Return fraud: How to manage retail’s most miserable holiday tradition 

The holiday shopping season is obviously behind us, but it remains a front-and-center concern for online retailers this month because of the flood of returns merchants face in January. And, unfortunately, many of those returns — 10.6% — are fraudulent, a number that’s rising even faster than surging e-commerce sales. 

That harsh reality was deeply dissected when J. Bennett, Signifyd’s senior vice president of operations and corporate development, sat down recently with Omni Talk podcast hosts Anne Mezzenga and Chris Walton to talk about the growing issue of fraudulent returns. 

A few things you’ll want to know about the current state of return fraud

Among some of Bennett’s key points on Omni Talk’s “Ask an Expert” segment were: 

• As many as 30% of ecommerce sales are returned online, compared to less than 10 percent of brick-and-mortar sales, and the differential has been continuously rising. The point is that while online retail sales and fraudulent online sales both keep rising, fraudulent sales are increasing at a much faster pace.
• As usual, January was the biggest month for online retail returns, mostly legitimate but also fraudulent. What set this January apart, was that return activity was bigger than ever. “It was a wave on a wave on a wave,” Bennett said.
• Ecommerce fraudsters are very smooth and professional. They know that cagey customers don’t like dealing with online retailers. So they strike a deal with return-oriented customers offering “return services,” in which they keep the item meant to be returned and keep a cut of the refund while returning a carefully selected, but less expensive knock-off. “They’ll give the consumer a cut; they’ll take a cut and the retailer is left with nothing,” Bennett said. 
• In deciding whether to accept a return and provide a refund, retailers face a crucial choice. If a retailer denies a questionable return that is legitimate, they have quite likely frustrated and insulted a valuable customer. If they provide a refund and the return was fraudulent, their business takes a financial hit. (And through social media, chat rooms and word of mouth, they open themselves to more return fraud.) How crucial is the yes-refund-no-refund choice? A Signifyd consumer sentiment survey found that 75% of customers who have a bad return experience will not shop with the retailer again. Meanwhile, 83% of customers who have a good return experience will return to that online shop. 

These issues reflect the dramatic evolution of the internet, which has helped foster the kind of anonymity that makes it easier for some to make false claims about products they return or to even claim an item that was delivered was never delivered.

Return abusers have no end to their creativity

Culprits’ methods are typically bold, whether professionals are brought into the action or not. Among other things, retailers face digital shoplifters looking to score a free pair of running shoes by claiming the first pair never arrived. They battle scammers who send back knock-off merchandise while keeping the real thing and the refund. They may even replace, say, a smart phone with a potato – yes, a potato – of similar weight.

Online merchants today can’t totally sidestep fraud, but they need not add to the threat. The truth is, many of the measures retailers have taken to keep up with consumers’ changing preferences have put them at greater risk.

For example, the explosion of omnichannel buying and fulfillment options during the pandemic have provided customers with a buy, pickup and return-anywhere world. But the speed required for filling curbside and in-store-pickup orders provides little time for fraud review. And this popular breed of online order arrives with no shipping address — meaning fewer insights into shopper identity and intent — because customers handle the last mile themselves. 

It’s important to underscore that not all returns are bad or done with malice, which is why most online retailers have flexible return policies. They understand that returns are a key part of the customer experience. They know that online customers in particular will inevitably want to return some items, because ecommerce doesn’t allow them to see, touch or try on merchandise before buying it. 

The good, bad and ugly of returns

But while the majority of returns are understandable – for instance, somebody buying a sweater with the wrong size or color or material – others fall into a gray area. Some people buy on impulse and later suffer buyers’ remorse, and others may buy a shirt in three different sizes for optimum fit. These cases, while irritating, aren’t fraudulent. So retailers have to decide what their return policies will allow and how to handle individual cases that appear to fall outside of their policies. 

On the other hand, it’s obvious when the name of the game is fraud. Among the best examples are underground organizations that do business on behalf of morally shaky customers and orchestrate improper returns in exchange for up to 40% of the value of the refund. For their 40-percent-or-so, fraudsters communicate with the retailer and falsify a complaint to collect ill-gotten gains without returning the actual item.

There are ways to mitigate online fraud issues, and ecommerce retailers should be aware of them. One is to work with companies such as Signifyd. Signifyd’s Decision Center uses AI and Signifyd’s vast Commerce Network to differentiate between risky and low-risk return requests while allowing ecommerce teams to tailor their responses based on the degree of risk involved. 

Instantly recognizing the identity and intent behind every return request allows Signifyd customers to set guardrails on issuing refunds. A very risky order might mean a refund is denied, or promised only after the return item has been inspected. A return request from a loyal customer might be refunded immediately, as soon as the return is shipped from a local UPS store.

How can we take the sting out of return season?

Here are some additional suggestions for online retailers to mitigate issues:

• Provide detailed data on your website about your products. By providing detailed photos and descriptions of merchandise — and in the case of clothing, providing accurate sizing charts — customers will have fewer reasons to return merchandise in the first place.
• Post a clear return policy on your website. This should include any conditions or restrictions on returns and detail the processing time for returns.
• Schedule deliveries for a time when the customer will be home. Retailers could even require a signature as proof of delivery. They can also work with their fulfillment companies to have them take a photograph of the delivered package at the proper address. Amazon is one company already doing this regularly. These steps inoculate merchants from claims that an item was not received. Of course, customer experience takes a big hit with some of these approaches. If a customer needs to be home when a package arrives, they might as well go to the store and buy the item. Or maybe not buy the item at all.
• Institute a return method that asks buyers returning merchandise not to re-package the merchandise themselves. Instead, suggest that a FedEx or UPS employee pack the item for return. This provides a witness who sees what is actually being shipped, minimizing the risk of receiving a decoy product or a potato. This requirement can be effective, but is best offered as a convenience to the consumer. An inflexible requirement could leave good customers feeling as if they’re being treated like criminals. 

Lastly, online retailers should avoid a one-size-fits-all policy to maximize the balance between the treatment of a loyal customer and a new customer requesting a questionable return. Putting up barriers to an easy return could insult the loyal customer, while providing an immediate, sight-unseen refund to a new customer with a questionable request could expose the business to unnecessary risk.

No question, in other words, that the importance of avoiding return abuse must always be carefully weighed against the possibility of insulting a valued and honest consumer. 

Photo by Getty Images

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