Return Fraud: What It Is, and How Merchants Can Fight It
Return fraud occurs when customers steal from a retailer by returning items that do not qualify for a return or refund. This can be the result of an honest mistake on the part of the consumer, but an increasing number of cases involve premeditation and malicious intent. Regardless of how it happens, though, return fraud is a real and growing threat to merchants, resulting in substantial revenue loss.
What Is Return Fraud?
- Return Fraud
Return fraud refers to the act of returning merchandise to a retailer for a refund, in violation of the merchant’s stated returns policy. The merchandise may be ineligible for a refund because it was purchased from another retailer, or because the item is used, or was marked as otherwise ineligible for a refund before purchase.
[noun]rə ● tərn ● frôd
Returns, of course, are an important part of any retail business. Knowing a product can be returned increases customer confidence, allowing them to feel more secure in buying from you. In 2020 alone, buyers returned roughly $428 billion in merchandise to retailers; that total represents over 10% of all US retail sales for the year.
According to a study by the National Retail Federation and Appriss Retail, however, nearly 6% of those returns—some $25.3 billion—were fraudulent. In other words, return fraud costs merchants $5.90 for every $100 of accepted returns.
With return fraud, consumers bring an item (or items) to you and request a refund in the form of store credit or cash. However, the return request is invalid; for one reason or another, the customer does not have a legitimate right to a refund.
There are several reasons why many merchants turn a blind eye to suspected return fraud. For instance, there’s the fact that a claim can often be your word against the cardholder's. Customers can use various excuses to claim a return, but you have no definitive way of verifying their claim.
And, even if you suspect fraud, you don’t want to risk alienating customers by making unprovable accusations. Angering customers can lead to reputational damage. Even worse, a buyer may file a chargeback to get their refund from the bank, rather than through the proper channels.
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Avoiding Return Fraud? It’s not as Hard as It Sounds.
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Return Fraud Tactics
As we mentioned earlier, it’s possible to commit return fraud innocently. A customer may not have read your return policy, or they may return the item to the wrong store by accident. To illustrate, think about retailers like Lowes, Home Depot, and Menards, which stock many of the same items. Without a receipt, it’s hard to prove someone didn’t purchase the item from one or another of those retailers.
That said, there are a number of tricks fraudsters use to intentionally commit theft through your returns process. A few of the more common tactics include:
Fraudsters can find sites that sell fake digital or physical receipts. The thief uses these resources to commit fraud without making a purchase from the targeted retailer.
Returning Shoplifted Goods
Bad actors shoplift merchandise, then “return” the item without a receipt for a refund or store credit.
The fraudster makes a purchase, leaves the store, then reenters later, and picks up an identical item. The thief uses the original receipt to secure a refund on the second item, effectively getting the first item for free.
Shoppers buy merchandise but plan on returning the items after initial use. For example, an expensive outfit that is worn once then returned, or a book that is returned after reading.
Fraudsters secure valid receipts that have been discarded or stolen. Using the receipt as a type of “shopping list,” they select items on the receipt and return them for a refund.
Buying an item at one price, then switching the tag with that of a higher-priced item before returning the item for a refund.
Merchandise Exchange (Arbitrage)
Shoppers purchase a new item, then return an older or non-working version of the same item, using the packaging from the newer merchandise. Another version of this scheme involves swapping similar-looking items with different features and prices, then returning the lower-cost one and passing it off as the expensive item.
Many return fraud schemes are harder to pull off in a physical store thanks to the use of bar codes on products and receipts. That’s why return fraud is even more of a threat for eCommerce merchants.
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Return fraud scams are not solely practiced by individuals. Large, multinational crime rings may be the perpetrators, but so might your competition. A competing seller may purchase a large amount of a product in your inventory, then wait for you to restock. The competitor waits then brings everything back and demands a refund, meaning you’re now stuck with much more inventory than you anticipated.
Many of these tricks are harder to pull off in a physical store thanks to the use of bar codes on products and receipts. That’s why return fraud is even more of a threat for eCommerce merchants.
Top 5 Tips to Avoid Return Fraud
Many instances of return fraud can be countered by implementing best practices for prevention. This can be a delicate balance between preventing fraud and serving customers.
