The number of retail return fraud cases is increasing rapidly as a growing number of consumers are returning their purchases.

• The number of retail return fraud cases is increasing, and businesses are closely monitoring consumer behavior until the end of January to return unwanted holiday presents.
• According to a survey by Appriss Retail and the National Retail Federation, retailers anticipate that 16.5% or $24.5 billion worth of holiday returns will be fraudulent this year.
• People may claim they never received certain items, return a different item than they bought, or send back a stolen product as tactics.

In an effort to attract customers and increase sales, retailers have recently made their online return policies more lenient than ever.

But those changes have come at a cost.

To combat fraud, retailers have intensified their efforts to verify the authenticity of returned items and ensure that customers are not returning stolen or non-existent products.

Last year, retailers estimated that 13.7% of returns, or $101 billion worth, were fraudulent, according to a survey by Appriss Retail and the National Retail Federation. During the peak holiday season, the share of fraudulent returns was even higher at 16.5%, or $24.5 billion worth, the survey found.

Retailers are still receiving returns for purchases made in November and December, and fraud has become their top concern, according to industry experts.

Vijay Ramachandran, vice president of go-to-market enablement and experience at shipping and mailing firm Pitney Bowes, stated that fraud is the top priority, with nothing else even coming close.

On average, processing an online return costs 21% of an order's value, according to a Pitney Bowes survey of 168 retailers. Additionally, half of the respondent companies paid more than this average cost.

The cost of processing a return is increasing due to higher shipping and processing costs, as well as rising fraud, industry experts said. As a result, many companies have started to make it more difficult to return items.

When fraud is increasing, like this year, retailers must adjust their policies to prevent abuse, which increases their costs and reduces their profit margin, says Michael Osborne, CEO of Appriss Retail.

Marc Metrick, CEO of Saks, stated at the NRF Big Show in January that the number of fraudulent "merchandise not received" complaints to the company has more than doubled in recent years, despite legitimate complaints from customers about missing items.

That’s just one fraudulent return tactic.

According to Pitney Bowes’ Ramachandran, the most common form of return fraud is shipping back an empty box or a different item than was received, such as a box of bricks instead of a television. In other cases, fraudsters could return stolen goods or dig through trash to find a receipt and then go into that store to take the product to the return desk.

According to Osborne of Appriss Retail, there are instances of price arbitrage where individuals purchase a product at a discount or promotion and then resell it at the original price, effectively stealing the extra dollars gained from the discount.

He explained that credit laundering involves using gift cards or store credit to purchase products, then returning them and putting the money back onto a different card, which enables individuals to take money from potentially stolen or fraudulently obtained gift cards or credit.

One individual made over $224,000 through fraudulent returns of more than 1,000 items to 215 stores in multiple states, utilizing various return tactics, according to Appriss Retail providing an example to CNBC.

Return abuse is more common

"Bracketing" or "wardrobing" is a less egregious behavior that is often considered return abuse rather than fraud.

Buying multiple sizes or colors with the intention of returning the one that doesn't fit is known as "bracketing." Although not fraudulent, it still results in a return expense for the retailer. On the other hand, "wardrobing," where shoppers buy an item, use it, and then return it, is considered a bigger issue.

A survey from fraud prevention firm Forter found that more than half of consumers, or 56%, admitted to "wardrobing," which involves buying clothes with the intention of returning them after use. One in four consumers also confessed to purchasing items during the 2023 holiday season with the intention of returning them after use.

Doriel Abrahams, the head of risk, stated that returns made with premeditation and intention after use are particularly problematic.

During the holiday season, 47% of those who planned to "wardrobe" were between the ages of 18 and 34, according to Forter. "Wardrobing" involves a variety of products, not just clothing.

Abrahams stated that people typically purchase tools, drills, and other necessary items when moving apartments, install shelves, and then return them after the move.

How retailers are combating return fraud

Those who track the tactics said that bad actors who commit return fraud are hurting honest shoppers as retailers make their policies stricter to prevent abuses.

Saks' Metrick stated that the current situation is negatively impacting the customer experience, as it resembles the Plexiglas at the drugstore. The company is adding friction to the customer experience, even for the good actors. This is a problem for Saks and they must fix it.

Several retailers have tightened their return policies due to fraud, with some using artificial intelligence and technology to personalize their policies for each individual consumer.

Retailers can offer different return windows based on a customer's history with them, similar to a loyalty program status level, said Osborne. He mentioned that companies like Amazon have adopted this strategy, and it's something other retailers should consider.

Amazon has not disclosed whether it is experiencing more return fraud, but a company spokesperson stated that Amazon is making progress in identifying and stopping fraud before it occurs. The company uses advanced machine learning models to proactively detect and prevent fraud, and employs specialized teams to detect, investigate, and stop fraud.

Retailers are striving to maintain customer satisfaction in a highly competitive market by implementing lenient return policies. A survey by Appriss Retail and Incisiv found that 73% of shoppers select a retailer based on the return experience, and 58% desire a seamless, hassle-free return process across all channels.

Companies must strive to find a balance between satisfying customers and reducing return costs and instances of fraud and misuse.