In the struggle to make legitimate returns profitable, retailers must also tackle the mounting issue of returns fraud. According to the National Retail Federation, returns abuse and fraud cost retailers about $24 billion annually, or 7% of all returns and exchanges. And that’s during a normal year. In the age of COVID-19 shopping, retailers may be at an even greater risk.
Retail Touch Points predicts that organizations will inevitably see a spike in returns abuse this year due to the increase in online shopping as well as lenient returns policies created to improve the customer experience and accommodate for closures during the COVID-19 pandemic. Now more than ever, it is critical for retailers to be aware of their vulnerabilities and begin implementing systematic changes to reduce the damages.
Here we review:
- 5 trends in electronics return fraud today
- 3 tips to prevent returns fraud
5 Top Returns Fraud & Abuse Trends
- A new twist on the bait-and-switch
This fraud strategy is nearly limitless for ingenious criminals. At goTRG we process hundreds of millions of returned items each year for the world’s largest retailers and manufacturers including Walmart, Lowe’s, Home Depot, Target and Lenovo. From online to in-store returns, we’ve seen it all.
For example, we have seen boxes containing bags of sand filled to the exact weight of iPods, iPhones, Xboxes, and other electronic devices. We have also seen inflatable mattresses stuffed inside TV boxes.
Two of the most common items we handle are TVs and computers. Oftentimes, fraudsters will buy a new TV and return their old model in the brand new box and try to receive a full refund. In other cases, people remove parts of the electronic device before returning it. Oftentimes, it’s not until that box arrives at one of goTRG’s return and refurbishment centers that one of our technicians uncovers the fraud.
Fraud ring offenders have even been known to leave behind strange messages or symbols to be later discovered. One of the most creative examples we have seen was a Maxi Pad with an “I” written over it for “iPad”. We cannot make this up.
- Buy Online Return In Store (BORIS) Policy
BORIS policies allow shoppers to buy online and return items in store. While this policy helps enhance the customer experience, it has also created a breeding ground for more returns fraud. In fact, BORIS fraud rates rose 23% in 2019 compared to the year before.
Under BORIS policies, store employees are supposed to ask for ID before submitting a refund. However, they may let it slide when consumers claim they’re returning an item for their spouse. Some stores don’t even require receipt or proof of purchase to refund an item. This creates ample opportunities for customers to return stolen items and receive gift cards, store credit, or money.
Wardrobing is a term for what some call “friendly” fraud. It refers to the process of buying products with the intent of returning them after use. This trend is most commonly seen with high-end apparel, but is also extremely prevalent in electronics.
At goTRG, we’ve been refurbishing electronics for 10 years and we’ve seen this phenomena in real time. It’s especially noticeable around Superbowl season when consumers purchase big-screen TVs with the intent of returning them after the game.
When a customer returns a used item, the resale value significantly declines and retailers are forced to spend time and money transporting, repairing, and restocking the item.
- COVID Inspired Returns
At home and bored, Americans have been busy making impulse purchases online. In fact, two-thirds of customers have reportedly increased online shopping since before the pandemic. At the same time, people are struggling financially with the economy at its worst since the Great Depression. What’s the result? Buyer’s remorse.
While it’s not criminal for a customer to return an item she doesn’t want, we believe COVID shopping will lead to more rampant abuse of retailer’s lax return policies. For example, customers may decide to enjoy 89 days of Playstation 3 bliss before returning the console right before the 90-day return period.
Others may dispute the purchase all together to redeem the money from their credit card company. Another way COVID shoppers may retrieve their money is through Item Not Received (INR) abuse. This occurs when a customer receives an order and says it never arrived. INR abuse rose by 8% year-over-year, according to Forter’s April report.
We won’t know the full extent of COVID-related returns fraud for a few months to come, but the rise in online shopping, coupled with the financial crisis and easy returns policies, creates a recipe for disaster.
