How to Prevent Return Fraud from Eating Away at Your Bottom Line

How to Prevent Return Fraud from Eating Away at Your Bottom Line

Online shoppers love a good returns policy almost as much as they love buying great products. A customer-friendly returns policy encourages purchases, boosts customer retention and loyalty, and improves the overall perception of your brand.

However, having an overly-convenient returns policy can put an ecommerce retail company at risk for return fraud. Return fraud refers to all returns made by shoppers for reasons other than dissatisfaction with the product.

This can be when shoppers buy multiple types of the same item (bracketing) to choose the one they like best and return the rest, when they buy a product to use once and return, or when they send back a product in poor or used condition.

Many shoppers commit fraudulent returns without even knowing it. According to a recent study by the National Retail Federation, return fraud costs merchants an estimated $25 billion annually in the US alone. Unfortunately, some online shoppers may look for loopholes within ecommerce returns policies to take advantage of.

Discovering sustainable solutions for controlling return fraud among ecommerce shoppers has been a growing concern among online merchants. In this article, we explore the impact of fraud on businesses, ways to detect warning signs of fraud, and best practices for preventing and mitigating it for your ecommerce business.

How to Know the Warning Signs of Return Fraud

Knowing the Warning Signs of Return Fraud
Fraudulent shoppers like to manipulate returns policies. It’s important to keep this in mind when finding ways to mitigate returns fraud

Fraudulent shoppers like to manipulate returns policies. It’s important to keep this in mind when finding ways to mitigate return fraud. Is your returns policy providing the leeway that shoppers need to fraudulently return purchased items? To determine this, you should know what fraudulent shoppers look for in a returns policy.

Fake Receipts or Missing Tags

Fraudulent returners will often try to use fake receipts, missing tags, or lost packaging when returning items. This makes it easier to return items that were stolen or bought past a return window. Fraudulent shoppers will take advantage of merchants who are lenient in verifying receipts of returned products. Having a returns management process that properly qualifies returns when they’re initiated, and again once it arrives back at the warehouse keeps instances like this from constantly happening.

Suspicious Timing of Returns

Timing plays a big impact in discovering what customers are committing return fraud. As ecommerce shopping has become more popular, consumers have evolved in their shopping behavior. Oftentimes, they make purchases online with every intention of returning them. Whether they bought a bunch of items to try out and return the ones they don’t like, or they bought a new outfit that they plan to return once the event is over, the shopper never had the intention of keeping the product when they made the original purchase. Having a way to track repeat offenders and the timing of returns to the initial purchase makes it easier to detect when cases like this are at play.

Missing Parts or Poor Condition

Another instance of return fraud would be when shoppers return a product in an unusable or unsellable condition. Common cases include stripping a product for its parts and returning what wasn’t used, returning empty or replaced packaging, or returning an irreversibly damaged or misused product. Merchants in specific industries, such as electronics, are at the most risk for this type of return fraud behavior.

High Return Rates for Individual Shoppers

Excessive returns from a single customer can be another warning sign of fraud. When a fraudulent shopper identifies an ecommerce merchant that has lax return policies or weak fraud detection measures, they’ll take advantage of the opportunity repeatedly. Tracking returns data and analyzing return rates arms ecommerce merchants with the information needed to identify shoppers who exhibit an unusually high frequency of returns. Identifying patterns of excessive returns enables merchants to protect their profitability and maintain a healthy balance between customer satisfaction and fraud prevention.

What Are Some Prevention & Mitigation Strategies for Return Fraud?

return fraud prevention strategies for merchants
Financial or taxes fraud. Business report and magnifying glass.

Reducing the risk of return fraud starts with your returns policy. Ones that are too lenient can easily be taken advantage of by fraudulent shoppers. It’s important to clearly communicate the conditions eligible for a return and encourage shoppers away from common fraudulent returns behaviors.

