Refund FraudDiscover the Top 9 Ways You’re Being Targeted by Return Scammers

January 11, 2023 | 12 min read

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Refund Fraud

In a Nutshell

Let’s say a customer has recently returned an item and you’ve already returned their money. Only, when you get the package back… the item has been replaced with merchandise you don’t even sell! What happened? In this article, we’ll explain everything you need to know about refund fraud, and how you can avoid it in future.

The 9 Most-Common Refund Fraud Threats & How to Stop Them

Revenue loss due to refunds and product returns is an unavoidable part of operating in the retail space. To add insult to injury, though, a shocking percentage of the refund requests sent your way by customers will be cases of refund fraud.

According to the National Retail Federation, the average retail return rate rose to 16.6% in 2021 (up from 10.6% the year before). 2020 was an outlier year, though; if we look at the trendline over the last several years, 2021 actually saw fewer returns than in previous years. 

It’s a little too soon to celebrate, though. The data also shows that, of the approximately $218 billion in online purchases returned in 2021, $23.2 billion were cases of return fraud. In other words, the average merchant lost $10.64 to refund scammers for every $100 in refunds they processed.

Whichever way you look at these figures, refund fraud is a lose-lose situation for merchants. But which scams are most common, and how might your business be targeted?

What is Refund Fraud?

Refund Fraud

[noun]/rə • fənd • frôd/

Refund fraud, sometimes referred to as refund theft or a “whitehouse scam,” involves abusing a merchant’s policies to pursue a refund from a retailer and receive money or other goods without a valid reason to do so.

Refund fraud covers a broad range of possible scenarios. It can refer to any situation in which a bad actor exploits standard logistics, fulfillment, and customer service practices to get a refund without a good reason.

Refund theft could be a professionalized scam, like organized retail crime (ORC) or an overpayment scheme. Or, it might be a simple one-off act carried out by an otherwise-legitimate customer. The goods in question might have been stolen, marked as final sale, or tampered with in some way that would make them ineligible for return

To illustrate this, imagine that a customer has two items from the same store. If only one item is eligible for a return, the buyer might swap the price tag on the items to get a refund that would not normally be allowed. Or, they might swap the tags to get a much larger refund value for one item compared to the other.

Did You Know?

Taking action against refund fraud can also help you reduce the threat posed by chargeback abuse.

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How Big of a Problem is Refund Fraud?

In short: big.

According to the NRF, US consumers made $4.58 trillion in total retail purchases in 2021. Of that total, about $761 billion worth of merchandise was later returned by the buyer. This amounts to 16.6% of all retail purchases.

The categories with the highest return rates in 2021 were similar to 2020 metrics: auto parts (19.4%), apparel (12.2%), and home improvement and housewares (both tied at 11.5%). The most common types of payment used during the original purchase that led to a return were credit cards (22.78%), cash (12.69%), and debit cards (7.04%).

If we look at online sales, specifically, we see $1.05 trillion in US retail sales in 2021, of which approximately $218 billion were returned. The NRF further estimates that $23.2 billion of these, or 10.6% of all online refunds, were fraudulent.

Why Do Buyers Commit Refund Fraud?

Frankly, no one has the answer to this question. The reason why someone commits fraud could stem from any number of sources and factors. Not all of them need to be nefarious in nature, either.

Some customers commit fraud unintentionally; they genuinely didn’t know they weren’t entitled to a refund. Others turn to fraud because they are upset or angered by a shop’s policies. Others may have committed it accidentally one time, then decide to re-offend after realizing how it was to get away with.

That said, upticks in both criminal and friendly fraud often follow certain commercial patterns:

Ultimately, there’s no definitive answer for this question. It’s much easier to explain why merchants are hesitant to fight back, though.

Why Do So Many Scammers Get Away With Refund Fraud?

Given how much retailers lose every year to refund abuse, you’d think that stopping these attacks would be a top priority. However, customers often get away with refund fraud pretty easily.

There are a few reasons for this. First, there’s the fact that refund fraud is hard to identify. A customer can use any number of excuses to claim a return, and you have no way of verifying if they’re telling the truth. Second, you don’t want to alienate customers. After all, your reputation is one of your most important — and sensitive — assets. Angering customers can lead to reputational damage.

Finally, there’s the fact that it could be much, much worse.

SHOCKING!

For every $100 in refunds they processed, the average merchant lost $10.64 to refund fraudsters, according to the NRF.

If a buyer is committed to getting their money back, they won’t take “no” for an answer. They might file a chargeback if they don’t get their way. When this happens, you lose the merchandise, and the overhead associated with the purchase (shipping, fulfillment costs, etc.). You also get hit with a chargeback fee

First-party fraud tactics like refund fraud and friendly fraud all exist within a tricky “gray area,” in which it can be very difficult to fraudsters from legitimate customers. Bad actors know this, and are counting on that gray area to commit their crime. They also count on your reluctance to accuse paying customers of doing anything wrong. 

9 Most Common Refund Fraud Tactics

Like we alluded to above, there is a range of tactics that fall under the broad umbrella of “refund fraud.” Some are simple mistakes, while others are intentional and malicious fraud. Here are some of the most common refund fraud tactics you might see in your business:

Box Swapping

This occurs when a shopper purchases an item, then returns an older or non-working version of the same item using the packaging from the newer merchandise. Another version of this scheme involves swapping similar-looking items with different features and prices, then returning the lower-cost one and passing it off as the expensive item.

Bricking

This happens when a customer buys an item, strips out valuable components for parts for resale, then returns the item and pockets the profits. Electronics are most often the target of this type of refund fraud. 

