The growing threat of returns fraud

John-David Klausner at Loop Returns examines a rising menace to retail businesses

In the last year, retailers faced an alarming surge in financial losses due to returns fraud. In fact 2023 saw fraudulent returns increase to an estimated 13.7% and, according to the Centre for Economic Business and Research, the UK retail industry lost £11.3bn ($14.30bn) to fraud last year.

As online sales continue to rise, return policy abuse and fraud is set to escalate, posing significant threats to retailers’ growth and profitability, with merchants indicating that their margins are already directly being impacted.

Understanding return policy abuse

Return policy abuse encompasses a spectrum of different behaviours, ranging from mildly

unfavourable actions to outright fraud. At one end, customers may engage in practices like

bracketing—ordering multiple items to try on, knowing most will be returned—or attempting to return items that do not qualify, such as final sale items or those past the return period. While not explicitly fraudulent, these behaviours strain a retailer’s resources and affect their bottom line.

At the more severe end, return abuse involves actions that deliberately exploit a retailer’s

policies. This includes purchasing items with the intent to use them briefly and then return them (wardrobing), falsely claiming a functional item as defective to get a refund, or even retaining the product after requesting a return.

The most egregious cases, known as return fraud, involve criminal actions such as empty box fraud—returning an empty box or a cheaper item instead of the original purchase—claiming non-receipt of a product to receive duplicates or refunds, and using stolen credit cards for purchases with the intention of processing refunds to different cards.

Consumer motivations behind return policy abuse

A recent study amongst over a thousand UK online shoppers revealed that 38% had either

engaged in return policy abuse or knew someone who had in the past 12 months. The

motivations behind these actions vary. For example, 27% of respondents admitted to

wardrobing, while 17% exploited lenient return policies, and 7% aimed to keep or gift items

without paying for them. On a less malicious note, 59% of shoppers engaged in return abuse to determine the size or fit of items, and 21% needed the money they had already spent.

Furthermore, two-thirds of online shoppers admitted to regularly ordering multiple items with the intention of returning some to decide their preferences, with 15% engaging in this type of

behaviour at least once a week. This preference for flexibility indicates a significant challenge for retailers who strive to balance accommodating customer needs and minimising abuse.

Impact on retailers

Return policy abuse and fraud have far-reaching consequences for retailers. Financial losses are just the tip of the iceberg. The operational burden of processing high volumes of returns, restocking, and managing inventory discrepancies creates substantial costs.

Furthermore, frequent returns can distort sales data, complicating inventory management and demand forecasting. These issues collectively threaten retailers’ profitability and hinder their ability to achieve sustainability goals.

Strategies to combat return policy abuse

To mitigate the adverse effects of return policy abuse, retailers must adopt a multifaceted

approach. Firstly, absolute clarity of policies with clear repercussions is essential. By outlining return policies and setting strict guidelines retailers can deter abuse. Since 91% of online shoppers review return policies before making purchases, prominently displaying these policies can set clear expectations.

Additionally, introducing return fees or offering free returns exclusively to loyalty program members can discourage casual abuse.

Another solution may be to segment customers based on their prior behaviour. If a shopper is identified as a return fraud perpetrator and then attempts another return, they won’t be able to automatically complete that action. Instead, they’ll be required to talk to the customer service team to prevent them from abusing
the system again.

Finally, educating customers about the financial and environmental impacts of returns can foster responsible behaviour. A growing number of consumers avoid return abuse due to ethical or moral concerns, fear of legal repercussions, or awareness of the environmental consequences. Highlighting these issues in communications can cultivate a sense of accountability and align customer behaviour with the brand’s values.

The role of technology in combating fraud

As the battle against return policy abuse intensifies, technology of course plays a crucial role in detection and prevention. Data-backed insights and machine learning will allow retailers to more easily recognise patterns indicative of fraud, allowing for timely interventions and strategy adjustments.

Leveraging detailed data analytics, including analysing patterns to identify repeat offenders, will help to monitor and manage return behaviours. When a pattern of abuse is detected, retailers can require customer service intervention for subsequent returns, making it harder for abusers to exploit the system. Collecting feedback on returns also enables retailers to improve product descriptions, reducing the likelihood of size and fit-related returns.

By leveraging these insights, retailers can strike a balance between offering flexible return policies and protecting their bottom line.

Return fraud and abuse represent a growing menace to retail businesses, exacerbated by the rise of online shopping. The financial and operational challenges posed by these behaviours necessitate robust, multifaceted strategies to protect retailers’ interests.

By clearly communicating return policies, leveraging data analytics and educating customers on the broader impacts of their actions, retailers can mitigate the adverse effects of return abuse and enhance their post-purchase experience while safeguarding their margins.

John-David Klausner is SVP of Business Development & Strategic Alliances at Loop Returns, a leading post-purchase platform optimising returns, exchanges, and reverse logistics for 3,000 of the world’s most-loved brands

Main image courtesy of iStockPhoto.com and Andrii Zastrozhnov