With all that in mind, here are five simple steps you should take to avoid return fraud and minimize your risk:
Fine-Tune Your Return Policy
Develop and implement a clear, reasonable set of parameters for returns. Your policy should be practical, yet adaptable. Things to consider include:
- Expectations: Clearly define the condition in which merchandise should be returned. For instance, specify that goods should be unopened, with tags attached, including invoice or other product-specific data such as serial numbers.
- Time Limits: Set a time limits for the return of merchandise. The timeframe is usually a few weeks, but can vary. Some mattress manufacturers, for instance, offer up to one year to make returns.
- Return Shipping: For card-not-present purchases, you should specify how return shipping should be done. Include such things as acceptable carriers, packaging, and insurance requirements.
- Fees: Are there additional charges associated with the return, such as a restocking fee? Who will pay for return shipping, if necessary? Will you supply a return label on request?
- Exceptions: If certain merchandise (such as a customized item) is subject to alternate policies, be sure to thoroughly explain this difference and get confirmation from the customer prior to the sale.
- Special Circumstances: Your standard return policy may vary depending on the product category, location, currency, or other conditions. For example, international customers may require more time for returns.
Make Sure Your Policy Is Accessible
More than two-thirds of online shoppers will insist on reading your return policy before deciding to buy. If customers can’t find or understand that policy, however, it might as well not exist. Once you developed a transparent return policy, you must make sure those rules are easily accessible. This means prominently displaying the policy in as many places as possible. Your terms should be easy to find from every page of your website (including checkout), on invoices and other customer records, on receipts, and even on packaging.
Your return policy should be a mandate. However, what happens when a customer narrowly misses the cutoff date for a return or explains that they ordered the wrong item as a gift? Being flexible here is a great way to build brand equity and long-term customer loyalty. Keep in mind, one of the top reasons customers commit friendly fraud is convenience. Making your return policy as customer-friendly as possible takes away a primary incentive for cardholders to contact the bank.
Transform Returns into Opportunities
Returns are an unfortunate part of retail. If leveraged properly, though, each one is an opportunity to create new sales and build customer relationships. Consider offering customers the option to trade a returned item for 10% more than its value in-store credit. This is a win-win for you and your customer. The buyer may never use the credit; in fact, over one-third of store credits are never used, with the average value of unused store credit (including gift cards) sitting at $167 per person. Even if the credit is used, the customer will often make additional purchases at the same time. They’re happy, and you’re happy.
Consult the Experts
Still concerned about your ability to fight back and avoid return fraud? It may be time to call in outside assistance. At Chargebacks911®, we create custom chargeback management strategies for merchants, tailored to your company’s unique needs. Contact us today to learn how we can help you fight back against return fraud, friendly fraud, and many other threats.
Q: What is return fraud?
A: Essentially, return fraud refers to the practice of claiming an invalid refund from a merchant. The return may violate the merchant’s policies, or the fraudster may attempt to swap the new merchandise for a used, broken, or lower-quality item.
Q: Is return fraud illegal?
A: In most cases, return fraud is considered theft or robbery. Depending on state and local regulations, it may be either a felony or a misdemeanor, punishable by jail time, house arrest, probation, and/or considerable fines.
Q: How do fraudsters commit return fraud?
A: There are a number of situations that could be considered return fraud. Common tactics include wardrobing (or “free renting”), returning stolen merchandise for a full refund, price tag switching, and substituting a cheaper item for a higher quality one before attempting a return.
Q: Can best practices prevent return abuse?
A: Yes. By making your return policies more customer-friendly, and ensuring those policies are transparent and easy to find, you can keep return abuse to a minimum.
Merchants can fight credit card chargebacks by submitting a rebuttal letter explaining their case and compelling evidence to support it. This process is called representment. The issuing bank will review the case and make a decision.Can a merchant reverse a refund? ›
The first form of payment reversal is called an authorization reversal. This is when the cardholder contacts the merchant and requests that the funds for a transaction be returned. Once approved, the merchant can then process the reversal and refund the cardholder.How do you deal with customer charge back? ›
- Learn How to Handle Chargebacks in 4 Easy Steps.
- Step 1: Identify the Source. You Can't Handle Chargebacks Until You Know the Source.
- Step 2: Prevent Future Chargebacks. Criminal Fraud. Merchant Error.
