How to Recognizing Retail Return Fraud

Signs of return fraud and how to prevent it

return fraud
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Return fraud is a type of theft in which a customer steals from a store by returning an item that is from that store and receiving money from the fraudulent transaction. There are many ways for it to occur, such as returning merchandise that the customer shoplifted or returning clothing that the customer has already worn.

Return fraud is one of the types of risk that retail stores are exposed to, and it is on the rise. From 2018 to 2019, losses from return fraud rose 35 percent and totaled about $27 billion. Many retailers are tightening their return policies in response, some at the expense of customer service.

Common Types of Return Fraud

The first step to avoiding becoming a victim of fraud is to understand how it happens. Some of the more common types of return fraud are:

  • The return of stolen merchandise, such as picking up an item in the store and then walking it to the return counter, or shoplifting an item one day and returning it the next. 
  • The return of merchandise purchased with counterfeit money or counterfeit credit cards.
  • The return of used merchandise, sometimes known as "wardrobing" or "renting."
  • The return of merchandise using counterfeit receipts or receipts that belong to someone else.
  • The return of exchanged merchandise, such as buying a working item, replacing it with a broken version the thief already owns, and returning the broken item for a refund.

Stores that accept returns without a receipt experience the most return fraud, but those with stricter return policies or who require a receipt for every return are at risk as well.

Signs of Return Fraud

Spotting return fraud as it occurs may be difficult for some retailers. You can also tell if your store is being adversely affected by returns by looking for:

  • High inventory shrink rate, or the amount of inventory lost from one physical count to the next.
  • A dramatic increase in the number of returns.
  • Return policies not being enforced by employees or managers.
  • An increasing number of markdowns due to returns.
  • Out of town customer returns.
  • Returns immediately after a store opens, just before closing, or other times when only one employee is working.
  • Returns for high-priced items with no receipt.

Employing point of sale (POS) analytics can help your managers spot odd trends in returns or inventory, which can be an indicator that fraud is occurring.

Stores that offer buy online/return in-store policies are sometimes at increased risk for return fraud. For example, it is often easier to counterfeit a packing slip than a standard receipt. Items purchased online also frequently lack tags or other labels, which makes it easier for thieves to use or wear items before returning them in-store or to replace them with broken items and receive a refund.

How to Minimize Retail Return Fraud

Preventing return fraud starts by crafting a return policy that limits the opportunity for fraud to occur. Some helpful policies include:

  • Requiring a receipt for cash returns.
  • Only issuing refunds in the same form of currency used for the purchase.
  • Offering refunds by mail after 14 days from receipt of the returned merchandise if the purchase was made by personal check.
  • Offering only store credits or equal exchanges to limit or eliminate cash refunds.
  • Limiting returns to 15 or 30 days.
  • Providing gift receipts.
  • Assessing a restocking fee for opened items where legal, unless they are defective.
  • Requiring identification and contact information when accepting returns, especially if they are made without a receipt.
  • Following up with a phone call after returns are made to ensure the customer listed on the return form actually made the return.

Your return policy should be placed in plain view, which will make it easier for the customer to understand upfront what the store will allow. You can also include your return policy on receipts so customers can find it easily after they make a purchase.

Displaying your return policies isn't just good for customer service and fraud prevention. In many places, it's required by law.

Your return policy will be more effective at discouraging fraud if it is consistently enforced, without making exceptions for certain circumstances or times of the year. You should also train employees to understand and enforce the store's return policy, as well as teaching them how to spot suspicious or potentially fraudulent returns.

Should Stores Stop Offering Returns to Prevent Fraud?

It is important for stores to continue to accept returns in order to maintain customer goodwill. Customers report that a smooth return process is more important to their satisfaction that an easy shopping process.

On average, about eight percent of merchandise is returned, and just under nine percent of retail returns are fraudulent. A retailer's best customers will be the ones who make the most returns because they make the greatest number of purchases.

A better strategy is to implement store policies and employee training that safeguard against return fraud while still accepting returns, which allows you to maintain customer satisfaction.