Breaking Down Return Fraud and Ways To Prevent It

Businesses in the retail industry face tremendous pressure to satisfy their customer’s needs and provide flexibility in the purchasing process. Unfortunately, their efforts to do so make them much more susceptible to fraud. In fact, variations of return fraud cost retail businesses in the US more than $25.3B in the past year alone.

Here, we’ll take a look at different types of return fraud and how to stop it.

Types of Return Fraud

Return fraud is a surprisingly broad category comprised of many different fraudulent actions and schemes. As a type of friendly fraud, it can often involve otherwise legitimate customers, but full-time fraudsters are always a threat.

The following types of return fraud leverage different aspects of a given retailer’s return policy to obtain free goods, cash, or both:

Receipt Fraud

This type of return fraud is especially effective when either a real receipt is stolen or a sophisticated fake receipt can be produced. Scammers use these acquired receipts to return goods for cash. Often the goods are stolen, though they may also have been purchased from another source for significantly less.

Stolen Merchandise

Some scammers choose to not only attempt a return with stolen goods but also steal the goods from the store they intend to return them to in the first place. To do this, they may buy a product one day, then come in the next day with just the receipt. They will then take the product they want to return off the shelf and return it. If they can avoid detection this can be a lucrative scheme.

Employee Fraud

Employee fraud can take many forms, including illegitimate invoicing and spikes in expenses. When fraudsters join forces with the right employees–those with direct access to returns handling processes–they can benefit from significantly reduced oversight of their activities and insider assistance with shoplifting or exchanging items for cash.

Price Switching

Price switching is a less effective tactic where scammers place a new, higher price tag on an item they have acquired, then return it for this illegitimate price in cash.

An integrated point of sale system can help staff to keep tabs on tag information for specific items, staving off most scams of this variety. It’s worth noting that price switching is more difficult to stop if the scammer switches tags before buying an item.

Arbitrage

This scam centers on returning matching packaging for a given product, but with an older, defective, or completely different (and less expensive) product inside. Fraudsters cash in on the return value of the item they purchased without actually returning it.

This can become a much more difficult threat when your company offers multiple versions of similar products but with key differences that put them at separate price points.

Open-Box

This type of fraud occurs when illegitimate customers buy an item, then open it before returning it. Their strategy revolves around certain stores’ open box policies which place the item back on sale at a reduced price.

This makes it possible for the scammer to effectively lower the price of any item they aim to obtain, potentially returning it several times to pocket the difference between the lower price and its normal value.

Wardrobing

With wardrobing, fraudulent buyers purchase an item, normally an article of clothing, with the intent to wear it once or for a period of time and return it as new when they are done with it.

Wardrobing accounted for more than 33% of all cases of illegitimate returns in the past year.

Receiptless Returns

These types of returns are among the easiest for fraudsters to leverage as they require very little (often zero) proof of purchase to be made. Retailers trying to improve the customer experience by offering these highly convenient return policies must work double-time to prevent scammers from pawning off stolen or defective goods for cash.

Preventable Measures

What makes return fraud so challenging is the trouble retailers have actually knowing who is returning products. Issues discovered too late are practically impossible to fix and, unfortunately, businesses are the ones typically held liable. Legitimate customers caught in the crossfire find themselves either being inconvenienced by troublesome return policies or becoming collateral damage to the actions of fraudsters.

Discovering return fraud of any kind does little good for businesses in this space as they will likely need to foot the bill for the stolen item and placate legitimate, disgruntled customers. The financial and reputational impact revolving around return fraud is significant.

That’s why you should consider introducing an ID verification check into both the purchasing and returning processes. This is an easy way to create a more effective feedback loop for sleuthing out fraudsters.

Accuracy is Key

Only a tried and tested solution should be trusted to validate a customer’s ID. Inaccurate solutions muddy your results and frustrate legitimate customers as fraudulent ones slip through the cracks.

Boasting 99.9% accuracy, Intellicheck’s ID validation solution provides the kind of accuracy companies can depend on to protect their customers as well as their profits from fraudsters.

Intellicheck integrates seamlessly into your existing systems and processes, and is so quick, that engagement does not suffer. Whether you need API-based integration or an effortless, turnkey solution, Intellicheck is your business’s best bet for bettering its defenses against fraud of all kinds.