- Step 3: Engage in Tactical Representment.
- Step 4: Get a Long-Term, Professional Partner.
- A True, Professional Partner. FAQs.
These scams occur when criminals target business's card payment terminals to change transactions from sales to refunds. They use various distraction techniques so that staff are taken away from the physical location of the terminal while they then issue multiple refunds to their card.What is the reason for preventing fraud? ›
Fraud can cause catastrophic losses.
The consequences of large failures can impose financial, reputational, loyalty, and other brand-related costs that will persist for a very long time. The cost of a fraud prevention program is tiny compared to a major failure.
If asking the merchant for a refund didn't work, request a chargeback with your credit card issuer. Many card issuers let you dispute transactions by phone, mail or online. You may also be able to submit a dispute directly through your card issuer's mobile app.Do merchants respond to disputes? ›
This gives the merchant a chance to provide documentation proving that the charge is legitimate before the dispute becomes a chargeback. Merchants should always respond to these inquiries promptly.What is the chargeback process? ›
A chargeback is the payment amount that is returned to a debit or credit card, after a customer disputes the transaction or simply returns the purchased item. The chargeback process can be initiated by either the merchant or the cardholder's issuing bank.Can a merchant reverse a payment? ›
Payment reversal (also "credit card reversal or "reversal payment") is when the funds a cardholder used in a transaction are returned to the cardholder's bank. This can be initiated by the cardholder, merchant, issuing bank, acquiring bank, or card association.What are your rights to a refund? ›
Your legal rights to a refund
You have 30 days to return faulty goods and receive a full refund. You're entitled to ask for a refund or price reduction after one failed attempt by the retailer to repair or replace a faulty item. Or you can request another repair or price reduction at no extra cost.
Common reasons for a payment reversal include: the item purchased could be out of stock or backordered, the customer may not be happy with the purchase, or the merchant could make a mistake such as charging the wrong amount.What are two examples of refund fraud? ›
Fraudsters use a discarded or stolen valid receipt as a shopping list to find items in a retail store and return them for a refund. 2. Shoplifting with a receipt. A good example of this is when the fraudster makes a purchase, leaves the shop with the item.How do I dispute a refund and get money back? ›
Ask the company if it will reverse the charge. If you're not satisfied with the merchant's response, you may be able to dispute the charge with your credit card company and have the charge reversed. This is sometimes called a chargeback. Contact your credit card company to see whether you can dispute a charge.How does refund protection work? ›
What is refund protection? Booking Protect's refund protection gives ticket purchasers the opportunity to apply for a full refund if certain unforeseen circumstances occur and they can no longer attend an event.Can a consumer refuse a refund? ›
You do not have to offer refunds to customers in the following circumstances: They were aware that an item was faulty when they bought it. The item was damaged whilst the consumer was attempting to carry out a repair. They may still have the right to a repair, replacement, or partial refund.What happens to the merchant when you dispute a transaction? ›
The merchant is simultaneously notified that they've received a dispute from the cardholders, and that the acquiring bank has debited funds from the merchant account to reimburse the cardholder for the transaction and to cover the fees for investigating the chargeback.Can a merchant reverse a pending transaction? ›
Disputing a pending transaction
The issuer cannot cancel or alter the transaction until it's been finalized. If you need to cancel the transaction before then, you'll have to contact the merchant who placed the charge. You can ask them to contact your card issuer and reverse the transaction depending on the situation.
It involves processes and techniques of conflict resolution without litigation and empowers parties to work together using a framework to amicably settle complex issues. The most common ADR methods are negotiation, mediation, conciliation, arbitration, and private judging.How long does merchant have to respond to dispute? ›
How Long Do Merchants Have to Respond to a Chargeback? The deadline for responding to a chargeback varies by card network, but the most common time limit is 30 days. Note that this is measured from the day the chargeback was filed, which may be several days prior to when the merchant is notified.What are the three types of chargebacks? ›
Instead of diagnosing chargebacks according to reason code, it's best to try and segment them into one of three basic chargeback types: merchant error, criminal fraud, and friendly fraud.
