Insights

How to identify return fraud in 2024

April 3, 2024

Table of Contents

Table of Contents

Return fraud poses a significant challenge for retailers, affecting their bottom line and operational efficiency. This type of fraud includes a variety of deceptive practices, such as returning stolen merchandise for a refund, using and returning items, and exploiting return policies. 

Here’s what you need to know to eliminate return fraud in your business.

What is return fraud?

Here is a simple definition of return fraud:

While the tactics vary, and the fraud may or may not involve an employee, at their root return frauds are simply taking advantage of a return policy to steal merchandise and/or money. 

See how Solink’s loss prevention software can help you eliminate return fraud.

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12 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 return fraud.

  • 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 big of a problem is return fraud?

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.

How to identify 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 surveillance 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 by offering an innovative approach to safeguarding your business. With its advanced cloud video surveillance 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.

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Timothy Warelinked in icon email icon

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.