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7 ways to protect your ecommerce business from returns fraud

Versha Kamwal
March 20, 2021
7
mins read

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Returns are inevitable in ecommerce as customers expect a flexible return policy to be an essential part of the online shopping experience.

For ecommerce merchants, this means offering fast and easy returns, with little to no questions asked to meet the customer's expectation. There's no way around it: accepting returns is a typical way of engaging with your customers. It turns shoppers into long-term customers, grows loyalty, and boosts your brand reputation. And it's possible to manage returns when legitimate reasons cause them.

However, deceitful customers take advantage of a lax return policy, and that's when things go wrong.

What is ecommerce returns fraud?

Return fraud is when customers receive a financial gain from the returns process by taking advantage of a business, resulting in a loss of inventory and profits.

As you can see, the definition of returns fraud is tricky. It signifies that you have to maintain a fine line between allowing honest purchasers to return goods within a time frame legitimately and balance it against fraudulent returns practices.

Online businesses across the globe suffered a loss of nearly 25.3 billion due to returns fraud in 2020.

What are the types of ecommerce returns fraud?

  • Wardrobing or free renting

Wardrobing is when customers purchase a product with the intention of using it temporarily and returning it for a full refund. Normally, customers return a product if it's defective, there is some issue with the size or any other reason, but in wardrobing, customers want to use the product at no cost to them.

It is a common practice in the apparel industry but not limited to it. Electronics such as computers are ordered, used, and then returned for a refund.

  • Swapping merchandise

Swapping is when customers order a new product to exchange it with the one they own that is damaged or old. Here, the customers get a new product for free while the ecommerce merchant is stuck with a lost sale and non-sellable inventory.

Let's take an example, a customer has a JBL speaker that has gone defective over time. The customer orders the same speaker, and after receiving the new one, the customer returns the old one in its place.

  • Friendly fraud

Friendly fraud is when customers order a product, and after receiving it, they claim that they never placed an order or never received the product.

For instance, a customer receives the product, keeps the product for his personal use and raises a refund request claiming that the product was never delivered.

  • Deliberate fraud

Deliberate fraud is when customers create multiple accounts, purchase various products, and return empty packages to resell these products elsewhere else. This is effectively a return scam, where the customers try to get the merchandise for free and resell them for a significant financial gain.

For instance, in 2019, a Spanish customer ordered products worth $370K from Amazon and returned boxes filled with dirt.

  • Return with a stolen credit card

In this type of returns fraud, fraudsters get hold of legitimate customers’ credit card details. Before the customers have a chance to report and block their stolen cards, fraudsters make online purchases, returns them and get a refund processed on other credit card.

For example, a customer makes a purchase and pays for it via a stolen credit card. After delivery, the customer places a return request and asks the ecommerce merchant to process the refund to another credit card.

  • Snap and send back

This return fraud is driven by social media trends where customers order a product, click pictures with it, and return it for a full refund.

Let's take an example, social media influencers feel the pressure of not being seen in the same outfit twice. So, to maintain their status and defraud ecommerce businesses by only wearing items for a photo and then returning them.

How to spot ecommerce returns fraud?

It can be difficult to know if fraud is happening to your ecommerce business. Here are several clues you can look for to spot returns fraud:

1. Compare returns with exchanges

The first and the most significant indicator for returns fraud is more returns than exchanges. When a customer returns a product, you lose a sale. On the contrary, when a customer exchanges a product, you still make a sale. By comparing the number of returns with the number of exchanges, you can determine whether your returns policy is being abused and possibly taken advantage of with swapping and theft.

2. Examine product categories

The second way is to look at your returns by product categories. Usually, returns fraud happens with expensive products. For example, a customer can gain more financial benefit by committing returns fraud for a blazer rather than a T-shirt. There is very little incentive to spend time and effort with small products. But industries like apparel, electronics, and footwear serve the purpose of getting maximum benefit.

3. Inspect seasonal events

The third indicator is seasonal events like Diwali, wedding season, and more such occasions. With these, there’s a rush for ethnic dresses, suits, shoes and other essential products. Customers don’t usually wear these things on a daily basis except for such events. You need to watch out for unusually high returns during these periods of time.

4. Analyse business indicators

Other business indicators of returns fraud include inventory shrinkage or loss and a drop in profits resulting from returns. However, these tend to be secondary in nature and require financial and accounting analysis before a returns fraud trend is spotted. If you notice such trends developing in your online business, you may have a case of return fraud on your hands.

7 ways to protect your ecommerce business from return fraud

As an ecommerce business owner, you can safeguard your business by following the below-mentioned strategies:

  1. Enhance your ecommerce return policy

The first step to protecting your online business from potential return fraud is to have a very clear, accessible return policy published on your website. It's important to ensure that returns are hassle-free for honest customers but shouldn't be too complicated that they take their complaints to social media. While updating your ecommerce returns policy, you need to consider the following things:

  • Number of days to make a return: A short returns window will dissuade wardrobing
  • Proof of purchase: Proof of purchase such as email, paper receipts or confirmation codes will prevent the return of stolen goods
  • Original packing: Insisting on original packaging like tags, labels, stickers, plastic bags will turn away wardrobers and swappers
  • Condition of products: Check the returned product for stains, damage or smells to prevent swapping and temporarily used products
  • Method of refund: Make sure to send the refund amount to the original payment mode so that fraudsters may think twice before getting the refund in the stolen card, which they can't access anymore.

