Practical Ecommerce

3 Types of ‘Return Fraud’ to Monitor this Holiday Season

Return fraud, which is expected to cost brick-and-mortar retailers $3.48 billion this holiday season, could also snag online merchants — significantly increasing costs and chargebacks.

Return fraud takes several forms but three stand out as real concerns for ecommerce. They are: (1) wardrobing, (2) returns of merchandise purchased with stolen or fraudulent cards, and (3) cross-merchant no-receipt returns. In all cases, online and multi-channel merchants get hurt.

Wardrobing

Wardrobing is a form of return fraud wherein customers buy items with the intention of using those items and returning them for the full value.

As an example, a thief who wants to throw a fancy holiday party might purchase new high-end linens, special centerpieces, or even a new television from an online merchant. The merchant dutifully ships the goods, and when the party is over, the thief returns those goods expecting a full refund and free return shipping. As a second example, imagine a thief that orders a new and expensive ski jacket from an online specialty retailer, takes the jacket on a week-long ski adventure and then returns it, again expecting a full refund and free return shipping.

According to a National Retail Federation (NRF) survey of 103 retail companies, wardrobing is a serious issue, with some 61.4 percent of those surveyed reporting that they had experienced some form of wardrobing in 2011.

To help curtail wardrobing in ecommerce, merchants can update return policies to specifically prohibit the act, since some wardrobers may not even realize they are stealing; shorten return windows; and refuse orders from serial returners.

With wardrobing, there’s a clear distinction between shoppers who specifically intend to use items and return those items for a full refund, and shoppers that may order a product in a couple of sizes, keeping the one that fits best. The former is fraud, while the latter is a practice actually encouraged by retailers like Zappos.

Returns from Purchases with Stolen or Fraudulent Cards

Multi-channel merchants who sell both online and at a brick-and-mortar location may also see returns from purchases made with stolen or fraudulent cards. In this form of return fraud, thieves steal credit card data, make an online purchase, wait for the goods to arrive and then return those goods for cash at the multi-channel merchant’s physical store.

A pair of thieves working in the U.S. northwest in just that past month apparently stole credit card data from a part supplier in California. Using the stolen card numbers, the thieves are purchasing either goods or gift cards online, and then using those goods or gift cards to get cash from brick-and-mortar stores.

Merchants in this scenario loose the money the thieves get plus experience chargebacks from the actual card owners.

To help prevent this type of return fraud online merchants should use some sort of fraud prevention software, and vet any suspicious orders.

Cross-merchant, No-receipt Returns

According to the NRF survey, some 35 percent of retailers do not require identification for returns. This creates a return fraud opportunity for thieves to conduct cross-merchant, no-receipt theft.

In this form of return fraud, a thief purchases a relatively high-value, boxed item from an online merchant using some form of ground shipping, typically UPS ground. Since UPS will often leave items outside at residential addresses, there is no positive confirmation of delivery. The thief claims that he or she never received the item, and initiates a chargeback with her credit or debit card company, all while taking the item to a brick-and-mortal store with a lax return policy. Even if the brick-and-mortar store only gives store credit for no-receipt returns, the thief can still post the store credit on a site like Plastic Jungle and eventually get cash. Even if this sounds like a lot of work, one needs to remember that this is effectively money for nothing from the thief’s perspective.

To avoid this form of return fraud, refuse orders from customers that have previously initiated any chargebacks, consider joining industry groups that track bad customer lists and contribute the names of any customers that have initiated a chargeback.

Summing Up

Return fraud is often discussed in the context of brick-and-mortar retailing, but it is also a serious issue for online merchants. Return fraud undermines the bottom line and can damage a small business. Retailers should be on the lookout for this sort of theft, and seek ways to minimize it.

Armando Roggio

Armando Roggio

Bio   •   RSS Feed


email-news-env

Sign up for our email newsletter

Comments ( 3 )

  1. Ben Dwyer November 18, 2011 Reply

    Another source of what could be considered return fraud comes from credit card processors, not customers.

    Each time a business issues a refund, they’re supposed to receive a portion of the credit card fee they paid on the original transaction. Any merchant that pays for processing on a tiered pricing model is allowing their processor to intercept their refunded interchange. It’s a little-know “hidden” credit card processing fee that can amount to thousands in losses for many businesses.

  2. Carlos Rivera December 9, 2011 Reply

    Good point, Ben! I never thought of that.

  3. Ivonne April 24, 2016 Reply

    I have this experience with an US client, he request refund the same moment we send the videos and designs, now we are in debt with paypal.

    We are still on the early stages of E commerce