Table of Contents
Table of Contents
Return fraud is a deceptive practice where customers exploit a retailer’s return policy to gain refunds, store credit, or replacement products under false pretenses. This can include tactics like returning used items (wardrobing), receipt fraud, price switching, or even returning stolen goods for cash. Businesses lose billions of dollars each year due to fraudulent returns, leading to higher prices for consumers and stricter return policies. Understanding return fraud is crucial for retailers looking to prevent financial losses, protect inventory, and maintain fair policies for honest customers.
What is return fraud?
Return fraud is when someone abuses a company’s return policy to get money or goods dishonestly. It costs businesses millions every year and comes in many forms, including:
- Receipt fraud – Using fake or altered receipts to return items for cash.
- Wardrobing – Buying an item, using it, and then returning it as if it were new.
- Return abuse – Repeatedly returning items outside the normal policy.
- Stolen goods returns – Returning stolen items for a refund.
- Employee fraud – Workers processing fake returns to steal money or help someone else commit fraud.
Businesses use tools like video-integrated transaction monitoring to detect suspicious returns and stop fraud before it happens.
See how Solink’s loss prevention software can help you eliminate return fraud.
Different types of return fraud
There are many types of return fraud. However, they can be first broken down into two broad categories, internal and external.
Here’s a helpful analogy.
When magicians perform an illusion, they often need an accomplice. Sometimes the accomplice is a confederate, that is a person working for the magician who knows what they need to do to help sell the illusion. This is akin to internal theft, where the person performing the return is part of the plan to defraud the business.
Other times, the accomplice is just a member of the audience who doesn’t know what is going on. While they still help the magician fool the audience, they too are being fooled. This is more like external theft, where the person committing return fraud either fools the person performing the refund, or the return policy is so undefined or lax that no fooling is even necessary.
Here are 12 types of fraudulent returns.
- Bricking: An electronic device that sells for $500 can have >$100 in “component value.” Some fraudsters will purchase an electronic device, open up the shell, remove the valuable parts to resell online, and then return the useless empty “brick.”
- Credit card return fraud: Someone purchases items with a stolen credit card only to return them later for a cash refund, often to a retailer that allows returns without a receipt.
- Defective item return: In this case, someone tries to fraudulently return a broken item. They first purchase a new version of the broken product. Then, they replace the item in the box with their old broken one. That way they now have a working product again without needing to buy it.
- Empty box: Some people will purchase an item and then rewrap the package, possibly weighted with something cheap inside to make it feel right. The clerk is then fooled into thinking that it is unopened merchandise.
- Free renting: Similar to the more well-known wardrobing discussed below, some people will purchase expensive tools, finish a specific repair or renovation, and then return them.
- Open boxing: Some stores offer deep discounts for purchasing an open box. In this case, a person manufactures the open box discount by buying the item, opening it, and then returning it. They then return the next day to make the open box purchase.
- Price arbitrage: When two retailers sell the same product for different prices, and the higher price retailer doesn’t require receipts to return items, then a person can buy at the lower price and afterwards return it for the higher one.
- Price switching fraud: In this case, someone buys an item for a lower price based on the switched price tag. Then, they return the item without a receipt for the listed price.
- Receipt fraud: In this case, the person uses the same receipt for multiple returns or returns an item with a fraudulent receipt. This might be to return a stolen item, or it might be to buy something at a deep discount and then return it for the full price.
- Seller sabotage: To corner the market for a period, an unscrupulous rival may purchase out a competitor’s inventory only to return all of the items once they have sold all of their merchandise as well. This is more common online, but it can occur in brick-and-mortar retail as well.
- Stolen merchandise return: Similar to using a stolen credit card, some fraudsters take advantage of no receipt return policies to return items they previously shoplifted.
- Wardrobing: Some people will purchase clothing, wear it once or twice, and then return it. This is commonly the case for expensive one-time purchases, like prom or wedding attire.
How Return Fraud Affects Businesses and Consumers
It is estimated that the retail industry loses about $24 billion annually to return fraud and refund policy abuse. This represents about 8% of all returns and nearly a quarter of the $100 billion in annual retail shrinkage.
As mentioned above, a major additional problem is the difficulty in recognizing when an employee has also been fooled by the fraudsters versus is an active party in the theft.
For retailers, return fraud leads to lost revenue, inventory disruptions, and higher operational costs. To offset these losses, businesses often raise prices, meaning all customers end up paying more. Fraud also forces retailers to implement stricter return policies, such as shorter return windows and restocking fees, making the process more difficult for legitimate shoppers. Additionally, employees must spend more time verifying returns, reducing efficiency and negatively impacting the overall shopping experience.
Consumers also feel the effects of return fraud in other ways. Stricter return policies make it harder to return items legitimately, while increased security measures, such as additional receipt checks, can lead to longer wait times and a less enjoyable shopping experience. As businesses adjust to combat fraud, the cost of goods often rises, meaning honest customers ultimately pay the price.
To prevent return fraud, businesses need better visibility into transactions. Solutions like Solink integrate video security with point-of-sale data, helping retailers quickly identify suspicious patterns and reduce fraud. By protecting return policies from abuse, businesses can maintain fair policies and a better experience for honest customers. Learn how Solink helps.
How to identify and prevent return fraud
It can be difficult to know whether any single return is fraudulent, although some tools try to do just that. In the moment, they do the math on the parameters of the return (e.g., value, whether there’s a receipt, whether it’s a cash return, whether the same person has made returns recently, whether the item is returned often, etc.) and then provide a risk assessment.
Alternatively, tools like exception-based reporting can help find outliers in data so you can look for potential fraudulent returns after the fact. This is especially useful when looking for employees who may be a willing or unwitting partner in a large share of the potentially fraudulent returns.
Here are some ways to identify return fraud:
- Train staff: Staff should be trained to identify potentially fraudulent returns. They should be given the freedom to request ID, receipts, and ask follow-up questions on why an item is being returned. This will help them better judge the legitimacy of the return.
- Integrate your data: Solink integrates your point of sale and video security footage without a text inserter. By filtering high-risk transactions, for example cash refunds, it’s possible to review the paired video to confirm their legitimacy.
- Deploy artificial intelligence: Solink Sidekick AI uses generative artificial intelligence to help find sources of loss.
Solink can help you reduce return fraud
Solink can help you reduce return fraud by offering an innovative approach to safeguarding your business. With its advanced cloud video security technology, Solink empowers retailers to detect and prevent fraudulent return activities effectively.
This system not only enhances security but also provides crucial insights that can lead to better decision-making and improved loss prevention strategies. By integrating Solink’s solutions, businesses can significantly reduce the impact of return fraud on their operations.
Want to see how new insights into your transaction data can put an end to return fraud? See what Solink has to offer.
Timothy Ware | 
Solink stands at the forefront of security solutions, excelling in loss prevention and asset protection for businesses. Our content is rich in industry expertise and crafted to provide actionable insights and innovative strategies. We empower businesses to enhance their security systems, optimize operations, and protect their assets more effectively. Discover how our advanced cloud video management system can transform your security approach.
