Is Returns Fraud On the Rise in 2024?

Over the last year, growing levels of shrink among retailers have captured headlines, from quarterly earnings calls to major publications to the halls of Congress. Retailers including Target, Home Depot, Macy’s, and Dick’s Sporting Good have publicly spoken about increased shrink due to shoplifting and theft, especially by Organized Retail Crime (ORC) rings. While this has sparked a national conversation about ORC, there’s another worrying trend in the retail industry. 

The rapid rise of returns fraud and refund abuse. 

In this article, we examine whether returns fraud is on the rise in 2023 and 2024, what might be causing such growth, how it is impacting retailers, how retailers are responding, and why their current approach might be incomplete.  

Is Returns Fraud and Refund Abuse Actually Increasing? 

According to the National Retail Foundation, returns fraud cost retailers a staggering $101.91 billion in 2023 – a 20% year-over-year increase. Shoppers returned 16.5% of items they purchased, double the percentage of goods returned in 2019.  

The problem is quickly gaining attention through viral TikTok videos and reporting in the New York Times and Wall Street Journal among others. At NRF Big Show 2023, Marc Metrick, CEO of Saks, noted that fraudulent “merchandise not received” complaints have more than doubled over the past several years. High-profile cases such as the Artemis Refund Group, which was charged with conspiracy to commit wire fraud due to a return fraud scheme, have also brought the issue into the spotlight.  

Retailers are feeling the pinch. In a survey conducted by Axonify, 81% of the 300 retail frontline managers surveyed said return abuse is a growing issue in the industry, and 70% reported fraudulent returns at their store in the last three months. 36% are encountering fraudulent returns on a weekly basis and 18% deal with fraudulent returns daily, while more than four-in-10 respondents believe that fraudulent returns significantly or very significantly impact their store’s revenue.  

These figures paint a clear picture: return/refund fraud is a serious and growing problem that's costing retailers billions. As we move further into 2024, tackling this issue continues to be a top priority for the retail industry. 

Why is Returns Fraud Growing? 

There are multiple factors at play, but the current rise in returns fraud can be traced back to the effects of the Covid-19 pandemic. The pandemic created a huge surge in e-commerce and online shopping which in turn created new opportunities for fraud. Scammers are exploiting the generous return policies introduced by retailers seeking to attract customers in the post-pandemic online shopping boom. Such policies changed shopping habits and contributed to a rise in the volume of goods being returned, as shoppers now frequently order multiple sizes and colors of an item online, intending to send back those they do not keep. 

The anonymity of online transactions can also embolden and encourage fraudulent behavior by customers that they wouldn’t attempt in-store, and the automated processes around online returns are easy to game. Shoppers may mail back entirely different items, such as a box filled with bricks instead of the electronic device they purchased, or attach the tag of a more expensive product to a less costly item. Fake products may be returned to high-end retailers with the hope of securing a refund before the forgery is detected, with little risk to the person making the return. Individuals count on the likelihood of receiving a refund once the return shipping label is detected by a courier service, before the retailer verifies the actual product returned.   

At the in-store level, the labor shortage creates another vulnerability, as new and seasonal staff are often more vulnerable to the deceitful tactics employed by criminals. Combine all of this with generous return policies by retailers seeking to compete for market share and you have a recipe for growing fraud and shrink.  

While this change in shopping habits is a major contributor, it’s not the only one. The rise in ORC and shoplifting also impacts return fraud, as returns are a major vector for organized fraudsters. Stolen merchandise might come back in the form of returns as criminals try to get cash or store credit for items passed off as purchased goods. About 44% of retailers surveyed in the NRF report said they have had stolen merchandise returned within the past year, while just over 20% said they have experienced coordinated returns fraud from ORC groups. Even the return of merchandise using counterfeit receipts is becoming more common, with 25.6% of retailers encountering such cases in 2023, up from 11.4% in 2022. 

Returns are Squeezing Retail Margins 

Retailers face a lot of pressure to offer a seamless return experience. One survey found that nearly three-fourths of shoppers choose a retailer based on the return experience and 58% want a smooth, no-questions-asked return experience across channels. When it comes to the current competitive retail landscape, retailers want to do all they can to delight their customers and provide a great experience. 

However, the impact of returns abuse, ranging from outright fraud and theft to softer, non-illegal forms of abuse such as ‘wardrobing,’ has a high cost for retailers. According to a Pitney Bowes survey, on average a return amounts to 21% of an order’s value. Shipping and restocking costs add up. According to Gartner’s Tom Enright, companies lose 50% of their margin on returns when accounting for the cost of initially selling the item plus processing the return.  

