To Fight Returns Fraud, Retailers Need Smarter — Not Tighter — Policies

Returns have always posed a challenge for retailers. They’re expensive, logistically challenging, and (too often) devoid of adequate oversight. However, now there’s a new factor to consider: returns fraud.

What used to be a relatively rare, isolated occurrence has now become more sophisticated thanks to social media and advanced technology. Internet users from all over the world can now collaborate online and workshop tricks and strategies for committing returns fraud. Some customers have found ways to exploit loopholes and oversight gaps in retailers’ returns policies, racking up credits totaling tens — or hundreds — of thousands of dollars.

Retailers need to fight back, but it’s not as simple as tightening restrictions since well-meaning customers still expect (and deserve) flexible and easy returns. Rather, retail teams need to get smarter about how they approach returns.

Faced with the modern challenge of returns fraud, retail leaders should look to tech-forward solutions that can help them recoup costs, minimize fraud, and meet customer expectations.

The Growing Threat of Returns Fraud

An increasing number of shoppers are exploiting loopholes in retailers’ returns policies. Common practices include:

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• Wardrobing: Purchasing items with the intent to use them and then return them, like wearing an outfit to an event and returning it afterward.
• Receipts fraud: Using stolen or fake receipts to return items for cash or store credit.
• Dummy packages: Sending back a parcel whose weight matches the original package but filling the box with dirt or other filler material.
• Abusing “keep it” policies: Determining which items are most likely to be eligible for “returnless refunds” and taking advantage.

These tactics cost U.S. retailers almost $102 billion annually. It’s clear something needs to be done.

Tighter Returns Policies vs. Customer Satisfaction

To combat these potential losses, retailers often tighten their returns policies — at the expense of customer experience.

If retailers simply shorten returns windows or require stricter proof of purchase, they negatively impact the shopping experience for well-intentioned customers. Blue Yonder’s 2024 research found that stricter return policies deter 69 percent of shoppers from making purchases.

Sweeping policies that treat all customers as a monolith can lead to:

• lower customer retention rates;
• negative reviews and public backlash; and
• lost sales, as customers may choose competitors with more flexible return policies.

But there is a better way — one that lets retailers protect their bottom lines (and merchandise) while prioritizing customer experience.

Pinpoint the Bad Actors With Advanced Tech

Retailers that lean into tech-forward solutions can protect themselves from financial loss without compromising the customer experience.

1. Leverage existing data.

Retailers must be able to connect their item processing (i.e., checking, grading, dispositioning) to the customer record to determine whether their data aligns with what the customer has told them. By connecting the dots between customer data, item data, and warehouse processing data, exceptions can be identified quickly and specific customer accounts can be flagged to prevent further abuse.

With an intelligent returns platform, retailers can treat each return on its own merits, at scale, by configuring rules based on customer data. If they receive a returns request from a brand-new customer, they may want to wait for the package to be properly processed before issuing a refund. If, on the other hand, the request comes from a 10-year customer, they could consider issuing the refund as soon as they receive confirmation the package has been dropped off.

2. Embrace AI and ML.

Artificial intelligence and machine learning can help retailers by scanning huge datasets and pulling out trends and associations that would be difficult for humans to spot. For example, identifying niche item categories that generate marginally greater returns, or geographical locations that have growing rates of fraudulent returns using specific drop-off options. When data can be scrutinized to this level, it makes the customization of the solution even more exacting and enables the retailer to truly match the returns experience suited to the specific situation.

ML’s superior pattern recognition can help, too. Smart systems can detect when a particular customer frequently exploits a specific returns loophole and, in real time, tighten the return process for high-risk transactions without impacting low-risk customers.

3. Optimize efficiency.

Tech-enabled efficiency can go a long way. The faster and more efficiently retailers can process their returns, the more effectively they can stop bad actors. Letting returns queue up in a warehouse for several weeks does nothing to stop bad actors from continuing their fraudulent activity. With streamlined, tech-forward processes, retailers can ensure quick identification and deter future fraud.

The Bigger Picture

While returns fraud continues to pose a serious challenge for retailers, the response doesn’t need to involve complicated processes that alienate loyal customers.

By adopting smarter, tech-driven solutions, retailers can effectively combat returns fraud while delivering a seamless experience that delights well-intentioned shoppers.

However, mitigating malicious behaviors isn’t all that’s required for an optimized returns framework; retailers must also work to build a broader customer experience ecosystem that fosters loyalty and efficiency.

Tim Robinson is corporate vice president, returns, at Blue Yonder, a provider of end-to-end supply chain management solutions.