Return Frauds: Types, Impact, and How to Protect Your Business

Have you ever wondered if the “damaged item” return request you processed was real? Or maybe questioned whether a customer could lose their receipt for the third time in a month?

Your gut might be telling you something.

Return fraud hit retailers with $101 billion in losses last year. And here’s another shocking news: For every $100 in returned merchandise, you lose $13.70 to fraudulent activities. If you get a $250,000 refund in a year, around $34,250 could be fraudulent (that’s a lot!).

Return frauds aren’t always easy to identify because some activities can appear to be return abuse. And we agree.

But return abuse is when customers take advantage of your policies without breaking them, while return fraud is straight out theft using fake receipts, telling lies, and stealing money or identity.

It may take some time to become familiar with return fraud. But we’re here to help.

In this article, we’ll break down the types of return frauds, show you how they impact your business, and give you simple tips to prevent them.

Understanding Common Types of Return Frauds

Fraud is a poison to your business. If you’re not aware of it, you might become a victim of schemes that steal your profits for personal financial gain.

Here are the most common return frauds to watch out for, including wardrobing, receipt fraud, and price switching.

Wardrobing: Using and Returning Merchandise

Wardrobing is when customers buy a product, use it for a short time, and then return it for a full refund. Many shoppers (69%, to be exact) admit to doing this fraudulent act at least once. Can you believe that?

While it can happen to any product, it’s more often in apparel and accessories. Let’s say a customer bought a dress for a special event, wore it once, and then returned it because it “didn’t fit properly.”

Wardrobing falls somewhat into the gray area (which is probably why many shoppers do it). It’s not completely theft since customers do return the item. But you can still lose money because of restocking and processing fees.

Receipt Fraud and Refund Fraud

Receipt fraud is a refund fraud where the scammer creates a fake receipt or edits a real one to return items they never bought in the first place.

Faking receipts used to be a thing for Photoshop masters. But here’s the scary news: AI can now do it in just one prompt… flawlessly. We believe there will be an increase in this type of fraud soon.

Besides receipt fraud, some other types of refund fraud are:

• Claiming that packages never arrived when they did
• Reporting items as “damaged” during shipping (but they aren’t)
• Processing chargebacks after keeping products.

Empty Box Scam

The empty box scam happens when customers claim they received an “empty package” (or the product is missing) and then demand a full refund from your store.

I thought it only happens the other way around, where sellers send empty boxes to buyers. But it has become a fraud-favorite for scammers.

While it’s not easy, you can fight this by recording your packing process with videos and photos and then shipping with insurance coverage.

Price Switching and Price Arbitrage Schemes

Have you ever met a customer who bought a $50 item from your store but somehow returned it with a $150 receipt? You knew something was off… it just didn’t click right at the moment.

That’s price switch fraud. What fraudsters do is swap price tags or barcodes on expensive products with those of cheaper items, buy at the lower price, and then return using the original, higher-priced item to receive the full retail price.

Whatever fraud they use above, they steal your money and product. And that affects your cash flow and inventory. Plus, it messes up your mind.

Returning Stolen Merchandise

Scammers steal products through shoplifting and then return those stolen goods to your store for cash refunds without any receipt. I mean… where do they get the guts?

Most fraudsters target brick-and-mortar stores. And the National Retail Federation (NRF) mentioned that 44% of retailers have experienced this type of fraud. That means almost half of the stores deal with people returning stolen stuff.

So, what can you do to protect your store? You can always ask for receipts and ID verification (for expensive items). Another great idea is to offer store credit instead of cash refunds.

Identity Theft Used in Fraudulent Returns

I’m sure you know the dangers of identity theft. But it can also be used for return fraud.

What scammers do is use a stolen credit card to buy products from your store. Once the real cardholder sees this “unauthorized” transaction, they’ll file a dispute.

Imagine that you’re selling gadgets in your shop. Earl (the scammer’s alias) used Mia’s credit card to buy a $500 laptop. He already had it for two days when Mia saw the charge and disputed it.

This incident results in lost sales and products, as well as payment processing fees.

PRO TIP: Use a multi-step verification process, such as OTP, for online transactions. For in-store transactions, always request identification before accepting credit card payments.

Cross-Retailer Return Fraud

Cross-retailer fraud happens when customers buy cheaper products from competitors, and then return them to your store (claiming they bought the items from you).

Let’s say your shoe store sold leather boots for $79.99. One customer (let’s call him Jake) bought the same model from the XYZ store for $69.99. He then brought them to your store without a receipt, saying he couldn’t find it. Because you had the same brand of leather boots (and were unaware of this scam), you gave him $79.99 in cash.

Cross-retailer is similar to price arbitrage. And what happens is that the price difference you lose comes straight out of your sales and messes up your inventory.

Other New Scams

Here are other return fraud tactics besides the common ones above:

• Bracketing: Some customers buy multiple sizes or colors with plans to return most items. For example, ordering shoes in sizes 8, 9, and 10, keeping one pair that fits, then returning the rest under false pretenses.
• Bricking: This fraud is about stealing valuable parts of a working electronic item before returning them as “defective.” One example is buying a laptop, removing the RAM and hard drive, and then claiming it arrived broken.
• Package redirection: This is when scammers reroute return shipments to fake addresses and make you think the package got lost during return shipping.

