The dark side of returns and refunds: How policy abuse damages CX and what to do about it

A flexible return policy is key to e-commerce success, but it can also open the door to fraud. Return fraud was rising even before the pandemic led to more online shopping, more buyer's remorse and more friendly fraud. Now, there are also professional return fraudsters in the mix.

To balance the needs of customers with the need to prevent return fraud, it's important for merchants to understand the scope of the problem they face now. Twenty percent of e-commerce refunds are fraud, at a cost to merchants of $24 billion per year. On the other hand, more than 80% of consumers are checking retailers' return policies before they buy, according to Shopify, so return policies that are too strict will cause losses, too.

Return and refund fraud is common and growing

There are three general kinds of return fraud. Wardrobing fraud is the practice of ordering high-end apparel and accessories, hiding the tags without removing them, wearing the items and then returning them. In an August 2020 survey, security-tag maker Secure Authentication Brands found 37% of respondents admitted to "wardrobing" clothing from retailers.

Friendly fraud is committed by individuals who order an item and then claim that it never arrived, arrived damaged or was not as described. They may make "Item Not Received" (INR) or "Did Not Receive" (DNR) refund claims with the merchant or file chargebacks that add to the merchant's losses.

Forbes reported that one study found a 67% increase in friendly fraud between October 2019 and October 2020. Another study from late 2020 found that more than 1/3 of US and UK shoppers admitted to committing friendly fraud, up from 8% at the start of 2020.

There's also a growing industry of professional refund fraudsters who consumers can hire for a percentage of the refund. Lending-fraud expert Frank McKenna reports that many of these fraudsters advertise their services online, share lists of "hot merchants" to target and help customers plan their purchases to boost their chances of successful fraud.

This is what merchants are facing when it comes to returns. How can you fight back without losing customers?

Optimize your return process and create hurdles for fraudsters

Start by reviewing your return policy to make sure it's easy to understand at a glance. Include a short summary and a link to the full policy on your product pages so good customers know exactly what to expect.

Add tracking and delivery verification to all your orders, to reduce the risk of fraud claims and for proof in case of fraudulent chargebacks.

Next, make sure you have the data analytics and fraud prevention tools you need to identify your customers even if they're using multiple accounts, channels or devices. This allows you to create a seamless experience across channels for good customers and to spot known fraudsters using multiple identities and devices.

You can also work with a return management service or your in-house technology teams to create a self-service returns center on your site where customers can find their orders and start the return process. Make sure it's easy for customers — and you — to track the status of their return so you don't end up with claims that their refund never arrived or that the item they returned was lost in the mail.

You may want to require that customers give a reason for their return, to help you spot fraud trends. For example, if you see a string of "never arrived" claims for the same style of diamond earrings to different customers, you may be dealing with individual frauds or a return fraudster for hire. You can add fraud disincentives, discussed below, to those products. Return reasons can also help you identify products that consistently disappoint your good customers so you can remove them from your store.

In addition to return reasons, you can also track and analyze returns by channel. This can show you if one channel has a particular problem with return fraud or if there are omnichannel paths that fraudsters are following, such as buy online, return in store (BORIS) policies.

If you have a brand monitoring program to look for brand impersonators and phishing scams, add checks for fraudsters-for-hire who may be advertising their skill at targeting your store. If you don't monitor your brand already, it's time to start.

Finally, consider creating disincentives for fraud that still let good customers make returns. These can include:

  • Setting time limits like 30, 60 or 90 days on returns. A good example is Amazon Prime Wardrobe, which allows shoppers free returns before the end of a seven-day try-on period to reduce wardrobing fraud.
  • Making seasonal adjustments to your returns policy. For example, a clothing retailer might extend refund time limits after the holidays to accommodate gift recipients but then shorten those time limits for the rest of the year.
  • Adding restocking fees on high-ticket value items. The classic example here is adding a high restocking fee to big TVs before the Super Bowl, to prevent customers from "renting" from you for the big game.
  • Using hard-to-hide garment tags to prevent wardrobing.
  • Requiring that customers show proof of purchase for in-store returns to prevent BORIS fraud.
  • Changing your policy to give store credit instead of refunds to discourage fraud-for-hire.

As you make changes, be sure to track the results to see how they impact conversions and revenue as well as fraud. By keeping an eye on return fraud and CX, you can shift the balance of fraud losses and customer experience to your favor, while keeping your good customers happy.

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