Owning an online business lets you sell to customers from all over the world while avoiding some overhead costs. But with such an expansive reach, you need to watch out for breaches in security, including return fraud.
Return fraud in 2015 resulted in losses to U.S. businesses totalling about .9 billion.
As an eCommerce business owner, you need to know how to spot and protect yourself against return fraud before you see a loss of revenue and inventory.
What is return fraud?
Return fraud is when a customer gains financially from the return process, taking advantage of your business and resulting in a loss of profits and inventory. There are different ways return fraud can be committed, and some consumers might try the same return fraud tactics in brick-and-mortar stores as eCommerce websites. Some instances of return fraud are specific to online businesses.
If you’re operating an online store, keep your eyes open for instances of return fraud. Here are some common tactics more unscrupulous eCommerce customers might try.
Wardrobing
Wardrobing is when a customer purchases a product, uses it temporarily, then returns it for a full refund. The customer plans on returning the item even though it is not defective. With wardrobing, the customer gets to use the product at no cost to them.
Wardrobing is popular with big-ticket items like formal dresses, suits, video cameras and televisions.
The National Retail Federation reported that 72.6 percent of businesses have been victims of wardrobing.
Swapping merchandise
Some customers order a new product to replace one they own that is damaged or old. When they receive the new product, they return the old one in its place. With swapping, the customer gets new merchandise for free while you’re stuck with a lost sale and less inventory.
Friendly fraud
Friendly fraud is specific to eCommerce businesses, and it’s a prominent issue for many online stores.
Friendly fraud alone cost online businesses .8 billion in 2012.
With friendly fraud, customers claim they never made a purchase or that their merchandise was never received. The customer disputes the purchase and issues a chargeback with their bank or credit card company. A chargeback is a demand for a refund.
Other types of return fraud
There are other types of return fraud you might come across that are more common in brick-and-mortar stores, such as customers attempting to return stolen products.
Returning shoplifted products is the most common type of return fraud, with 91.9 percent of businesses experiencing this method of fraud.
Fortunately, this type of return fraud is less common in eCommerce unless you sell the same items present in a brick-and-mortar store.
Pro tip: Be on the lookout for customers who try to use fake receipts or return merchandise that was purchased with stolen tender.
How to spot return fraud
It can be difficult to know if fraud is happening to your business. Here are several clues you can look for to spot return fraud:
- Excessive inventory shrinkage (loss of inventory)
- Increase in the number of returns
- Decreased profits as a result of returns
If you notice any of these trends developing in your business, you might have a case of return fraud on your hands. Fraud can be devastating for your business’s bottom line. Fortunately, you can work to prevent return fraud and protect your business by trying the following tips.
How to protect your business from return fraud
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Enhance your return policies.
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Keep accurate records.
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Take shipping precautions.
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Identify fraudulent customers.
1. Enhance your return policies
You should have a clear purchase return policy that lets customers know exactly what they can and can’t send back, as well as what supporting documents (e.g., receipts, packaging, etc.) they need.
Make sure your return policy is noticeable on your website.
Add your return policy on a FAQ and checkout page, and include it in the package when you ship your products.
Customers want return policies to be hassle-free, but you also need to protect your business. Consider the following questions when creating or enhancing your return policy:
- Does the customer need proof of purchase (e.g., receipts or confirmation codes) with returns?
- Does the customer receive a refund in the method they paid with, or do they receive store credit?
- Who pays for return shipping?
- How long does the customer have to make returns (e.g., 30 days, 60 days, etc.)
- Are there any restrictions?
- What documents does the customer need to send back?
To protect your eCommerce business from return fraud, you might want to require proof of purchase for returns on sales. You can offer refunds via the same payment method customers used to avoid fraud as well. Or, you can offer store credit to deter people who want to profit.
If you have a physical business in addition to your online presence, you can always encourage customers to return products to the store.
You don’t want to make your return policy too difficult, or you will end up with disgruntled customers. Yet at the same time, you need to protect yourself and your company’s bottom line.
Pro tip: Make sure you enforce your return policy consistently. If you have employees, make sure they also adhere to the regulations you set.
2. Keep accurate records
Accurate tracking of sales, returns and inventory in general is vital to avoiding return fraud. Use a reliable point of sale (POS) system that stores information on sales and returns. There are many cloud-based POS systems you can choose from. Your accounting records should reflect returns, as well.
Make sure you count your inventory periodically.
If you have more inventory listed in your records than what’s physically available, you might have fallen victim to return fraud. Do periodic inventory counts every three or six months to make sure your inventory numbers are accurate. There are even inventory software options if you want to automate your processes.
You should also mark each product that you sell. Include a tracking number or scannable barcode to verify the product is yours. This can protect you against fraudsters who swap merchandise.
3. Take shipping precautions
Then you ship, make sure you do everything you can to protect your merchandise in the process.
To limit instances of friendly fraud, use tracking numbers that show you when the merchandise is delivered to the customer. Keep up-to-date with shipments by using online tracking to see where packages are. And, if possible, require customer signatures when they receive the packages.
In chargeback disputes, you need to have proof that the package was received. A customer’s signature and confirmation from the shipping service can help verify your case.
4. Identify fraudulent customers
Be on the lookout for customers who continually return products. If their reasons for return send up red flags, mark them as potentially fraudulent customers in your system. You can choose not to fill their orders if you feel they are committing return fraud.
For most online businesses, customers must set up accounts to purchase goods. Once they do, you have access to their purchase and return history. If you know a customer has a questionable history, carefully inspect the returns before you process the refund.
Conclusion
Be proactive with your online business. Instead of hoping fraud won’t happen to you, look for signs of return fraud and follow these tips to protect your eCommerce business. Reliable consumers won’t mind the added refund steps, and questionable buyers will think twice about trying to pull one over on you.
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