As a seller, you have to be 100% aware and ready to combat return fraud and protect your business. It won’t be easy. But with the right strategies and tools, you can! (more on that later.)

The Negative Impact of Return Fraud on Businesses

You might think that one to two incidents of fraud can be brushed off (especially for some affordable items). But if you don’t act on it, the costs will pile up and be bigger.

Let me show you the negative impact of return frauds and why it’s more devastating than you think.

Direct Financial Losses

Did you know that nearly 9 out of 10 businesses report losing up to 9% of their total revenue to fraud?

If you’re earning around $120,000 per year (maybe more), that’s $10,800 less… from the money you earned with your blood, sweat, and tears.

You’ll also be responsible for return shipping, restocking fees, and processing fees. And what about the returned item? You may have to offer it at a discounted price.

Operational Costs

One of our clothing brand clients had a traumatic experience with return fraud. They lost a lot of money from it, but their team also suffered from the workload that came after.

Their customer service team spent hours each day reviewing any possible fraudulent activities, inspecting suspicious returns, and explaining their refund policies (again and again).

It used to take them only 5-10 minutes to process returns. But because of so many cases, they took 20-30 minutes to “investigate” each.

Broken Trust

What’s more upsetting about fraud is how it ruins your business relationships.

First, it affects legitimate customers. Return policies may become stricter and make honest buyers feel like “criminals” when they need genuine returns. Then, they start questioning your brand reputation and wonder if you care about them.

Your team also loses faith in customers. Employees become suspicious of every return request and deal with them poorly.

It’s sad, but fraud can affect customer loyalty growth and your team’s morale.

Compromised Retailer’s Return Policy

If you keep experiencing return frauds, your return policy can start to feel like a fence with too many gaps, like it’s meant to be an “aesthetic” design and not protection.

And what’s the usual response? You start adding more rules and restrictions to stop fraudsters. But honest customers get caught in the complicated process.

What was once a simple policy turns into a barrier that pushes good customers away.

5 Strategies for Return Fraud Prevention

We’re done with the negative impacts. Now, it’s time to learn how you can prevent return fraud from happening.

Here are some simple but effective steps you can take, such as creating a stronger policy, using technology, and applying verification procedures:

1. Developing and Enforcing a Strong Return Policy

Your return policy is like the front door to your house. It needs to welcome honest customers while keeping troublemakers out.

The best way is to find the sweet spot between being customer-friendly and protecting yourself from fraud. And how can you do that? Set clear (but reasonable) time limits, require receipts for high-value items, and specify which conditions void returns.

Don’t make it so strict that good customers run away. But don’t make it so loose that fraudsters take advantage.

2. Leveraging Technology for Effective Fraud Prevention

Technology can be your best friend when it comes to catching fraud early. Instead of manually checking every return, you can use tools that analyze your data and flag weird patterns automatically.

ParcelPanel Returns & Exchanges offers block settings that let you exclude certain cases from being eligible for returns. You can set up rules to automatically block suspicious patterns (before they become a problem).

Technology also helps during in-store return processing. For example, barcode scanning confirms that the exact product matches what was originally sold. It can help you catch people who try to return duped items.

3. Implementing Verification Procedures

Setting up verification steps can stop fraudulent returns before they hit your sales. Here’s what works:

• Verify original purchases: You can do this by matching customer details with order records. Ask for order numbers, email addresses, or phone numbers used during checkout.
• Require ID for high-value returns: Match billing addresses with customer information to prevent stolen credit card fraud.
• Be careful of employee fraud: Do you know that return fraud can also happen from inside your business? And it happens even in big retail stores! Macy’s is currently retrieving over $600,000 in executive bonuses (wow) after discovering an employee hid $154 million in delivery expenses.

4. Monitoring and Analyzing Return Patterns

Tracking your return rates helps you notice weird behaviors that could signal fraud before it gets worse.

One of our clients noticed their return rates jumped 40% in two weeks. When we dug deeper, we found five customers had returned identical “defective” electronics using different names but the same shipping address. That’s when we knew something was wrong.

Tools like ParcelPanel Returns & Exchanges can help you catch these behaviors easily. Its advanced analytics track how customers return items, block return requests from some products, and give you detailed reports on return trends.

5. Training Employees to Identify Suspicious Returns

Your frontline staff are your best defense against return fraud (they see everything first). But do they know what red flags to watch for?

Train your employees to detect suspicious behavior, like customers who seem nervous about providing ID or returns without original packaging. Also, teach them to watch for multiple returns from the same person.

PRO TIP: Create a simple checklist your team can reference during busy periods.

Conclusion: Protecting Your Business from Return Frauds

Return frauds come in many forms. Wardrobing, receipt fraud, identity theft schemes, and cross-retailer scams can all hurt your profits and make your operations more difficult (not to mention the stress they cause).

Fraud prevention is something you need to do if you want to protect your hard-earned revenue. So, create a better policy, add verification steps, and use technology like return management tools to get started.

Ready to take more control of your return process? ParcelPanel Returns & Exchanges helps you prevent fraud and reduce return losses by up to 40% while keeping customers happy.