, we’ll suggest some ways you can detect, prevent and deal with returns fraud. It’s an ugly side of the business but you need policies and plans to deal with it before it becomes a festering sore.
What is Returns Fraud?
The definition of returns fraud is tricky. It is about maintaining a fine line between allowing honest purchasers to legitimately return goods within a time window. And balancing it against clearly abusive and fraudulent returns practices that tip into criminal territory. No business wants to mistakenly brand a customer and suffer lost sales as a result.
Returns fraud can be described as when a customer gains financially from taking advantage of your returns policy, and you suffer a loss in profits and inventory as a result. But hey, aren’t customers entitled to returns or exchanges when they are unhappy with their purchase or have a change of heart? Well, yes and no. As with anything in life, there are limits, even with regular customers.
As a business owner, you absolutely have to draw the line here with keeping regular customers and honoring regular returns. Where and when do you decide that you’ve had enough with a high rate of returns? There’s no hard and fast number to tell you when something is fraudulent and when a return is done with honesty.
Types of Returns Fraud
Here are some common returns fraud practices that retailers and wholesalers face. It’s arguable that online and brick-and-mortar retailers face a bigger problem with returns fraud for various reasons. Their sheer number of stores means that it’s hard for overworked staff to detect returns fraud. And sometimes it’s all too easy for everyday customers to commit returns fraud. Let’s see how they do it.
Wardrobing is where a customer purchases a product, uses it for an event or purpose, and then proceeds to return it within the time window for a full refund at the end of it. Unfortunately, generous returns policies due to competition mean that customers can enjoy a no-questions-asked returns policy or even a returns window of up to one year!
Customers typically practice wardrobing for time-based events where they have no further use of an expensive product once an event is over. Just think of formal suits and dresses for proms, large screen TVs or projectors for Super Bowl or English Premier League football. Or action and 360 degrees cameras for that trip of a lifetime.
In effect, the customer gets to use the product for the duration of your returns policy at no cost to them! They’re not even renting it because they get the full purchase price refunded back to them. And savvy customers cleverly hide product tags while they wear the clothing, or put back stickers once they’re done using the product.
This is probably the number one fraudulent returns practice. Why? Because it’s very easy to commit and difficult to assess. The customer simply returns the goods within the time window and demands that you honor your returns policy. And it isn’t limited to clothing, shoes, and accessories. Even electronics such as cameras, TVs, and other travel electronics are not spared either.
Swapping describes a practice where customers buy a new product in order to replace an identical one that is old or damaged. So when they receive the new product from you, they swap new for old and then proceed to return the old product. Sneaky, sneaky. In the end, the customer gets a new product for free while you lose a sale and need to deal with unwanted inventory.
This is arguably more criminal than wardrobing as the customer premeditated the returns swap under the guise of returning a product within the returns window. It is no longer a simple return of the original product but a fraudulent swap that the customer has clearly thought through by buying the same color, design or specifications to replace their old item.
A chargeback, or friendly fraud, is where a credit card customer disputes a charge with their bank and demands that they reverse the original transaction. This means that funds previously credited to a retailer or wholesaler will be forcibly taken back. The customer meanwhile enjoys a credit back for the same funds. It is a forced refund done by the credit card issuer and not through the seller.
It’s probable that credit card chargebacks are as old as the issuance of credit cards themselves. They’re not limited to online e-commerce transactions but also to just about any goods or services bought with a credit card. The same reasons for a chargeback — undelivered goods or disputed charges — applies to online and brick-and-mortar businesses.
The return of stolen goods is more prevalent in brick-and-mortar retail stores than online retailers. Here, “customers” attempt to return stolen goods that they shoplifted earlier for a full refund! This is clearly a criminal practice as the goods were never purchased in the first place. And hence will lack any form of proof of purchase necessary for a legitimate refund.
Online retailers aren’t totally immune from the return of stolen goods though. Large retailers with multiple sales channels, such as retail stores and online websites, might encounter the return of stolen goods from their brick-and-mortar stores to their online store. Customers may attempt refunds with altered receipts or plausible stories.
How to Spot Returns Fraud
1. Compare Returns with Exchanges
The number one indicator for returns fraud is to simply look at the number of returns versus exchanges. With returns, you lose a sale. With exchanges, you still make a sale but exchange one product for another. Excessive and persistent returns over time is a clear indicator that your returns policy is being abused and possibly taken advantage of with swapping and theft.
