The Perfect Retailer’s guide to prevent return frauds at a large scale

As a retailer, you should understand the importance of customer satisfaction and loyalty. One way to maintain this is by accepting returns, which improve the customer experience and create opportunities to cross-sell and up-sell products. However, not all returns are legitimate so this retailer’s guide to prevent return frauds can be a great help for you. 

Return fraud is a growing issue that can cost retailers billions of dollars each year. In general, it can be any fraudulent activity involving merchandise return. This can include returning stolen merchandise, returning used or damaged goods as if they were new, or returning counterfeit products. Unfortunately, return fraud has become more sophisticated over time, making it challenging for retailers to detect and prevent. In fact, the National Retail Federation estimates that return fraud costs retailers $17.8 billion annually, which is nearly 2% of all retail sales.

Its impact on retailers goes beyond the financial losses. It also affects inventory management, employee morale, and customer trust. Retailers must take proactive measures to combat return fraud on a large scale.

This blog will explore different types of return fraud, their impact on retailers, and best practices to prevent and combat it. We will also discuss the importance of developing a comprehensive return policy and can be the perfect retailer’s guide to prevent return frauds. By implementing these measures, retailers can protect themselves from the adverse effects of return fraud and maintain customer satisfaction and loyalty.

What is Return Fraud?

Return fraud is a fraudulent practice where a customer returns a product to a retailer with the intention of deceiving the retailer for personal gain. This can be done in several ways, such as returning stolen or used items, exploiting the retailer’s return policy, or using counterfeit receipts or IDs to receive a refund.

  • Wardrobing: One form of return fraud is known as “wardrobing,” where a customer purchases a product, uses it, and then returns it for a refund. For example, a person may buy an expensive dress, wear it to a special event, and then return it to the Retailer. This practice is also sometimes referred to as “renting” a product.
  • Switching: Another type of return fraud is “switching,” where a customer replaces the original contents of a product with cheaper items and returns it to the Retailer. This can be done with electronic products or clothing, where the customer replaces the original parts or tags with cheaper alternatives.
  • Stolen returns: Stolen returns are another common form of return fraud. Thieves shoplift products from retail stores and then return them for a cash refund. This is a severe problem, with shoplifting alone resulting in around $60 billion in losses. Not only does it cause financial losses for retailers, but it can also contribute to rising prices for honest customers.
  • Refund fraud: Refund fraud involves creating counterfeit receipts or using fake IDs to receive a refund for a product that was never purchased or has already been returned. This can be done by customers or employees, who may collude with customers to commit fraud.
  • Bricking: Bricking refers to a fraudulent activity where a customer purchases a product, typically an electronic device, and removes essential components, rendering the product inoperable or almost unusable. This allows the customer to resell the valuable parts and return the remaining product for a full refund, deceiving the Retailer into thinking that the item is still functional.
  • Empty box fraud: Empty box fraud is a major concern for retailers who provide local delivery services. It involves instances where customers falsely allege that the package they received was empty to obtain a cash refund or a replacement. In reality, they have already kept the original item that was delivered. This deceitful practice can result in significant financial losses for businesses.
  • Open box fraud: Retailers often implement an open box policy to sell previously returned or opened items at a discounted price rather than disposing of them entirely. However, this practice has led to increased open box fraud, which occurs when shoppers buy expensive products, return them to the store, and then repurchase them at a lower cost using the store’s open box policy. This type of return fraud takes advantage of the Retailer’s generous policy and may negatively impact its profits and customer trust.
  • Cross-retailer returns: Beware of cross-retailer returns if you notice a rival offering a similar product at a significantly lower price. This type of return happens when customers purchase a cheaper item from a competitor and then return it to your store for a higher refund amount, which can result in financial loss for your business.

Impact of Return Fraud on Retailers

Return fraud is a serious issue affecting retailers of all sizes, and it can significantly impact their profitability. When customers engage in fraudulent returns, retailers suffer losses in several ways that can harm their bottom line.

  • Revenue Loss: One of the most immediate and tangible effects of return fraud on retailers is the loss of revenue. When customers return products they have fraudulently obtained, retailers cannot resell those products at full price. This can result in a direct loss of revenue and a reduction in overall profitability, which can harm the company’s financial health.
  • Operational Costs: In addition to revenue loss, return fraud can also result in increased operational costs for retailers. Processing fraudulent returns can be a time-consuming and labor-intensive process, requiring additional staff to sort, restock, and ship returned products. Retailers may also incur fees and other expenses associated with restocking and shipping, which can further eat into their profit margins.
  • Reputation Damage: Perhaps even more concerning, return fraud can damage a retailer’s reputation and lead to negative publicity. When customers feel they have been victimized by fraudulent activity, they are likely to share their experiences with others, potentially dissuading other shoppers from doing business with the Retailer in question. This can lead to a decline in sales and customer loyalty and long-term damage to the retailer’s brand.

