Escalation in Retail Return Fraud Underscores Urgency for Innovative Mitigation Strategies

Over the last several years, there has been a notable escalation in retail return fraud, raising serious concerns for the industry’s well-being. There are two primary types of retail returns fraud: organized retail crimes and general consumer abuse. Organized retail crimes involve coordinated efforts by professional groups to exploit retailers and their return policies for significant financial gain. In contrast, general consumer abuse refers to individual shoppers misusing return policies for personal benefit, such as wearing an item and then returning it. Impacting the financial stability of businesses, both types of fraudulent returns are forcing honest shoppers to shoulder the burden of rising costs, reduced inventory, and service interruptions. The complexity of return fraud is evolving, constantly challenging retailers to outwit increasingly clever fraud schemes. Amidst these challenges, retailers are striving to retain customer trust, while having to raise prices to recoup profit losses.

The growing scale of retail return fraud has urged us to probe deeper into the problem, seeking a comprehensive picture of how this issue is reshaping retailers’ business strategies. In goTRG’s recent survey focused on retail fraud, we analyzed responses from more than 400 US-based retailers who shared details of the impact of this growing issue and how they are responding with stricter return policies, additional fees, and sometimes even banning excessive returners from eCommerce sites. These measures, however, can have implications for customer satisfaction, brand loyalty, and a business’s bottom line. Our findings unveil how retailers are challenged with the balancing act of effectively mitigating fraud without compromising a positive shopping and post-purchase experience.

ORC stranglehold on the retail sector

The tactics of fraudsters are as varied as they are damaging. Our survey reveals that a striking 57% of retailers experience the return of stolen goods as the number one most common form of return fraud, a statistic linked to the rise in Organized Retail Crime (ORC). These crimes often involve smash-and-grab operations where groups of masked criminals create chaos, steal merchandise, and return it using counterfeit receipts. According to our findings, 42% of retailers face challenges with items returned that were acquired through fraudulent means, and 35% deal with fake receipts and other falsified documents, such as IDs.

Amazon recently suffered more than $700,000 in losses at the hands of several different refund fraud organizations with refund schemes promoted on TikTok and Telegram. In one scheme, fraudsters recruited a warehouse worker to falsely enter items into Amazon’s system as returned with the items never being sent back, in exchange for a $3,500 payout. Other fraud rings exploited the company’s permissive returnless refund policies by claiming refunds for items they reported as never received and would sell on other channels.

ORCs have become such a serious problem for retailers to the extent that on April 9th, Florida Governor Ron DeSantis signed a bill introducing tougher penalties for retail theft and inciting looting via social media. The bill mandates a third-degree felony and up to five years in jail for theft by groups of five or more, which increases to a second-degree felony with a maximum of 15 years if social media is used for recruitment. These types of measures establish a precedent that may inspire other jurisdictions across the United States and the world to create safer environments for retailers who have become increasingly vulnerable to ORC syndicates.

Wardrobing: Returns abuse that’s become normalized

The practice known as “wardrobing”—buying and using items with the intention of returning them—impacts 50% of retailers, making it the second most common return fraud. Propelled in part by social media trends, wardrobing has gained traction among consumers who frequently switch their attire to maintain a varied online presence. This issue is most prevalent in eCommerce, where consumers can easily return used items without direct confrontation with store personnel. Consequently, retailers find themselves financially burdened, absorbing the myriad of costs associated with these exploitative return practices.

Turning a challenge into an opportunity, some forward-thinking companies have transformed the issue of wardrobing into a viable business model. Enterprises such as Rent the Runway, Nuuly, and Armoire have pioneered clothing rental subscriptions, catering to consumers’ appetite for one-time-wear clothing and diversity in their wardrobes. These services invite patrons to enjoy the latest fashion, capture their moments, and then return the items, dovetailing with the increasing consumer interest in sustainable and circular fashion economies.

Quantifying return fraud’s financial toll on retail

The findings from our Retail Return Fraud Survey point to a critical issue—68% of retailers have noted a troubling increase in fraud, sparking grave concern regarding the health of the industry both from a financial point of view and a consumer equity perspective. The numbers speak volumes about the growing crisis. In 2015, return fraud was a significant yet manageable cost to retailers at $10.9 billion. In under a decade, return fraud costs catapulted to an unprecedented $101 billion in 2023, as reported by NRF and Appriss. For 2023, 37% of retailers reported losses over $1 million and 10% witnessed losses surpassing $5 million. These statistics underscore the need for immediate, thoughtful strategies to address the complexities of today’s retail environment and to protect both business viability and consumer confidence.