Oftentimes, ecommerce shoppers don’t realize what they’re doing could have such a significant impact on a business, or that the behavior would even be labeled as “fraud” to begin with. Communicating clearly with customers about their returns policies and the consequences of fraudulent returns could be all they need to keep them from doing it.

Maintaining open communication with your customers keeps them aware of the negative effects their behavior may be having on their favorite brands. This can include using clear language in returns policies and providing customer service representatives with training on how to identify and handle potentially fraudulent returns.

Use Returns Data to Unveil Potential Fraud

Ecommerce merchants should have an automated returns management strategy to streamline the returns process and make it easy to collect data on returns. Using automated software allows the customer success and warehouse teams to quickly communicate with one another about the conditions and disposition of each return.

Within a returns portal, merchants can require an upload of a receipt during the returns process or even require pictures to be uploaded to show a clear image of the product’s condition. Returns management tools allow for customization and return rules that help mitigate and protect merchants from fraud.

If the product isn’t in the condition that was specified when the RMA was initiated, then the merchant has the opportunity to deny the return and flag the customer for suspicious behavior. Keeping track of the state of products when they arrive back at the warehouse becomes much less cumbersome.

Using algorithms that analyze customer data to flag suspicious behavior, such as frequent returns or unusual item combinations helps discover such patterns that could indicate fraudulent behavior.

How to Calculate the Financial Impact of Return Fraud

The Importance of ROI calculators
ROI (Return on Investment) calculators help businesses estimate the financial impact of returns fraud and determine the effectiveness of anti-fraud measures.

It can be hard to determine how cases of returns fraud affect the overall business. Calculating the financial impact of returns fraud is crucial for businesses to understand the extent of their losses and make informed decisions on fraud prevention strategies.

By quantifying the costs associated with fraud, merchants can better allocate resources and implement targeted measures to mitigate the risk. ROI (Return on Investment) calculators can help businesses estimate the financial impact of return fraud and determine the effectiveness of anti-fraud measures.

By inputting variables, such as the cost of each return and the estimated rate of returns fraud, merchants get an estimate of the financial impact of return fraud on their bottom line. This information helps them understand the magnitude of the problem and prioritize efforts to combat it.

Understanding the Indirect Costs

It’s important to also consider the indirect costs. These costs may include chargeback fees, restocking expenses, additional shipping costs, and customer service resources dedicated to handling fraudulent returns.

Considering these hidden costs give merchants a more comprehensive understanding of the true financial impact of returns fraud, and having a way to measure them gives merchants more accurate information on their business.

ROI calculators are also great for evaluating the effectiveness of anti-fraud measures and determining the return on investment of implementing preventive solutions or tools. Say your company adopts a new returns management solution to help combat return fraud. The monthly cost of this solution minus the potential savings from mitigating the risk of return fraud would be the cost of implementing an anti-fraud strategy.

Merchants who utilize cost-estimation tools have the ability to compare the projected savings from fraud reduction with the costs of implementing these solutions to determine the best course of action for their company. Using ROI calculators to track the associated costs with returns fraud and preventative actions gives merchants the power of data-driven decisions.

Return Fraud is a Problem that Can’t be Ignored

return fraud charge backs

Return fraud, like returns in general, only becomes a growing problem when it’s ignored by merchants. Ensuring that high return fraud rates don’t eat away at profits requires facing the problem head-on.

Although it can never completely be eliminated, mitigating the risk of return fraud starts with understanding the different types of fraudulent return behaviors for online shoppers. From there, merchants will be better equipped to identify warning signs and implement preventative measures.

Without a preventative approach, fraud rates can become detrimental to online businesses. Effectively combatting it requires vigilant monitoring of returns, clearly communicated policies and procedures, and well-utilized fraud detection tools.

Begin investing in better return fraud prevention strategies today by booking a free demo with us to learn how to use an automated returns management system to track and monitor returns and prevent return fraud.

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Schedule a free ecommerce returns audit today!