The impact of returns abuse also stretches beyond these direct costs and impact on margins. It complicates inventory management in many ways, such as distorting inventory records, leading to discrepancies between actual stock and inventory system records. Returned items may be processed under generic codes, and damaged or otherwise unsellable items may be erroneously reintroduced into inventory – disappointing future customers when they come to buy these items.   

Handling abusive returns also strains operational resources, wasting the time of in-store staff to process returns, manage inventory discrepancies, and address related issues. It can also strain relationships with business partners, such as gift card vendors, when they become a vector of refund abuse schemes.  

Retailers need to balance providing a seamless customer experience with the high costs and operational impacts of generous return policies and combat the various forms of returns fraud and abuse. 

How are Retailers Responding? 

Retailers are not standing idle in the face of this growing threat – they are stepping up their efforts to combat fraudulent returns. To combat return abuse, 36% of retailers made some items non-returnable over the past year and according to a Happy Returns survey, 91% of merchants implemented some return fee in the last year. Fast-fashion retailers H&M and Zara have started charging customers to mail items back, while Old Navy added online tools demonstrating how clothes will fit. Amazon now alerts shoppers about commonly returned items, urging them to double check their purchase.  

Most retailers are making use of technology to track and analyze return patterns, implementing stricter return policies, and training staff to detect and prevent fraud. However, most retailers will need a combination of tools to effectively clamp down on returns abuse.  

The Limitations of Real-Time Return Authorization Tools 

One popular solution to returns abuse is a real-time return authorization tool. While real-time return authorization tools provide a degree of protection against fraud, they often fall short of providing comprehensive coverage. These tools typically function by flagging suspicious transactions as they occur, an approach that can be effective for catching certain types of fraudulent activity. However, their capabilities are often limited to detecting immediate red flags, leaving them ill-equipped to identify more complex, nuanced fraud schemes. 

Furthermore, these tools often fail to provide the deeper insights and intelligence necessary to understand the broader patterns and trends in fraudulent activity. This lack of insight makes it difficult for retailers to develop effective strategies to prevent future return fraud. 

Real-time tools can also sometimes lead to false positives, flagging legitimate transactions as fraudulent and frustrating honest customers in the process. In fact, according to one study, between 30% to 70% of declined credit card transactions are false positives, which can result in lost sales and damaged customer relationships. 

While real-time return authorization tools serve an important role in the fight against return fraud, they are not a complete solution. Retailers need a more advanced, data-driven approach that can provide the insights and intelligence necessary to understand and prevent return fraud on a deeper level. 

Agilence: Your Partner in Preventing Returns Abuse 

As e-commerce continues to grow, so does the opportunity for fraudsters to exploit return policies for their gain. Criminals are becoming increasingly sophisticated in their tactics, often operating in well-orchestrated schemes that make fraudulent returns difficult to detect and prevent. Traditional security measures and real-time return authorization tools may help flag some instances of fraud, but they merely scratch the surface of this complex problem. 

Agilence Analytics provides retailers with a formidable tool in the fight against return fraud, leveraging data from over 200 sources to unearth instances of fraudulent activity. This comprehensive approach allows retailers to gain a holistic view of transactions, identifying patterns and anomalies that could indicate fraud. 

What are some things you can do with Agilence Analytics compared to a real-time authorization tool? 

• After-the-Fact Analysis and Pattern Recognition: Agilence excels in identifying broader patterns and trends beyond the real-time decisions made by returns authorization tools. For example, the return authorization tool may have declined the return, but the manager may have overridden it. Agilence would allow the company to identify this policy violation.    
• Comprehensive Data Analysis: Agilence can integrate and analyze data from returns authorization systems and other data sources to provide deeper insights into return patterns, cashier behaviors, and customer profiles.  
• User-Friendly Analytics: Agilence offers a more accessible and intuitive interface for creating reports and dashboards, making it easier for retailers to analyze and act on their data.  
• Enhanced Alerting Capabilities: While returns authorization tools offer alerts (referred to as work items), Agilence provides a robust alerting system that can be more comprehensive and user-friendly.  

Analysts can use Agilence for a variety of return abuse use cases, including: 

• Analyzing purchase vs return history 
• Detecting same-day, cash, and same-cashier returns 
• Identifying frequent returns shortly after purchase 
• Examining product types in return transactions 
• Correlating employees with customers or original transactions 
• Tracking purchases and returns across different locations 

Learn more about shifting your returns strategy from reactive to proactive using analytics.