Returns Fraud: The Hidden Billion-Dollar Drain on Retail
Returns Fraud: The Hidden Billion-Dollar Drain on Retail
While shifting consumer behavior serves as a significant driver, it is not the sole contributor. The rise in ORC and shoplifting exacerbates returns fraud, with stolen merchandise often finding its way back into retailers' returns systems.

By Brian Brinkmann, Chief Product & Marketing Officer at Agilence

The past year in retail has brought forth a deluge of challenges, capturing widespread attention and keeping industry giants on edge. Major retailers like Target, Home Depot, Macy’s, and Dick’s Sporting Goods have openly confronted the growing issue of shrink, largely attributing it to the surge in shoplifting and theft orchestrated by Organized Retail Crime (ORC) rings. While this topic continues to dominate national discourse, another pressing concern has surfaced alongside it: the alarming rise in returns fraud and refund abuse.

Now more than ever, retailers are acutely feeling the repercussions of returns fraud. According to a survey by Axonify, a staggering 81% of 300 retail frontline managers identified returns abuse as a significant and growing concern. Over the past three months alone, 70% reported encounters with fraudulent returns in their stores. An alarming 36% grapple with fraudulent returns on a weekly basis, while 18% face them daily.

The impact of returns fraud extends far beyond individual stores, affecting the entire retail industry. According to the National Retail Federation, returns fraud inflicted a staggering $101.91 billion in losses upon retailers in 2023, representing a 20% increase from the previous year. Shoppers returned a significant 16.5% of their purchases, doubling the return rate observed in 2019. This issue has garnered considerable attention through the proliferation of viral TikTok videos and extensive coverage in notable publications such as the New York Times and the Wall Street Journal. At the NRF Big Show 2024, Marc Metrick, CEO of Saks, emphasized a dramatic surge in fraudulent complaints of “merchandise not received” in recent years. High-profile cases, such as that of the Artemis Refund Group, charged with conspiracy to commit wire fraud due to a return fraud scheme, have further underscored the severity and far-reaching implications of the issue.

Factors Fueling Returns Fraud’s Growth

The rise of returns fraud can be attributed to several factors, with the COVID-19 pandemic playing a pivotal role. The pandemic catalyzed a rapid and substantial shift towards e-commerce and online shopping, providing fertile ground for fraudulent activities to flourish. Scammers adeptly exploit retailers’ lenient return policies, strategically crafted to attract customers amidst the post-pandemic online shopping boom. These policies, encouraging customers to order multiple sizes and colors with intentions to return unwanted items, have led to a surge in return volumes. The anonymity of online transactions further emboldens fraudulent behavior, compounded by the ease of manipulating automated online return processes. Additionally, labor shortages heighten vulnerabilities at the in-store level, with inexperienced staff susceptible to deceptive tactics employed by seasoned criminals. Generous return policies, aimed at maintaining a competitive edge in the market, inadvertently worsen the problem, creating an environment ripe for fraud and shrink

While shifting consumer behavior serves as a significant driver, it is not the sole contributor. The rise in ORC and shoplifting exacerbates returns fraud, with stolen merchandise often finding its way back into retailers’ returns systems. About 44% of surveyed retailers reported incidents of stolen merchandise being returned, while over 20% experienced coordinated returns fraud from ORC groups. Moreover, the prevalence of counterfeit receipts has surged, with 25.6% of retailers encountering such cases in 2023, up from 11.4% in 2022.

The Financial Fallout of Returns Abuse

Returns pose a significant strain on retailers’ margins, driven by the imperative to provide a seamless return experience amidst intense market competition. Nearly three-fourths of shoppers choose retailers based on their return policies, with a majority seeking hassle-free returns across channels. However, returns abuse, ranging from outright fraud to softer forms like ‘wardrobing,’ exacts a heavy toll. On average, returns amount to 21% of an order’s value, with associated shipping and restocking costs compounding the financial impact. When factoring in the cost of initial sale and return processing, companies lose a staggering 50% of their margin on returns. Returns abuse also disrupts inventory management, leading to discrepancies between actual stock and inventory records, potentially reintroducing unsellable items into inventory.

Retail’s Path Forward to Combat Returns Fraud

Addressing returns abuse necessitates a delicate balance between providing exceptional customer experiences and mitigating operational impacts and financial losses. Retailers are responding proactively to this growing threat, implementing measures such as making certain items non-returnable and imposing return fees. Fast-fashion giants like H&M and Zara have introduced customer-paid return shipping, while Old Navy enhances online shopping experiences with fit-demonstrating tools. 

Technology such as data analytics for retail plays a crucial role, enabling retailers to track and analyze return patterns, enforce stricter policies, and train staff to identify and prevent fraud. A multifaceted approach combining policy adjustments, technological solutions, and staff training is imperative to effectively combat returns abuse and safeguard retailers’ bottom lines.

About the author

Brian Brinkmann is the Chief Product & Marketing Officer at Agilence

Brian Brinkmann is the Chief Product & Marketing Officer at Agilence, the leading loss prevention and operational analytics provider for retailers, grocers, and restaurants. Brinkmann is an industry veteran with over 25 years of experience bringing analytics, data mining, machine learning, and AI products to market to improve business and organizational performance.

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