Returns policy of Casper
Returns policy of Casper

  1. Take shipping precautions

When you are shipping your products, you must do everything you can to protect your products along the process. Firstly, use tracking numbers on your packages to view when it has arrived at your customers' doors. Make it mandatory for the customer to acknowledge receiving the package by providing their signature. Moreover, to add an extra layer of security to your packages, you can send a one-time password (OTP) to your customer, which needs to be entered on the delivery agent's device to complete and confirm the delivery.

For instance, Amazon India requires OTP to complete high-value order deliveries.

Amazon India requires OTP to complete high-value order deliveries

  1. Invest in fraud-protection software

You can proactively monitor possible fraudulent or high-risk activities with fraud-protection software. These AI-powered software, use models, global signals and AI algorithms to detect fraudulent behaviour accurately. Thus, enabling ecommerce sellers to reduce returns fraud in real-time.

You can use software like Thirdwatch and more to detect high-risk transactions and reduce fraudulent customer behaviour.

  1. Increase staff during returns season

During seasonal events and the festive season, returns fraud increases. With a limited staff, it's more likely that human error and exhaustion can result in fraudulent returns slipping pass the quality check. It's better to engage more staff during these time periods to ensure every return request and returned product is examined carefully.

For instance, Flipkart added extra verification steps in the returns process to prevent returns fraud, such as product with a broken seal, wrong product, and empty shipment. Flipkart ensured that the products with a selling price of over INR 5000, an ekart personnel in the Delivery Hub would open the returned product's secondary packaging to check if the primary packaging is intact.

Flipkart added extra verification steps in the returns process

  1. Identify fraudulent customers and blacklist them

You should be on the lookout for customers who have an unusually high return rate. If their reasons for the return send up red flags, mark them as potentially fraudulent customers in your system. You can carefully inspect such customers' returns before processing the refund, or you can choose not to fulfil their orders if you feel they are committing a returns fraud. It is better to blacklist and stop selling to a fraudulent customer than to continue to suffer losses, receive unsaleable inventory, or fight refund claims. In fact, many ecommerce merchants are adopting a blacklist for customers with irregular returns patterns.

  1. Streamline claim filling process when you sell on marketplaces

When you sell your products on marketplaces, it's imperative to understand their policies to protect sellers from returns fraud. For instance, Amazon's seller flex refund and reimbursement policy and Flipkart's seller protection fund safeguard sellers against fraudulent returns and enable them to cover their losses.

If the returned products don't pass the quality check, for instance, a seller has received an empty box or products of some other brand, the seller can raise a claim based on the guidelines set forth by the marketplace. While raising a claim with the marketplace, you need to:

  • Be diligent: Be cautious with the facts of the case that you are reporting, as simple mistakes can result in your account being suspended.
  • Do not use automated tools: Make sure you don’t allow an automated tool to collect your reimbursement claim or open cases. Additionally, opening too many cases at a time may result in a warning or lead to account suspension.
  • Be proactive: Usually, the claim filing window is open for a short period of time. So, when the returned products reach your facility, it's better to process them fast rather than pilling them up. Ensure that you have an adequate workforce to process returns which as important as order processing.
  • Set a SOP: As mentioned before, there are different types of returns fraud. To file claims for each type you need to define a standard operating procedure. And when you file claims for each type, you need to prepare information to support your case with images, videos, and other supporting documents.
  • Follow up for reimbursement: After filing a claim, you need to keep track of the reimbursement that you ought to receive. There can be two scenarios— you haven't received the reimbursement amount or the reimbursement amount doesn't match the amount you were supposed to receive. So, you need to follow up with the marketplace for both cases.

Eshopbox simplifies the claim filing procedure for its sellers with its expertise and infrastructure. The Eshopbox facilities have dedicated return processing workstations that are equipped with cameras for photography and videos. In addition to that, a highly-trained workforce is dedicated 24/7 to processing returns and performing quality checks. Eshopbox generates a Claim Filing Report (CFR) that helps sellers to raise claims and seek reimbursements as per the guidelines set forth by the marketplace within the claim raising window.

7. Implement a quality check process at the customer's doorstep

It's essential to make returned products re-sellable by ensuring quick restocking into your available inventory. But in returns fraud, it is possible that you don't receive a product at all, receive a different product, or a damaged product. A lot of sellers schedule a pick up from the customer's doorstep, then the shipping provider picks up the returned product and delivers it to the fulfilment center. Then the returned product undergoes a quality check, and if it passes, it gets restocked. However, if it's a fraud, you will receive a damaged product that cannot be resold to the customers.

To curb this, you can implement a quality check at the customer's doorstep by establishing and communicating necessary quality check parameters with your shipping provider. At the time of return pickup, the shipping provider can perform a quality check at the customer's doorstep to ensure that the returned product is correct, unused, has all its tags and labels. If the returned product fails the quality check parameters then the shipping provider can refuse the return request. This will save a lot of your time and money.

With the rapid increase of returns fraud, it is essential to consider profit margins and minimise unnecessary costs. Eshopbox can help you save costs and arrest leakages on the spot by configuring doorstep QC and ensuring that only legitimate returns reach the fulfilment facility.

Bottom line

Despite this being dismissed by some that returns fraud is merely the cost of doing business online but to ensure the long-term health of your ecommerce business; you need to be proactive. Look out for the signs of returns fraud and follow the tips mentioned earlier to protect your ecommerce business. Honest customers won't mind the added refund steps, but dishonest customers will surely think twice about pulling returns fraud over your business and deter their behaviour.

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