Summary:
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Retail return fraud is on the rise, with 93% of retailers reporting that fraud is a significant issue for their business.
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There are seven types of retail return fraud, including empty box returns, price switching, label tampering, and more.
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Retailers are fighting back with proven fraud prevention tactics like item verification at drop-off, tamper-proof labels, and in-store returns processing.
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Our Return Bar® service helps prevent fraud by verifying items at the point of return, stopping bad actors early.
The convenience and market opportunity of e-commerce shopping has come as a boon to the retail industry. We can order what we need, when we need it, and it generally shows up on our doorsteps in a reasonable amount of time.
But this convenience has also come at a cost: According to the 2024 Consumer Returns in the Retail Industry report conducted jointly by the National Retail Federation and Happy Returns, retailers report an increase in explicitly fraudulent returns behavior with 93% of merchants reporting that retail fraud and other exploitive behavior is a significant issue for their business.
In response to this macro trend, almost all retailers surveyed (99%) now employ one or more tactics to reduce return fraud, with new techniques, technology, and targeted approaches coming online every year.
So, what exactly do we mean by ‘fraud’, and what types of retail return fraud should you be watching out for?
Retail return fraud occurs when a customer purposefully exploits a retailer’s return process. The person engaging in this fraudulent behavior may have a few goals in mind—getting a refund, receiving a discount on a high value item, or in the case of an organized scam, making a profit on stolen goods. But at its core, the goal of return fraud is to obtain something without paying what is owed to the retailer.
True fraud, a criminal act defined by the deliberate intention to deceive and gain, is often conflated with returns policy abuse as well as costly, but normal, shopping behavior. While still expensive and cumbersome for the retailer, the reason for someone engaging in returns abuse or costly shopping behavior is more about negligence, ignorance, or recklessness, rather than calculated dishonesty.
Two examples of common behaviors that fall under the category of returns abuse or costly behavior include:
Returns Abuse: Wardrobing
This type of returns abuse is when someone purchases an item for short-term use and returns it in used condition looking for a full refund.
Costly Behavior: Bracketing
While neither fraud nor abuse, this type of costly behavior is when a customer purchases multiple products with the intention of sending some or most of them back. Retailers shoulder a costly burden when a shopper brackets their purchases, but this behavior is often with the intention of, for example, trying on different sizes or testing different fabrics. It is considered normal shopping behavior when it’s within the bounds of the retailer’s returns policy and time frame.
Fraud is a major business challenge.
In general, younger generations are more likely to engage in bad returns behavior, but it’s truly generation-agnostic. The rise in retail returns fraud is happening across the board, with all types and with all shopper demographics.
Those looking to defraud retailers by taking advantage of the returns process often rely on auto-refund systems because the customer will receive their refund before the retailer has had time to inspect the package. This type of returns policy is optimized for customer experience and to encourage customer loyalty with the ease, speed, and convenience of a quick refund, but it can also leave the retailer open to the kind of return fraud they would like to prevent.
Person-to-person drop-off, visual verification of items, no-print returns (when a return label is not provided to the customer to print at home, compelling them to bring their item to a drop-off location), and barcode scanning all ensure that the only person managing the return is the store associate at the drop-off location. This approach can detect and deter fraud before it becomes a costly problem.
Here are the seven types of retail return fraud that affect retailers today:
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Fraud Type: Empty Box Returns
How It Works:
A consumer requests a refund for goods purchased and ships an empty box back to the retailer while keeping the merchandise. 55% of retailers reported an increase in empty box returns over the last year. -
Fraud Type: Box of Rocks
How It Works:
To simulate the return of their product, a consumer will return the box with a worthless filler that matches the product’s weight. 59% of retailers report an increase in this type of fraud in the last year, and it’s particularly insidious because it incurs financial losses for the retailer through increased costs from the refund they issued, and the costs associated with restocking after receiving unsellable merchandise. -
Fraud Type: Price Switching
How It Works:
In the case of a price switch, a consumer will return a different item from the same retailer of lower value. -
Fraud Type: Decoy Returns
How It Works:
Counterfeiting isn’t a new form of fraud, but its impact compounds when a buyer returns a counterfeited item in place of the original. This type of fraud can be achieved through tag-swapping or replacing the tag of similar-looking, fake apparel with the original tag. -
Fraud Type: Overstated Quantity Returns
How It Works:
When a shopper purchases more than one item from a retailer and then claims to return more items than they actually ship back in their return package, they are overstating the quantity of their returns. -
Fraud Type: Label Tampering
How It Works:
A shopper edits the shipping address on the return label provided to them by the retailer with a PDF editing software before shipping their returns package. The barcode of the legitimate returns label (with the new address) is then scanned, indicating to the retailer that the return has been shipped, and a refund process is initiated, all while the package is on its way to an undisclosed destination. The loss for the retailer is compounded by the shipping cost, the unnecessary refund, the lost item, and the effect on product inventory. -
Fraud Type: No-Proof Returns
How It Works:
This type of fraud takes advantage of Buy Online, Return In-Store, or B.O.R.I.S, returns policies. An in-store return of an item purchased online without an order identification number, receipt, or order confirmation puts staff in a tough spot. Is it an innocent error on the part of the customer or are they looking for a refund on an item that they themselves never purchased?
So, how do we fix it? How do we mitigate retail return fraud?
It starts at the point of return. To catch fraud before a package makes it back to the retailer, we have to be able to see inside of the returns box before it’s sealed and sent. Enter: the Happy Returns Return Bar®.
At more than 8,000 locations nationwide (including more than 5,000 The UPS Store® retail locations), Happy Returns verifies the shopper and the items early in the returns process. With validation, shoppers can bring their returns without a box and without a label to a participating location, and an associate will scan and verify the product at the Return Bar®.
The early in-person interaction between the shopper and the Return Bar® provides the necessary technical infrastructure to catch and prevent retail return fraud as well as the social pressure to curtail the motivation to game the system.
The cost of retail returns fraud is too high to ignore.
The cost of ignoring retail return fraud is simply too high. As fraud tactics grow more sophisticated and consumer expectations for seamless returns remain high, retailers must strike a careful balance between convenience and control. Every fraudulent return erodes profit margins, disrupts operations, and can even increase the cost of goods for the customer as increased operational costs due to fraud get passed on to the consumer. But with smarter policies, better verification technology, and early intervention approaches like the Happy Returns Return Bar® locations, retailers can find and prevent fraud before a package makes it back to their warehouse. Investing in proactive fraud prevention isn’t just damage control—it’s future-proofing your business.
