Returns fraud is a serious problem for e-commerce businesses. In 2024, approximately 15% of all returns were fraudulent, resulting in a loss of around $103 billion for U.S. retailers1. This financial drain is due to a variety of exploitative practices. Examples of returns fraud include:
Wardrobing - Purchasing items for temporary use, then returning them as new.
Item Swapping - Returning a cheaper or counterfeit item in place of the original.
Empty Box Returns - Claiming an empty package was received.
False Damage Claims - Intentionally damaging items to justify a return.
Friendly Fraud - Disputing legitimate charges with a bank to claim that a purchase was never made.
All these methods exploit numerous vulnerabilities, including those in returns tracking and verification. The financial consequences can be significant. For every dollar of fraudulent return, retailers lose an average of $3.752. This amount accounts for the cost of the product, shipping, and labor.
However, brands face a complex challenge, which is balancing fraud prevention with the need to provide a seamless, customer-friendly returns experience. End-consumers expect fast resolutions and convenient return options, making it difficult to implement stringent fraud measures without negatively impacting customer satisfaction.
A September 2024 survey found that 60% of U.S. retail professionals say charging customers for returns has resulted in an increase in adoption of their free return methods,3 if those options exist. Moreover, 76% of consumers consider free returns when deciding whether to shop with a brand4. This data highlights the pressure on retailers to offer appealing free return options. However, offering free returns can increase the likelihood of fraudulent return attempts, as customers may feel less financial risk when returning items. Therefore, offering a comprehensive returns service while minimizing fraud requires a strategic approach.
Challenges of Returns Processing and How Brands Can Handle Them
Returns processes often rely on basic tracking methods, such as standard shipping labels and basic barcode scans. While these methods provide initial visibility, they can present vulnerabilities if not coupled with rigorous downstream verification.
In some standard e-commerce operations, this lack of detail leaves room for manipulation. For example, a fraudster could purchase a high-value electronic item and then return a box filled with cheap filler material using the basic return label. Your system would register the return as “in transit,” and if you are handling a high volume of returns, the empty box might not be immediately flagged. By the time the package is assessed, the fraudster hopes to have already initiated a refund and moved on. This is why, within Stord’s system, the use of basic labels is always followed by a comprehensive assessment and cataloging process before any refund is issued or inventory adjustments are made.
However, it's important to acknowledge that for brands relying solely on basic labels without thorough verification, the risks are significant. Given the rise of sophisticated fraud, basic methods when used in isolation, are simply not enough.
E-commerce brands also face a complex decision regarding returns management, each with its own set of challenges:
1. External Returns Providers
These are providers who focus solely on managing returns. While these providers handle the physical returns process, their use can increase costs, lengthen timelines, and create data complexity. Records are now isolated in a separate platform and a brand will incur additional shipping costs moving returns back and forth between returns providers, fulfillment centers, and other locations.
This option can often force brands to issue refunds before inventory is thoroughly checked. It can significantly increase the risk of fraud. Alternatively, it can lead to lengthy returns processes, which can frustrate customers and damage brand reputation.
2. In-House Returns Management
Managing returns in-house provides complete control over product verification to minimize fraud. However, it increases headcount and adds complexity to limited warehouse or returns locations, resulting in higher operational costs and potentially longer processing times.
3. Integrated Fulfillment Provider
Partnering with a competent fulfillment provider reduces extra transportation fees by returning products directly to those fulfilling new orders. If the provider has robust systems and processes, they can efficiently verify and restock inventory, often leveraging existing damaged goods management solutions.
This option requires a reliable provider and seamless returns integration within the Order Management System (OMS) for complete visibility.
Rigorous Tracking and Verification for Returns Fraud Detection
Many effective returns processes rely on a combination of careful receiving procedures and robust inventory management. At Stord, the use of basic carrier tracking is followed by a detailed assessment of each returned item upon arrival at our fulfillment center.
A dedicated returns team meticulously scans and assesses each item to determine its status. This information is automatically added to the OMS to give brands SKU-level visibility into their total inventory status. Returned items are tracked, and any anomalous behavior is flagged to facilitate investigations of suspicious repeat returns. This process, powered by Stord Returns and our dedicated team, protects brands from returns fraud through the rigorous tracking and rapid verification of a product before issuing a refund.
Stord's system also utilizes data analysis within the OMS to identify recurring return patterns that may suggest fraudulent activity. These patterns can trigger alerts to prompt further investigation into potentially suspicious returns.
Protect Your Bottom Line Against Returns Fraud
Returns fraud remains a persistent challenge for e-commerce brands, but its financial impact can be managed. By strategically partnering with providers who implement robust returns strategies and investing in reliable returns management tools, your business can significantly offset the risks, minimize financial losses, and, ultimately, secure your bottom line.