2. Examine Product Categories
A second way is to look at returns by product categories. Typically, returns fraud happens with expensive or big-ticket items. There’s little incentive to spend time and effort with small items such as flip flops, t-shirts or accessories. But formal wear and consumer electronics are ripe for picking as they serve a purpose, after which they are promptly returned for a full refund.
3. Watch Seasonal Events
Number three is to examine seasonal events. The obligatory high school prom is held between April and June in the United States. With this, there’s the annual rush for formal dresses, suits, and patent shoes. These are things that we don’t usually wear on a daily basis except for one-off balls and proms. So watch out for unusually high returns from May to July, assuming a 30-day returns period.
Other seasonal events include sporting events such as the Summer Olympics, Super Bowl or European football finals. Want a new 75 inch TV to impress your mates while you have them over for wings and beer? Sure, you can “buy” a new TV with a credit card (because they’re expensive and you don’t have cash) and then promptly return it after the final and get a refund on your credit card before payment is due!
4. Keep an Eye on Business Indicators
Other less obvious business indicators include inventory shrinkage or loss, and a drop in profits as a result of returns. These tend to be secondary in nature however and require some financial and accounting analysis before a returns fraud trend is spotted. It’s far better to deal with returns numbers than to glean them from financial reports.
Dealing With Returns Fraud
1. Have a Clear and Firm Returns Policy
The best way to nip returns fraud in the bid is to have a transparent and firm returns policy spelled out clearly in the store, office, invoice, and on your website. You need to set the conditions of sale which the purchaser must agree to, and follow when they make a purchase from you. Part of the terms of sale includes a clear-cut returns policy.
This is where it also gets a little tricky. You want honest customers to be able to return goods for a legitimate reason. But you also want to dissuade or filter out fraudulent returns. Returns need to be hassle-free for a pleasant customer experience but shouldn’t be too onerous or complicated such that they take their complaints to social media.
Set the Sales and Returns Terms
Ideally, your returns policy should clearly spell out the following:
- Number of days to make a return: 7, 14 or 30 days?
- Proof of purchase: email, paper receipts or confirmation codes?
- Original packing: tags, labels, stickers, plastic bags?
- Condition of goods: stains, damage or smells?
- Method of refund: credit, debit or store card?
Combat Returns Fraud with a Returns Policy
This is how a firm returns policy can combat returns fraud in the first place:
- A short returns window will dissuade wardrobing for an event or trip
- Proof of purchase will prevent the return of stolen goods
- Insisting on original packaging and condition will turn away wardrobers and swappers
- Make refunds to the original mode of payment. Shoplifters may think twice if they need to produce the original method of payment.
2. Control Your Inventory and Shipments
Keep a tight leash on your inventory by doing inventory cycle counts and using barcode technology. Unlike periodic physical counts, retailers and wholesalers can do cycle counting on a daily basis. It will not disrupt your normal course of business and you will maintain accurate inventory records by syncing physical inventory with inventory available for sale in your inventory management software package.
Also, adopting barcode labels and scanning technology means that you are able to tag each of your products with a unique serial number. This way you can prevent returns swapping fraud as each product would have been scanned into the sales order. And the serial number label will identify your product as being unique, unlike the swapped product that will have a different serial number or even missing tags.
Lastly, track your shipments right up to the point of delivery with shipping tracking numbers and signatures. Prevent friendly fraud or allegations of unreceived parcels by using trackable shipping methods. And also insist on the customer’s signature for confirmation of receipt of the delivery. This way you can refute chargeback claims with proof of receipt and delivery.
3. Blacklist Customers
We saved this for last as it’s a measure of last resort if a customer does not play fair and starts to abuse your returns policy. It is far better to blacklist and prevent further sales to a fraudulent customer than to continue to suffer losses, receive unsaleable inventory, or fight chargeback claims.
Compare customers’ purchases along with their returns in your order, purchase and inventory management such as EMERGE App. This should bring up red flags if their returns rate is unusually high or regular. In fact, many online retailers are adopting a blacklist for customers with irregular returns patterns.
The arrival of B2C and B2B e-commerce has no doubt been a great boon for businesses around the world. However, both retailers and wholesalers have had to deal with fraudulent practices related to returns. Unfortunately, customers take advantage of generous returns policies to use or swap an item for a full refund. Businesses should take steps to identify fraudulent returns patterns and set clear terms for returns and refunds.