Chargebacks can be classified into three types: criminal fraud, friendly fraud, and merchant error.Which is the types of chargeback method? ›
These can be classified into three types of chargebacks. Most chargebacks occur due to merchant error, true fraud and friendly fraud.What is a merchant reversal? ›
A merchant reversal is a process in which your customer receives back a refund from a transaction. Some of the common reasons why merchant reversals happen are: Shipping policy not fulfilled. No reply received to our emails. Incorrect/invalid delivery made in a physical store.Can a merchant void a transaction? ›
A void transaction is a transaction that is canceled by a merchant or vendor before it settles through a consumer's debit or credit card account. Although a transaction may be void, it does not appear on the customer's account statement.What are the 5 rights of a consumer? ›
Consumers are protected by the Consumer Bill of Rights. The bill states that consumers have the right to be informed, the right to choose, the right to safety, the right to be heard, the right to have problems corrected, the right to consumer education, and the right to service.Does a shop legally have to give a refund? ›
Typically a store is legally required to give refunds if a purchase breaches the customer's satisfactory rights.What are the 8 basic rights of the consumers? ›
- Consumer's rights to enforce terms about goods.
- Right to reject.
- Partial rejection of goods.
- Time limit for short-term right to reject.
- Right to repair or replacement.
- Right to price reduction or final right to reject.
To reverse a payment transaction
Enter the check number or the credit/debit card type in the Check/CC field. For credit/debit cards, enter the required card information. In the case of a returned check, it may be useful to prefix the check number with a code such as RET. Enter a negative amount in the Pay Amount field.
However, there is a basic difference between the two and it depends on context of the situation. General rule to keep in mind: If the payment in question was deposited into the account, it would be a Refund. If it was not deposited, it would be a Reversal.How do you reverse a transfer transaction? ›
You can do this by quickly calling up the customer care number and providing them with all the details of the transaction. They will provide you with a request or complaint number. You can then mail the customer care team with the details of the incorrect transfer.
On average, a customer can file a chargeback on a transaction within 60 or 120 days, depending on the card network and the chargeback reason code. Following that, merchants have 30-45 days to respond to the chargeback, again depending on network and reason code.Can a retailer dispute a chargeback? ›
Can a merchant dispute a chargeback? The good news for any merchants unsure of the chargeback dispute process is that it's always legal for a merchant to dispute a chargeback if it feels unfounded. This is particularly true if they suspect the chargeback to be a fraudulent claim.Can a merchant appeal a chargeback decision? ›
A merchant cannot outright refuse a chargeback, but they can dispute it in a process called representment, where they present their case for the legitimacy of the chargeback to the issuing bank.How often does a merchant win a chargeback? ›
While Heartland Payment Systems reports that less than 0.01% of all credit card charges result in chargebacks, if your business is facing the aftermath of a dishonest customer it can certainly make a difference to critical revenue.What happens to the merchant when you dispute a charge? ›
The merchant is simultaneously notified that they've received a dispute from the cardholders, and that the acquiring bank has debited funds from the merchant account to reimburse the cardholder for the transaction and to cover the fees for investigating the chargeback.What are retailer chargebacks? ›
A chargeback occurs when a cardholder questions a transaction and asks their card-issuing bank to reverse it. Also referred to as a payment dispute, it may sound like a return, but it's completely different. With a return, the customer gives the goods back to the retailer and gets a refund on the money they've spent.When should you fight a chargeback? ›
- A customer regrets a purchase and doesn't want to go through the typical return/exchange process.
- A customer intentionally files a false chargeback to avoid paying for the product or service they've acquired.
- A customer sees a strange charge on their bank statement and disputes it.
The card issuing bank receives the evidence from the merchant through his acquiring bank and card networks. If the card issuing bank decides that the provided evidence is enough to disprove the cardholder's dispute, the merchant wins the chargeback, and the funds are returned to the merchant bank account.Who loses money in a chargeback? ›
If the consumer files a chargeback and simply keeps the merchandise, the merchant loses that revenue and any future potential profit. If monthly chargeback rates exceed a predetermined chargeback threshold, excessive fines (in the ballpark of $10,000) will be levied against the business.Can a merchant sue after chargeback? ›
Both parties can still file a lawsuit over the matter, and merchants have been successful at winning back high-value chargebacks by taking the cardholder to civil court. However, some chargeback fraudsters can and do end up facing serious legal consequences.