- Fraud-as-a-Service (FaaS)
Fraud service providers exist on the dark web. Their services range from engineering social media attacks, to stealing banking information, and returning fraudulent items on behalf of their “clients.” Criminals helping criminals, you might say.
In the case of these FaaS rings, service providers work with customers to get a refund on stolen items. Then they take a cut of the earnings. One of the ways they do this is by looking for companies that will refund customers for broken items without asking them to send the item back. They also commonly exploit retailers via “Item Not Received” fraud as well as credit-card purchase disputes.
3 Tips to Catch & Prevent Returns Fraud
In the age of customer-centric returns policies and sophisticated theft, returns fraud is extremely difficult to detect and prevent. But not impossible. In fact, Arizona police notably charged a man with making $1.3 million in returns fraud at thousands of Walmart stores across the country. This arrest occurred after the man was caught returning an item with missing parts. After the arrest, investigators uncovered the million-dollar operation.
In a more recent example, employees at a Home Depot in Canada called the police when they became suspicious of a man returning merchandise without a receipt. Investigators later discovered the suspect obtained a store credit card using a fake ID and purchased items using the fraudulent card. He later tried to return the products to a different Home Depot location for a refund.
Cases like these are extremely common, and indicative of the fact that staff training can be a retailer’s best tool to prevent returns fraud. As an important supplement, retailers must also consider a holistic approach that involves revising returns policies and implementing tracking software.
- Employee training
Employee training is one of the most simple and effective tools for identifying and preventing returns fraud. Retailers must consider conducting quarterly training where they review the return policy and best strategies to identify fraudsters. Returns policies must also be documented and printed for staff to review.
In addition to being aware of the policies, customer service reps must also understand the importance of adhering to these policies no matter what. For example if they are faced with long lines and impatient customers, they must still take the time to open every box and check to make sure the item inside matches the UPC of the returned item. Depending on the cost of the item, it can be helpful to require a supervisor to sign off on all returns as well.
- Stricter returns policies
This may be a tough pill to swallow for retailers and e-tailers who have increasingly moved toward lenient, customer-centric policies. But slightly stricter rules may go a long way in putting a lid on the explosion to return fraud. Here’s a few options to consider:
- Mandating receipts for all purchases, including cash
- Waiting until product is received and inspected to issue a refund
- Only issuing refunds in the same method of the original purchase
- Implementing a restocking free for opened items
- Requiring ID for all returns, especially when the customer doesn’t have a receipt.
- Shortening the return period window
- Requiring customers to ship all returns back, even “damaged” items
- Tracking & reconciliation software
Software solutions can help detect fraud that humans miss. For example, Point Of Return (POR) software can help retailers track every return, along with the reason, and the condition of the product. This information allows the organization to analyze suspicious trends. Along with POR technology, returns reconciliation software can reveal the entire chain of custody so retailers can investigate suspicious occurrences during each touch point of that item’s lifecycle.
At goTRG, we developed advanced POR and reconciliation software to help our retail clients recover more from returns, and identify fraud along the way. Because of our rigorous refurbishment process, we can identify items that don’t match the product description or that are missing parts. From there, we analyze the chain of custody in hopes of identifying the criminal in question, or pinpointing the location where the fraud occurred. We can share this business intelligence with our retail clients and collaborate to help catch the criminal and mitigate the damage.
The bottom line
Returns are inevitable, but excessive fraud is not. Luckily, retailers don’t have to accept fraud as a cost of doing business. They have the power to update return policies, improve employee training and implement loss prevention technology without sacrificing customer experience.
Jet.com, for example, offers lower pricing if a customer opts out of their free return policy. Stitch Fix offers customers the option to buy their entire box of monthly apparel at 25% off to lower the rate of inevitable “wardrobing” returns.
Devising an effective returns fraud and abuse strategy is not easy, but it’s certainly possible. As retailers face ever-rising incidents compounded by COVID-19, they must take the time to incorporate a complete strategy to prevent loss and drive greater profits.