Navigating the tightrope and finding a balanced response

In response to the intricate and advancing nature of return fraud, a vast majority of retailers, approximately 80%, have enacted stricter policies to deter fraudulent activities. These include 44% who have implemented fees to discourage repeated returns, an impactful 69% who have imposed complete return restrictions on customers, and 40% who have taken the significant step of banning problematic customers from their websites.

While such forceful measures may be effective in reducing fraudulent returns, there is a risk that they might inadvertently punish honest consumers, damaging loyalty and trust. In a move towards sophistication, 70% of retailers are now leveraging customer profiling software. This technology helps them to distinguish between fraudulent actors and honest consumers by scrutinizing purchase patterns, return histories, and more. With a shift towards a more discerning analysis of consumer behavior, retailers aim to achieve a critical balance—effectively addressing return fraud while still upholding exemplary customer service and satisfaction.

The growing dilemma of ‘Keep It’ policies

‘Returnless’ policies are designed to cut down on the costs associated with returns, but they’re vulnerable to misuse because they rely on customers being honest. Retailers don’t check the items for wear or damage, so they must trust what the customer says. Unfortunately, some customers abuse this trust by falsely claiming they’re unhappy with a product to keep it and get a refund. Our 2023 Holiday Returns Survey Report, released last November, indicated that 59% of retailers offered these returnless options during the busy holiday season to minimize the cost impact of returns shipping and restocking.

As we move past the holiday rush, we’re noticing fewer retailers sticking with these consumer-centric return options. Even so, among the 52% of retailers who maintain ‘Keep It’ policies for cost-ineffective returns, we’re seeing stricter rules come into play. Our research shows that the algorithms deciding who gets a no-return refund are looking at more than just how much the item costs and what it would take to ship it. They’re also considering how much the customer has bought over time (LTV), how often they buy, and how their returns volumes and values compare to their purchases. Out of all these, the thing retailers care about the most is how often a customer returns items, which factors into almost half of their decisions.

A global problem: Europe’s struggle with return fraud

Retail return fraud is not a problem unique to the US but is a growing global issue. European retailers are combatting a significant surge in return fraud, a trend that’s putting immense pressure on the industry’s financial stability and customer trust. The leading tactics of fraudsters in Europe include ‘serial returners’ and ‘wardrobers’ exploiting return policies.

eCommerce growth has paved the way for sophisticated return fraud across the globe, as fraudsters exploit return policies designed to enhance customer experience. Businesses crediting returns upon shipment have faced fraudulent returns of incorrect items. In Europe, false item-not-received claims rose by 35%, and product condition complaints by 68%. The pandemic saw average consumers engaging in return fraud with over 30% in the UK making false claims to secure refunds. These patterns underscore the critical need for online retailers, in Europe and globally, to reinforce their fraud prevention strategies urgently.

Securing Retail’s Future: A Dynamic Response to the Surge in Return Fraud

The rising sophistication of fraudulent activities requires retailers to craft strategies that defend their bottom line while maintaining customer goodwill—a precarious balancing act. The escalation of return fraud costs to $101 billion underscores an urgent need for action.

Retailers have been proactive, with a significant majority tightening return policies, but the potential fallout on consumer relations cannot be ignored. Advanced technology in buyer profiling is becoming a go-to tool, aiming to preserve customer service quality without compromising fraud prevention efforts. Yet, as we bolster these defenses, the continuous evolution of fraud methods necessitate that we persistently reassess and refine our strategies, ensuring that the integrity of our staff and systems matches the sophistication of the challenges we face.

The utilization of specialized third-party providers remains low, with only 11% of retailers choosing this route, indicating a significant opportunity for growth in partnerships that could enhance returns management and reverse logistics. As retailers continue to refine their fraud mitigation strategies, the need for advanced detection methods and targeted staff training becomes ever clearer. The journey ahead is complex, calling for a nuanced approach that champions innovation, mutual trust, and relentless vigilance.