Best Practices to Combat Return Fraud

According to research, there has been an upward trend in the number of individuals who make serial returns, with 42% of retailers in the United States reporting an increase in such behavior over the last year. This retailer’s guide to prevent return frauds  can help you take several measures to combat return fraud on a large scale. These measures include:

  1. Develop a Comprehensive Return Policy
    Retailers must develop a comprehensive return policy that clearly outlines the conditions for returning a product, such as a timeframe for returns, the condition of the product, and the documentation required for returns. This policy must also include measures to deter return fraud, such as restocking fees and refund limits.
  1. Train Staff to Spot Fraudulent Returns
    Training staff to spot fraudulent returns is another critical best practice. This includes educating them on common return fraud tactics, such as returning stolen items or using counterfeit receipts.Retailers must train their employees to detect and prevent return fraud. Employees must be trained to verify the authenticity of receipts and documentation, identify signs of use or damage to products, and check the condition of returned products.By training staff to identify these tactics, businesses can reduce the likelihood of fraudulent returns and protect their bottom line.
  1. Require Proof of Purchase
    Another best practice for combating return fraud is to require proof of purchase for all returns. This can be in the form of a receipt, order confirmation email, or other documentation that confirms the purchase.By requiring proof of purchase, businesses can ensure that the returned item was purchased from their store and reduce the likelihood of fraudulent returns.
  1. Implement Technology Solutions
    Retailers can leverage technology solutions to combat return fraud. One such technology is barcode scanning to verify the authenticity of returned items. This option is one of the most effective in this retailer’s guide to prevent return frauds. By scanning the barcode on a returned item, businesses can confirm that it matches the barcode on the original purchase and ensure that the returned item is legitimate. Another option is to implement a POS system that tracks customer returns and identifies patterns of return fraud. Retailers can also implement RFID tags or other security measures to deter theft and fraudulent returns.
  1. Use Tamper-Evident Packaging
    Tamper-evident packaging can help reduce the likelihood of returns by deterring customers from returning items that have been opened or used. This type of packaging includes seals, stickers, or other indicators that show if a product has been opened or used. Retailers can also use unique serial numbers or barcodes to track products and identify if they have been previously returned. However, balancing the need for security with the customer experience is essential. Excessive packaging may be challenging to open or dispose of, discouraging customers from purchasing or returning items.
  1. Monitor Return Patterns
    Another best practice for combating return fraud is to monitor return patterns. This includes tracking the frequency of returns by a customer, the types of items being returned, and the condition of the returned items.By monitoring return patterns, businesses can identify suspicious activity and take appropriate action to combat fraudulent returns.
  1. Restrict Return Windows
    Retailers can reduce the likelihood of returns by shortening the return window. By restricting the time customers have to return products, retailers can create a sense of urgency and deter customers from making unnecessary returns.However, it is vital to strike a balance between the length of the return window and customer satisfaction. A too-short return window may discourage customers from making purchases, while a too-long return window may increase the likelihood of fraudulent returns.
  1. Offer Store Credit Instead of Cash Refunds
    Offering store credit instead of cash refunds can deter return fraud by encouraging customers to shop at the retailer’s store again. Store credit can also help retailers manage inventory by directing customers toward specific products or categories.However, ensuring a seamless customer experience is as important as reducing return fraud. In some instances, offering store credit instead of cash refunds may discourage customers from making purchases or returning items.
  1. Consider Outsourcing Return Processing
    Outsourcing return processing to a third-party logistics provider can reduce the workload on retailers’ staff and provide additional expertise in identifying and preventing return fraud. Third-party logistics providers can offer a range of services, including receiving and inspecting returned items, restocking products, and processing refunds.
  1. Conduct Random Audits
    Finally, businesses should conduct random audits of returned items to ensure they are in the expected condition and match the original purchase. This can include tracking the frequency of returns, the identity of customers returning products, checking for damage, verifying the item’s authenticity, and ensuring all components are present.By conducting random audits, businesses can identify potential issues early on and take appropriate action to prevent future fraudulent returns.

Conclusion

In conclusion, return fraud is a serious issue that can significantly impact retailers’ bottom line and reputation. The various measures proposed in this retailer’s guide to prevent return frauds can surely help you and your clients as well. By implementing best practices such as clear return policies, technology investments, and employee training programs, retailers can mitigate the risk of return fraud and protect their businesses from financial losses.

ServiceCentral’s depot management solution offers a range of features that can help retailers reduce the risk of return fraud, from end-to-end depot management to standardized processes and data capture. This solution allows retailers to improve their operations and protect their businesses from fraudulent activity.