Retailers Look To Tighten Rules as Fraudulent Returns Grow

Now that the holiday shopping season is nearly finished, retailers are gearing up for the next stage in the cycle as customers begin bringing in returns.

But while returns are projected to be slightly lower in 2023 than the previous year, retailers are working to battle the growing issue of fraudulent returns, setting up new policies to prevent abuse while ensuring customers keep shopping.

Total retail shopping returns in 2023 amounted to $743 billion in total merchandise, 14.5% of all sales, according to a report from the National Retail Federation (NRF). That's compared with about 16.5% of all sales in 2022. Online return rates are worse, as merchants deal with returns on 17.6% of their sales, compared with just 10% for exclusively brick-and-mortar sales. 

‘Wardrobing’ Most Common Form of Returns Fraud

While the percentage of sales that are returned is dropping, more shoppers are committing fraud and abuse, amounting to 13.7% of all returns, according to the NRF.

The most common form of fraud is “wardrobing,” in which customers return used non-defective merchandise such as clothing. This was a problem for nearly 49% of retailers surveyed by the NRF. A similar problem is “bracketing,” where shoppers buy multiple versions of an item, only to return the unwanted ones later.

A survey from service provider Narvar, which gives online retailers a “post-purchase platform” that helps streamline returns, found that nearly 36% of consumers admitted to at least one type of return fraud, with wardrobing being the most common at 13%. Men are 50% more likely to engage in wardrobing, the study found, and shoppers aged 18 to 34 are more likely than older shoppers to return a used item.

“From a pool of 100 consumers, somewhere between four and five will engage in wardrobing, making it the most prevalent form of returns fraud,” the Narvar report said. 

Retailers Enacting Stricter Return Policies

To help reduce returns, retailers are turning to stricter return policies, including adding return fees for online orders, shortening the return period, and enforcing no-cash returns on items without a receipt, the NRF said.

To help discourage online returns, 81% of merchants told a survey from retail service provider Happy Returns that they had implemented return fees in 2023.

“Creating and holding to stricter return policies are at the crux of the battle against fraudulent returns,” wrote David Johnston, vice president of asset protection and retail operations at NRF. “Limiting one’s ability to convert stolen or wardrobed goods to tangible currency, including store credit, can have a positive impact on returns.”

For example, TJ Maxx Cos. (TJX) has set up a $10.99 fee for returned items, while Macy’s Inc. (M) charges customers $9.99 for a return, and Abercrombie & Fitch (ANF) established a $7 return fee. In many cases, return fees can be avoided if the item is returned to a store location, or if the customer is a member of the store’s reward program.

Meanwhile, Amazon.com Inc. (AMZN), the largest retailer in the U.S., still offers free returns, including at locations like Kohl’s and at Amazon lockers located in places such as Whole Foods, but if customers use a UPS store for returns, they could face a $1 fee if another return location is closer.

Another idea to protect against fraudulent returns is insurance, where Narvar’s survey showed that 56% of customers would pay as much as $3 to guarantee a full refund on an order of up to $100, while 73% would pay for refund insurance for a product costing up to $1,000.

Counterfeiting, Appeasement Other Forms of Refund Fraud

Counterfeiting is often used to deceive retailers when a receipt is required, the NRF report noted, with fraudsters sometimes using fake online receipts to fool retailers into accepting a return in store.  Retailers are also reporting fraud with “appeasements,”  where retailers provide a credit for an online order the customer claims is defective.  A further 5% will return an empty box while keeping the refund, with some selling the item on another platform like eBay. 

While overall, retailers expect fewer returns for 2023 than in 2022, the amount of fraudulent and abusive returns is expected to be higher during the holiday season. 

“The trends in fraud and abuse are magnified during the holiday season as increased traffic puts pressure on staff to prioritize transaction speed over process and procedure,” NRF said in its report.