Does the risk of return fraud keep you up at night? It may be time to start sleeping easier.

The truth is that only 5% of returns are fraudulent. Yes, you read that right — only 5%.

That’s why you shouldn’t build your return policy for the minority of people that will abuse it. Putting too many restrictions on returns will only serve to alienate customers who might otherwise take a chance on your brand for the first time.

Instead, we’ll explain how to put the right checks and balances in place to offset the potential effects of return fraud.

What is return fraud?

First, let’s look at what return fraud is and study the most common tactics that customers might use to defraud merchants.

• Unintentional return fraud – Often, customers make an honest mistake by returning an item that isn’t eligible for a return. It might be a final sale item or an item from a category that doesn’t allow returns, such as intimates. In order to prevent this type of return fraud, it’s important to develop a clear and transparent return policy and build a returns portal that will ask the customer questions about the item and its condition before approving the item for a return.
• Wardrobing – Some people might buy an item, and then return it for a full refund after they’ve already used it—say, purchasing a fancy dress to wear to a dinner party or returning a book after they’ve read it. In order to prevent these types of refunds, you can put clear policies in place around the condition of your returns (i.e., all clothing items must be unworn and have tags in place, all books must be in new condition). Or you could take the opposite route and actually make a more lax return policy an incentive to get more customers onboard by letting them try-before-you buy. For example, Allbirds gives customers a no-questions asked return window of 30 days to return its items, whether they’ve been worn or not. 
• Returns after purchasing with a stolen credit card – In some cases, a fraudster will purchase items with a stolen credit card, and then attempt to have the refund processed to their own credit card. While this doesn’t impact your store directly, you can stop this type of fraud in its tracks by ensuring that refunds are processed to the original method of payment.
• Returning an empty box or different item – Some con artists will request a return and then send back an empty box or an item worth less than the original—or in some cases, they may send back the original item with expensive components taken out. They trust that they’ll receive their refund before the merchant has inspected the merchandise. You can get around this by processing refunds only after inspection rather than at the post office, as we’ll discuss in more detail soon.

There are many ways that customers can attempt to defraud your store, but fortunately, they aren’t that common. There are some simple things you can do to prevent return fraud from happening while still providing a generous return policy. 

Focus on providing the best experience for the majority of customers

It may be tempting to hone in on that 5% of fraudulent returns and dedicate resources to protect your brand. This usually takes the form of inflexible policies, lots of legalese on your website, and a complicated returns process. 

While this might shield you from occasional return fraud, it’ll also lead you down a path that creates a subpar experience for most of your customers. And a negative experience means fewer repeat customers.

Here is how you should approach building your return policy:

Build your return policy for the 95%, not the 5%. When you focus on trying to prevent the 5% from breaking the rules, you’re penalizing the 95% of customers who aren’t doing anything wrong. Instead, build for the customers who will be returning items as intended. This means being flexible, straightforward, and customer-focused in your policies and processes. 

Assume good intent. Nobody wants to be treated with mistrust. So always assume good intent in your customers unless they prove otherwise. Remember that customer retention leads to profit, so don’t put that in jeopardy. If you do experience return fraud, you can handle those situations on a case-by-case basis as they happen.

Ask yourself if you actually need to insure against return fraud

There are some tools that will issue a refund instantly upon customer request. If the item never comes back, they’ll cover that loss as well. Sounds great, right? While this may seem like a good idea on the surface, it does have its flaws.

You pay more than you protect

Any tool that is offering to cover your return fraud is going to charge you a premium per return/exchange for that insurance. For argument’s sake, let’s say it’s 10% per return processed. Your brand gets 1,000 returns per month and at a 5% fraud rate, 50 of them will be fraudulent.

If you are paying for return fraud insurance or risk protection, make sure the fraud you are seeing is worth the cost. Only 5% of returns are lost to fraudulent activity.

Again for argument’s sake, let’s say your brand’s average return item value is $20. That means that you could expect to lose $1,000 to fraudulent activity in the month (more on how to minimize this later). If you elected to pay 10% to insure all your returns, that would have cost $2,000 to save you from $1,000. Ask yourself how high you anticipate fraudulent behavior to be. 

Unless you think you will have more than the average brand you will be paying more to protect against it than it will actually cost you.

In summary:

1,000 returns x 5% = 50 fraudulent returns

50 returns x $20 = $1,000 lost to fraud

or

1,000 returns at $20 = $20,000 in return value

$20,000 x 10% = $2,000 to protect against fraud

Your return fraud rate should decline over time

In the next section, we will be going over a few ways you can build a process that minimizes fraud while still providing a great customer experience. Many tools allow you to block and limit how customers interact with your return policy. 

Reporting and admin tools allow you to see customers who are abusing the system and you can take action right away to prevent further abuse. As you find these customers and adjust your policy, you will find that you can drive your return fraud rate down as you learn.

Finding the right balance of protection and customer experience

So what’s the best way to balance protecting yourself and still provide an amazing customer experience? How can you minimize the potential losses around return fraud without compromising your return policy experience?

Use different processing events for different types of returns

If a customer is looking to expose your return process online, they are usually doing so by keeping the product and sending you back an empty box, a fake product, or a package of rocks. They are hoping that the refund is issued before you see that they have defrauded you.

This is only an effective tactic when the return is for a refund to the original payment method. If they are getting store credit or a new product, it is way less effective of a scam. 

That is why we recommend processing the return at different points for different types of returns.

• Refund: process once the return is inspected at the dock 
• Store credit: process the return when scanned at the post office
• Exchange: process the return when scanned at the post office

By processing the non-refunded returns at the post office, you are striking a great balance of protection and speed for your customers.

Processing a return once scanned at the post office is a great compromise

Returns are most susceptible to fraud when the return is processed instantly. That means that the customer is given the funds back as soon as they complete a return request. 

This is done so that customer vulnerability is removed quickly, and they now know they have the funds to make another purchase. From a customer experience standpoint, this is great; but it does leave you unnecessarily vulnerable. 

There is now zero incentive for the customer to actually send back what they are returning. They now have what they wanted from you… they have accomplished their goal. This will cause customers to delay sending the product back and can actually encourage people to abuse your return process by accident.

Processing a return when the customer gets the package to the post office is a great way to put them in control of when they get thier return.

A great compromise is to process the return as soon as the package is scanned in at the post office. It encourages the customer to get the package into the mail and allows them to be in control of when the return is processed (as drop off) instead of waiting for someone else to receive and review at some point in the future. The longer the customer waits, the more vulnerable and frustrated they become.

Add customers who abuse the system to a block list

One of the easiest ways to deal with return fraud is to simply block those who are being fraudulent. Building a policy that tries to eliminate all fraud often leads to a bad customer experience for the majority.

At Loop, you simply add customers to the block list. Essentially, what this means is that if a customer commits return fraud, you can block them in your system. If that same person tries to process another return, they won’t be able to do it automatically and will be required to talk to the customer service team to prevent them from abusing the system again.

Don’t let return fraud ruin the experience for everyone

Avoid the mistake of inflating the potential impact of return fraud on your business. The truth is that most customers follow the rules and want to build a positive relationship with your brand. Use these tips to minimize the risk of the 5% but, otherwise, stay focused on the 95%. 

Want to learn more about how Loop can help reduce your return fraud? Just get in touch with our team.