- Online returns fraud is a growing problem that is costing retailers billions of dollars each year.
- Fraudsters are using a variety of methods to exploit return policies, including wardrobing, price arbitrage, and synthetic identities.
- Retailers are fighting back with a variety of technological solutions and innovations, such as AI and machine learning, blockchain, and biometric authentication.
- There are a number of legal and regulatory measures that can help combat online returns fraud, such as strengthening laws against fraud and improving data sharing between retailers and law enforcement agencies.
The burgeoning e-commerce landscape has transformed shopping, offering consumers the convenience of browsing and purchasing products from the comfort of their homes. While this flexibility has enhanced the shopping experience, it has also inadvertently opened a door for a growing menace – online return fraud.
Online return fraud, a form of deceptive practice, involves individuals exploiting return policies to obtain illegitimate refunds or goods. This can manifest in various ways, from returning stolen merchandise to fabricating false claims to secure refunds. As more fraudsters engaged in this malpractice, 2022 witnessed a staggering USD 22.8 bn of returned goods. These were identified as fraudulent, representing 10.7% of total online returns.
The impact of return fraud is far-reaching, extending altogether beyond financial losses. Chiefly, it erodes customer trust, disrupts supply chains, and increases operational costs. How? As retailers are forced to implement stricter return policies, it deters potentially genuine returns, hindering customer satisfaction.
However, before we get into the ways of preventing online return fraud, it is important to understand its common trends.
Emerging trends in online returns fraud
As e-commerce evolves, so do the tactics employed by fraudsters in the realm of online returns. Let’s delve into the emerging trends that are reshaping the landscape of returns fraud.
Trend 1: Advanced return abuse techniques
The traditional concerns of wardrobing (The purchase of wearable or usable items with the intention of returning them after use) have escalated with the extension of return windows during lockdowns. Wardrobed returns not only lead to lost sales but also result in additional costs for production and returns. The challenge lies in quantifying the extent of wardrobing. Meanwhile, retailers are struggling to provide concrete data on the scale of this unethical practice. Moreover, advanced techniques, such as influencers carefully staging products to avoid damage while ordering and returning large quantities, add complexity to the issue. Likewise, the blogosphere is buzzing with stories of customers making substantial purchases and returning almost the entire amount.
Due to this, just last year about a quarter of 200 major UK online retailers started charging for returns. Fashion giant Zara charges GBP 1.95 return fee for online purchases, additionally having made in-store returns mandatory. Customers are not happy.
Trend 2: Exploiting loopholes in return policies
Price arbitrage, once a known concept, has taken on new dimensions, especially with higher-valued products. Electronic retailers are experiencing returns stripped of valuable components, creating a novel challenge for retailers. Shipping-related fraud has surged, with fraudsters exploiting security gaps and claiming non-receipt post the contactless COVID environment. Some even employ sophisticated tactics, ordering a small, high-value item alongside a large, low-value item and claiming the high-value item was missing from the package. Multichannel refund fraud, a hitherto unexplored territory, has fraudsters securing multiple refunds through different channels, posing a unique challenge for retailers in terms of tracking and prevention.
Trend 3: The rise of synthetic identities in returns fraud
A significant development in online returns fraud is the rise of synthetic identities. Fraudsters are creating identities that combine real and fake information. Consequently, making it challenging for retailers to distinguish between legitimate and fraudulent transactions. Synthetic identities are employed in various returns fraud schemes, from false refund claims using fake tracking IDs to obtaining multiple refunds through different channels. Professional fraudulent ‘refunder’ services have emerged. These service provide a structured approach for fraudsters to manage the entire refund process. This furthermore complicates the landscape of returns fraud.
Related reading: Navigating digital commerce with effective fraud risk management
Overcoming online returns frauds: Best practices
Technological solutions and innovations
As online shopping continues to expand, so does the potential for returns fraud. However, retailers are fighting back with a variety of technological solutions and innovations.
AI and Machine Learning in fraud detection
Artificial intelligence (AI) and Machine Learning (ML) are being used to develop sophisticated systems that can detect fraudulent returns in real time. These systems can analyze a variety of data, such as customer purchase history, return patterns, and product information, to identify suspicious activity.
Blockchain and tamper-proof tracking
Blockchain technology is being used to create tamper-proof tracking systems. These can follow the movement of products from the manufacturer to the consumer. This can help prevent fraudsters from returning items that they never purchased or that they have damaged.
Biometric authentication for returns
Biometric authentication, such as fingerprint scanning, is being used to verify the identity of customers who are returning items. By requiring customers to verify their identity using their biometrics, retailers can prevent unauthorized returns and ensure that only the rightful owner of an item can return it. Biometric authentication is particularly useful for high-value items or items that are easily damaged.
Legal and regulatory measures
Additionally, there are a number of legal and regulatory measures that can help combat online returns fraud. Governments are working to strengthen laws against fraud, including increasing penalties for those convicted of fraudulent returns.
Moreover, retailers and law enforcement agencies must improve data sharing in order to identify and prosecute fraudsters
Consumers are also playing a role in combating returns fraud. Aside from understanding return policies, being cautious about returning items purchased online, they can also report any suspected fraud to retailers.
Collaborative approaches to combat online returns fraud
Retailers are now forming alliances and partnerships with each other to share information about fraudsters, develop best practices, and pool resources for fraud prevention initiatives. These alliances can level the playing field against fraudsters and protect the collective interests of the industry.
Businesses are also engaging in more informal information sharing about fraudsters, such as sharing blacklists of known fraudsters or sharing insights into emerging fraud trends. This informal collaboration can help identify and prevent fraud before it occurs.
Most importantly, governments and the private sector must work together to develop comprehensive strategies for combating online returns fraud. This collaboration can involve sharing expertise, developing training programs, and supporting research into fraud prevention techniques.
Keeping up with online returns fraud
As these trends in fraudulent returns continue to evolve, retailers face an uphill battle adapting their strategies to combat the ever-changing tactics employed by fraudsters. Ultimately, the key lies in staying vigilant, leveraging technology for robust identification systems, and continually reassessing. Likewise, by fortifying return policies, businesses can thwart emerging threats in the world of online returns fraud. Only by adopting a multi-pronged approach can e-commerce businesses safeguard their profits and ensure a fair and secure shopping environment for all.
Netscribes has a stellar track-record of managing fraudulent returns with a return acceptance rate of over 12%. To get your hands on unparalleled results and protect your brand from the damaging effects of online returns fraud, empower your business with our expert Fraud and Risk Management guidance. Contact us today.