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

Refund Fraud: The $103+ Billion Threat & How Merchants Can Fight Back

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, 15.8% of sales will be returned in 2025, culminating in $849.9 billion in returns. This figure is roughly in line with the 16.9% return rate recorded in 2024, when buyers returned $890 billion worth of merchandise.

As unfortunate as returns are for your top line, what’s worse are fraudulent returns, which occur when buyers maliciously abuse your return policy for their benefit. Recent data suggests that about 15% of returns are fraudulent, which means that merchants could be losing more than $120 billion annually to return abuse.

In this article, we take a closer look at how return fraud works, including why it happens, how it happens, and how you can spot and prevent fraudulent returns from overwhelming your business.

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 is a form of first-party transaction fraud. However, it 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.

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.

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.

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

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. 

The 16 Most Common Refund Fraud Tactics (And How to Spot Them)

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:

The True Cost of Return Fraud (It’s Not Just the Refund)

The true extent of the financial damage caused by return fraud is usually two to three times the transaction value.

When a return fraud event occurs, you’re losing the revenue…plus a bunch of other direct and indirect costs. In other words, you’re essentially paying for the privilege of being robbed. To visualize this, let’s consider a hypothetical example where a buyer fraudulently returns a $100 item.

The direct costs of the scam hit you immediately: you lose the $100 in revenue that you refunded. On top of that, you lose the money you paid to ship the item to the buyer, additional return shipping costs, plus the payment processing fee, which is non-refundable, even in the event of a customer refund or chargeback.

Assuming that shipping costs were around $15 each way, and processing costs came to around $3, You are now out $133.

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Your staff spends time processing the return request and your warehouse team needs to inspect the returned item and restock it. In total, that consumes $20 in labor costs. If the fraudster returned something in a non-usable state — like the item is bricked, or it was clearly used before being returned — you also face a total inventory write-off of $100.

Add these indirect costs to the $133 I outlined above, and that single fraudulent return request has cost you more than $250.

Return Request Red Flags: How to Spot Refund Fraud After the Sale

Although fraudsters try to fly under the radar, they often leave breadcrumbs.

Rejecting a fraudulent return request may lead to the situation escalating. The buyer, confident that they’re entitled to a refund, may escalate to a chargeback. And, given the dollar value and other details of the transaction, it may not be worth taking that risk. That said, recognizing these patterns early can still help you minimize your losses:

Return Fraud Prevention Strategies That Actually Work

Preventing return fraud is no easy task. Like all forms of first-party fraud, return fraud doesn’t appear to be illegitimate until the moment the customer acts. That said, there are some moves you can make that should help.

Here, I’ll explain how you can use a tiered strategy to filter out bad actors without adding friction for legitimate customers.

Tier 1:  |  Policy-Based Prevention

Ambiguity is the fraudster’s best friend. So, your first line of defense needs to be clarity.

You’ll want to draft a straightforward and unambiguous return policy that intentionally leaves little room for interpretation on your terms. For example, define clear time windows (e.g. 60 days for home decor items, 30 days for apparel, etc.) to prevent fraudsters from “renting” or wardrobing your items. Explicitly list non-returnable items and “Final Sale” merchandise to prevent policy abuse. 

Clearly state who pays for return shipping. You’ll also want to spell out documentation requirements so that you shift the burden of proof to the buyer requesting the return. Make proof of purchase (via receipts or order numbers) mandatory for all returns. For damage claims, require photo or video evidence before issuing a return label.

Finally, when issuing the refund itself, strictly return funds to the original payment method or offer store credit only to stop fraudsters from liquidating stolen cards.

Tier 2:  |  Technology-Based Prevention

Policy controls aside, you’ll want to leverage automation to catch what your human staff miss. One way to do this is to secure your checkout environment.

In addition to the standard fraud prevention tools that should always be deployed at account creation and checkout, consider scanning serial numbers at the point of sale and again upon return. Doing so can effectively put an end to “switch fraud,” which occurs when a fraudster buys a new unit and returns an older or broken version. In a similar vein, weighing packages immediately before shipping — and comparing that strictly against the weight of the return package — is a low-tech but highly effective way to catch and deter empty-box scams.

High-tech fraud scoring tools can likewise be helpful. In addition to identifying potentially risky transactions by analyzing thousands of data points in your environment in real-time, these fraud detection machine learning systems can also learn from the data collected by other merchants. This allows you to flag bad actors who have a history of fraud with other merchants, even if they’re shopping at your store for the first time.

Tier 3:  |  Process-Based Prevention

Technology is ineffective without human oversight, which is why you’ll want to buttress your tech stack with a human firewall. For example, provide regular fraud awareness training to your support team so that they know how to spot signs of social engineering fraud and understand exactly when to escalate a suspicious ticket to a manager.

When receiving returned inventory, don’t shortcut the process by auto-restocking items. Every return should be opened, inspected, and tested — especially items like electronics and jewelry, which are commonly purchased and returned by scammers. Document the condition of returned items with photos to create an audit trail in case of a dispute.

You can further protect yourself by maintaining a database of return history. If a customer hits a threshold — say, three or more returns in 30 days — their account should automatically be flagged for manual review on all future orders.

Make Strategic Decisions

Remember: not every battle is worth fighting. So, use a decision matrix to standardize your response.

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

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