Empty-Box Fraud

Empty-box fraud happens when a shopper contacts you to claim that an item they ordered never arrived. The buyer claims to have received an empty box instead. If the scam works, that bad customer will keep the item they bought, and take a refund for the “missing” item, too.

Price Switching

This happens when a shopper buys an item at one price, then switches the tag with that of a higher-priced item before returning the item for a refund.

Receipt Switching

This happens when a shopper makes a purchase and leaves the store, but then reenters later and picks up an identical item which they did not purchase. The thief uses the original receipt to secure a refund on the second item, effectively getting the first item for free.

Shoplifted Returns

This one is pretty cut-and-dry. The thief goes into a store and shoplifts an item. The fraudster then returns it to the store (without a receipt) and pockets the refund. 

Shoplisting

A fraudster secures valid receipts that have been lost by other shoppers, or stolen from them. The fraudster then goes to the store in question, selects the items on the receipt, and requests a refund for the items, without ever having actually bought them.

Wardobing

A shopper buys some merchandise, but already plans on returning the item after using it. For example, an expensive outfit that is worn once and then returned, or a book that is returned after reading.

Refund Servicing

A refund service is a scheme in which a service provider offers to secure refunds for consumers in exchange for a fee. The scammer will usually engage in social engineering or other manipulative tactics to secure the refund.

How to Prevent Refund Fraud

Refund fraud has a lot in common with other difficult-to-address threat sources, such as friendly fraud or affiliate fraud. Ad, like all those other threats to your bottom line, the most common misconception that merchants have is that there’s nothing one can really do to stop it.

Of course, that’s not true. Refund fraud is preventable; the first step is learning how to separate the repeat offenders from your loyal customers and “accidental” refund scammers.

You can try identifying goods based on unique serial numbers (if applicable), or issuing conditional credits that can only be used on certain items in the same product category as the goods returned. We also recommend flagging customers who submit an abnormally-high number of refund requests within a predetermined period. These requests should be subject to additional scrutiny.

How much do you stand to save by optimizing your return process?REQUEST A DEMO

Tools like AI and machine learning are important assets for analyzing customer behavior. These tools let you analyze data in real-time for more informed decisions about returns. Plus, as they generate more data, decisions can be more precise and accurate over time.

Other important practices to keep in mind include:

#1 | Crafting Reasonable, Realistic Policies

No two purchases are ever the same, which means no two returns are exactly alike, either. The product category, location, currency, or other conditions can affect how a refund request should be processed. You’ll need to develop and implement policies that are clear, yet adaptable to a wide range of potential scenarios and special circumstances.

Expectations should be clearly outlined for the customers. You need to spell out the following:

  • Time limits for returns.
  • Any requests or authorizations must be submitted.
  • Any product-specific information to include (serial numbers, SKU, etc.).
  • Who pays for return shipping.
  • How to return shipping should be conducted.

Finally, make these policies easy to find on any page on your site. More than two-thirds of shoppers will read your return policy before completing a purchase. But, if your customers either can’t find those rules or are unable to understand them, they might as well not exist. 

#2 | Be Flexible

Showing that you can be flexible with customers is a great way to reinforce positive feelings toward your business, build brand equity, and ensure long-term customer loyalty. This will pay off in the long run by encouraging legitimate customers to keep coming back.

Remember: convenience is one of the top reasons why customers commit first-party fraud. If you make your return policy as customer-friendly as possible, you eliminate a primary incentive to commit friendly fraud. At the same time, you’ll be retraining customer expectations to deter future refund fraud attempts.

There will be outliers and exceptions to any rule, of course. So, be sure to explain any exceptions that could come up, like non-returnable and “final sale” items. These should be clearly justified in your policies, and your customer should know about them before making a purchase.

#3 | Transform Returns into New Opportunities

If leveraged properly, a return may be an opportunity to create new sales and build customer relationships. For example, you can give customers the option to trade a returned item for 10% more than its value in store credit, rather than requesting a cash refund.

If the customer opts for the store credit, they will probably end up spending more than the credit’s value. The customers walk away satisfied, while you recover — or even increase — your sales, rather than losing money to refunds or abuse.

#4 | Adopt a Multilayer Strategy

Refund fraud is a serious challenge for you as an online retailer. But, with the right strategies in place, you can eliminate losses and even grow your sales as a result.

Of course, adopting a comprehensive, multi-tiered approach to risk management is the best long-term solution. The smartest and most efficient way to do this is to:

  • Combine complementary fraud tools
  • Prioritize customer service and order follow-ups
  • Keep excellent records
  • Limit your exposure to friendly fraud
  • Fight back against illegitimate chargebacks

Ready to learn more about how to stop fraud and chargebacks, recover your revenue, and avoid costly fees? Click below to speak with one of our qualified chargeback experts today.

FAQs

How does refund scamming work?

Refund fraud, sometimes referred to as refund theft or return fraud, involves abusing a merchant’s policies to return goods that are ineligible for a refund to a retailer in exchange for money or other goods. Common tactics used for refund fraud including fake exchanges, "bricking," and wardrobing, to name just a few.

Is refund fraud illegal?

Statutes vary from one jurisdiction to another. In California, for instance, refund fraud is charged as petty theft under California Penal Code Section 484(a). Similar statutes will outline potential penalties in other localities, states, and countries.

Can I issue a refund to avoid chargeback fraud?

Yes. Refunding your buyer can allow you to avoid a costly chargeback. While refunds are not ideal, when looking at a chargeback versus a refund, a refund is definitely a better option. Check out our article on chargeback alerts to learn more about this practice.

Can simple policy changes prevent refund abuse?

Yes. By making your return policies more customer-friendly, and ensuring those policies are easy to find from every page on your site, you can keep refund abuse to a minimum.

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